abrdn: Climate transition plans: building a framework to assess corporate credibility

Jeremy Lawson, Eva Cairns, Anna Moss, Nick Gaskell, Alexandre Popa and Aidan Maloney 

One of abrdn’s strategic priorities is supporting real world decarbonisation, as outlined in our Net Zero Directed Investing strategy. For us, that means allocating capital to credible transition leaders and climate solutions, as well as influencing the firms we invest in through active engagement.

Credible transition leaders are firms that set ambitious emissions-reduction targets, proactively transform their businesses, and lead by example within their sectors. They are more likely to avoid the risks associated with the energy transition and take advantage of the opportunities. And it can make a big difference to how securities are fairly valued.

But how do we assess whether firms’ targets and business plans are credible? The most common approach is to take targets at face value. Some frameworks also factor in concrete actions by the firm, like their short-term capital spending plans. But there are other dependencies outside of companies’ direct control, including the policy backdrop and the maturity of zero- and low-carbon technologies, that also need to be considered.

Drawing on contributions from experts across abrdn, we have developed a new corporate credibility assessment scoring system that significantly improves on the default standards used across the industry.

Here are our key findings:

• Real world decarbonisation requires allocating capital to credible corporate transition leaders. These firms set ambitious emissions-reduction targets, proactively transform their businesses, and lead by example.
• Targets can’t be taken at face value. But assessing the credibility of transition plans is not straightforward. Third-party frameworks usually have narrow coverage and fail to consider factors outside the firm’s control.
• Our approach has six key pillars: emissions-target design, emissions performance, technology readiness, policy supportiveness, green market penetration and climate governance.

abrdn’s credibility score schematic

• We have tested the framework on around 400 of the large-cap global stocks most exposed to the energy transition. These firms are also covered within our bespoke climate scenario platform.
• None of the firms we analyse have fully credible transition plans, and the average firm has a large credibility gap, in much the same way that the average country has a large policy-credibility gap.

However, there is significant dispersion in credibility scores, both across and within sectors. When incorporated into our climate scenario framework, this can have a big effect on estimated exposures.

The distribution of credibility scores across sectors

• There is more work to do to improve the coverage of firms, the quality of the data, and the method of incorporating corporate targets into our climate scenario platform. These will be addressed in our 2023 work.

Early next year, we will publish a companion paper explaining how our proprietary assessment framework can best be incorporated into our investment processes, company engagement and products and solutions.

Read the full research here

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