How to spot a credible transition plan: Energetics

Editorial note: This is the fifth in a six-part series of articles brought to you by Energetics

Moving past ambitious net zero targets, investors are now focusing on how companies will get from here to 2050 and how robust their transition plans are.

Recently, Boral shareholders questioned the construction giant for walking back its 2025 commitment to reducing emissions from 18% to 12-14% on the way to net zero by 2050, with investors pressing the company to stick with its 2030 target to limit Scope 1 and 2 in line with the Science Based Targets Initiative (SBTi) and United Nations Framework Convention on Climate Change Race to Zero.

Meanwhile, the UK is considering making transition disclosure mandatory for larger British companies and has urged businesses to view transition disclosure as a "critical component of a firm's business strategy - helping to explain to their customers, shareholders and investors how they will adapt and grow as the global economy transitions to net zero."

Q&A with Andrew Tipping, general manager, Energetics

Q: What is a credible transition plan?

A: For me, it's about having a robust, technical and financial basis for your net zero strategy, and more broadly planning how your company will transition to a low-carbon economy. It's about understanding the risks and opportunities arising from a changing climate and going into detail as to how you're managing these from a strategic, governance, operational, technology, and financial perspective.

To be credible, transition plans need to have technical rigour and stand up to scrutiny, as well as be integrated with broader business strategy and operationalised with sufficient budget and resources.

Q: How do you understand those risks and opportunities and what are the tools?

A: Understanding climate risk often starts with climate scenario analysis. There are a range of different potential futures, and businesses need to understand how they're impacted across multiple scenarios. This includes the physical risks (eg. changing weather) and transitional risks (eg. government policy changes, technology shifts, financial markets, and consumer behaviour).

Mandatory reporting will require consideration of at least two scenarios, one of them being a 1.5°C world, but leading companies usually conduct four scenario analyses to assist them stress-test their business strategy and resilience.

Having an informed view of the nature and extent of risks and opportunities is crucial to developing a credible transition plan that mitigates or capture them, enabling business to understand how to prepare for change, and prosper in the long-term.

Q: How do you translate potential risks under various scenarios into financial calculations?

A: Some transitional risks (such as a price on carbon, electricity price increases, loss of a diesel fuel rebate or carbon border adjustment mechanisms) are relatively easy to put a number on. You model for the increased cost to the business and use scenario and sensitivity analyses to assess the financial impact. However, the ability for a company to pass on these costs are where the financial risk really lies. Physical risk can be a lot harder to assess and typically requires complex, asset-specific modelling to calculate their financial impact.

Q: How do you build long-term transition plans when most C-suite leadership has a relatively shorter tenure?

A: Despite the sometimes 'short tenure' of C-Suite leadership, long-term planning for a decarbonised economy is essential for all businesses. One of the key elements of a credible transition plan is breaking down the actions into 5-year time horizons, and clearly demarcating who is responsible for delivery within the organisation. This typically aligns closely with business planning cycles and can be baked into short-term incentives or remuneration-linked KPIs.