Every business has the opportunity to take climate action. Be it through easy wins such as going paperless or reducing energy usage, or more advanced ways such as shifting to renewable energy, each company can, in essence, positively contribute to the planet in some way.
Research, however, suggests that few businesses in Asia are proactive enough – despite being more aware of climate risks – with more concrete action needed for the region to meet near and long-term climate goals.
While 70 per cent of investors in Asia publicly recognise climate change as a source of material risks and opportunities, only 28 per cent have climate action plans to align their business activities with international climate targets, according to a report published this April by the Asia Investor Group on Climate Change (AIGCC).
The report provides a snapshot of climate progress by Asian institutional investors, amid the tangible impact of climate change on the region. In late April this year, for example, schools in the Philippines, India, and Bangladesh were forced to shut as the mercury soared past 40°C.
While climate change presents obvious risks, businesses can capitalise on the urgency to transition to more sustainable economic models via credible climate transition plans, which are time-bound action plans that outline how an organisation will better align its existing assets, operations, and business model with net zero pathways.
Climate transition plans go beyond setting emissions reduction targets to detailing specific actions across a business’s operations and value chain, and the accountability mechanisms needed to achieve these targets.
“The best way to understand transition planning is as the ‘third phase’ of responses to environmental challenges, especially climate change. It involves putting commitments into action,” said Paul Dickinson, co-founder of Transition Value Partners, a transition planning advisory firm.
Dickinson, who is also the founder and strategic adviser for CDP – a non-profit charity that runs the global environmental disclosure system – added that phase one included environmental impact disclosure, while phase two saw the widespread adoption of Science-Based Targets initiative (SBTi) for emissions reductions and net zero commitments by investors and businesses.
Established in 2015, the SBTi is a joint effort by the CDP, the United Nations Global Compact, the World Resources Institute, and the World Wide Fund for Nature, to enable businesses to set ambitious emissions reduction targets in line with the latest climate science.
Disclosures not aligned with climate transition plan indicators
Only 0.6 per cent of companies have disclosed data to all the key indicators of a credible climate transition plan, according to the latest statistics released by CDP this June. CDP is widely regarded as the gold standard for environmental reporting.
Although this number reflects a slight increase from 2022, nearly all companies are still not disclosing up to standards. Additionally, the percentage of companies disclosing data for only a few indicators – the lowest tier – increased to 70 per cent in 2023, up from 60 per cent the previous year.
Despite a slight increase from 2022, only 0.6 per cent of companies are disclosing according to all the key indicators of a climate transition plan. Image: CDP
“A climate transition plan is a key enabler in realising net zero goals. Through this process, companies and investors begin to understand what key levers can be applied to their targets,” said Dickinson.
Climate transition plans can also integrate climate considerations throughout a business’s operations, and identify opportunities for new revenue streams that emerge in a low-carbon economy, said Amita Chaudhury, group head of sustainability at AIA, the largest pan-Asian life and health insurer.
AIA unveiled its climate transition plan in November 2023, defining its strategy to align business practices with the latest climate science in line with the Paris Agreement.
AIA’s climate transition plan outlines near-term science-based targets the insurer has set for its business operations and general account in-scope investment portfolio, alongside the plans for meeting these targets. For example, AIA has committed to a near-term target of a 46.2 per cent reduction of Scope 1 and 2 emissions by 2030 through exploring opportunities to improve the energy efficiency of their buildings, lease greener buildings, transition company fleet to EVs based on market feasibility, and procure renewable energy based on regional availability.
AIA’s in-scope portfolio covers 55 per cent of its total investment and lending activities by general account assets under management, as of 2019. They are also the first insurer in the region to have its near-term targets validated by the SBTi.
To ensure accountability, climate-related responsibilities have also been assigned to management-level positions and committees, in addition to board-level oversight. For example, AIA’s environmental, social and governance (ESG) committee monitors and reviews the group’s ESG performance, while the company’s Climate and Net Zero Steering Committee oversees the execution of its climate transition plan.
“Strong leadership determines your level of commitment; you need to have committed and visible leadership from the top if you want to drive change,” said Chaudhury.
Investors want net zero transition plans, but challenges remain
Forty-eight per cent of investors want companies to produce or further develop their climate transition plans, according to the AIGCC report.
48 per cent of investors request that companies produce or further develop their transition plans, as part of their corporate engagement strategies. Investors can leverage their influence to drive the boards of portfolio companies to take climate action and invest for long-term value. Source: AIGCC
Such plans are important, Chaudhury noted, as they assure investors and stakeholders that the company has a well-defined strategy to keep its business model relevant and profitable, even as the economy transitions to net zero.
However, challenges continue to hinder the widespread adoption of climate transition plans among businesses.
About a third of firms find it most difficult to balance profitable growth with decarbonisation targets when considering a climate transition plan, according to survey findings by global consultancy KPMG.
Aligning business models with the latest climate science developments may require changes to well-established ways of operation and adjustments to the entire value chain and come with added costs.
Often, these costs are classified under the category of “transition risks” – the price of transitioning to a low-carbon economy influenced by policy action, technology advancement, or market changes.
The combination of increased carbon pricing, transition costs of greener technologies, and uncertain market signals can complicate the decision-making process for many businesses.
However, Dickinson noted that “investments delivering long-term benefits are not costs” if businesses understand digitisation and decarbonisation trends, which influence how economies produce and consume energy.
Chaudhury shared the same sentiments. “Companies that do not integrate climate considerations into long-term strategy are more vulnerable to transition risks such as regulatory changes and physical climate change impacts. This could lead to increased operational costs and a loss of competitive advantage, which will ultimately erode shareholder value,” she said.
Businesses without credible climate action plans may also face reduced access to capital and higher borrowing costs, as investors may seek to minimise exposure to sustainability and reputational risks, Chaudhury added.
Achieving net zero by 2050 will “require a collective effort from multiple stakeholders, and the climate ambitions of businesses must be complemented by robust engagement with the wider ecosystem,” according to AIA’s climate transition plan.
The report also noted that “comprehensive national and private sector commitments to the Paris Agreement, holistic decarbonisation roadmaps, and greater regulatory push for environmental disclosures are among many necessary measures needed to achieve climate transition targets.”
“We have mutual dependencies on other stakeholders, so we foresee several external developments that must occur, for us to achieve [our targets]. We need the availability of comparable, consistent, and accurate climate data as well,” said Chaudhury.
If investees are not committed to decarbonisation goals, or do not provide reliable disclosure metrics, this will undermine efforts by investors to decarbonise their own businesses, she added.
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Many companies have made net zero pledges. Credible climate transition plans are needed to provide confidence that the commitments you’ve made will turn into real action.
Amita Chaudhury
Harmonising the “alphabet soup” of disclosure mechanisms
Credible climate transition plans also rely on consistent and trustworthy reference points for disclosure. However, the landscape for environmental reporting has become increasingly fragmented with the emergence of new disclosure frameworks.
There are already over 600 ESG reporting provisions globally as of 2021, with differing interpretations of sustainability, according to a report by global consulting firm Ernst and Young.
Well-established mechanisms such as the Taskforce on Climate-related Financial Disclosures (TCFD) and the SBTi have recently been joined by new players, such as the Taskforce on Nature-related Financial Disclosures (TNFD), which provides organisations with a disclosure framework to report and act on nature-related risks and opportunities.
To provide a comprehensive global baseline of sustainability-related disclosures, the International Sustainability Standards Board (ISSB) issued its inaugural standards mid-last year.
ISSB falls under the International Financial Reporting Standards (IFRS) Foundation, to which AIA holds membership for its Sustainability Alliance.
IFRS S1 provides a set of disclosure requirements for companies to communicate to investors their sustainability-related risks and opportunities in the short, medium and long term, while IFRS S2 sets out specific climate-related disclosures.
“We are supporting these efforts to ensure that there is no further fragmentation of the alphabet soup of ESG ratings and frameworks,” said Chaudhury.
Global adoption of the new ISSB standards is expected to drive transparency and better valuation of sustainability considerations in business decisions.
Credible climate transition plans may also become mandatory as disclosure requirements grow increasingly stringent; climate transition plans are, for example, already mandatory for listed companies in the European Union under the Corporate Sustainability Reporting Directive.
While long-term goals are important, it is credible and science-backed transition plans – and companies taking concrete action based on those plans – that will reassure stakeholders and lead to tangible and measurable positive results, concludes Chaudhury.
“Many companies have made net zero pledges. Credible climate transition plans are needed to provide confidence that the commitments you’ve made will turn into real action – that you are on a trajectory to actually reducing emissions and achieving specific targets,” she said.
