Avoiding greenwashing in transition plans
If current trends continue, global temperature rise will exceed 1.5°C before 2030. Globally, companies need to urgently change the way they operate. Achieving a trajectory that is compatible with limiting global warming to 1.5°C implies halving greenhouse gas emissions by 2030 and becoming carbon neutral by 2050 at the latest. To do this, companies need to transform their entire value chain, which requires planning and monitoring mechanisms.
Corporate climate transition plans are intended to provide a solid, transparent and evidence-based roadmap that shows how the company can deliver a transition in line with the 1.5°C target, and enables other stakeholders to hold the company accountable for any shortcomings. However, in the absence of mandatory standards to ensure the quality of transition plans and without any monitoring of their implementation, transition plans can become formidable greenwashing tools. Pending regulations to remedy this major problem, all stakeholders have a role to play in ensuring the quality of transition plans.
The transition plan jungle
There is currently no established framework for standardizing the content of transition plans. Several methodologies have been developed, with varying objectives and scopes. Companies publish elements that are difficult to compare and analyze, without necessarily following a particular methodological framework.
More often than not, the issue of transition planning is reduced to decarbonization targets. Yet even these targets remain very partial. For example, only 4% of the 1003 large companies analyzed by Net-Zero Tracker in 2023 had targets in line with the UN Race To Zero’s (RTZ) recommendations. Beyond targets, companies’ behaviour is often at odds with their net zero commitments. For example, of the 114 fossil fuel companies surveyed by Net-Zero Tracker, only 2 coal companies – and no oil and gas companies – had committed to stop developing new capacity.
In the absence of any rules or supervision, there is a risk that “cosmetic” transition plans multiply. These would give a false sense of security, while masking chronic climate inaction.
New rules emerge…
Adopting a transition plan will become a regulatory requirement for large European companies operating within the European Union with the entry into force of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). For banks and insurers, prudential transition plans will also have to be defined following the revision of the Capital Requirement Regulation (CRR) and Solvency II.
Outside the EU, a number of bodies are working on the issue of transition plans, but have not produced binding rules so far. The work by the Network For Greening the Financial System (NGFS), the United Nations High Level Expert Group (UN HLEG), the US Treasury and the UK Transition Plan Taskforce (TPT) all point to future regulations in this area.
However, even the EU requirements are not enough to ensure the quality of transition plans or their effective implementation. While the new legislation encourages companies to adopt climate transition plans, it does not ensure that the plans are relevant, and therefore does not avoid greenwashing.
Identifying red flags
The priority for avoiding greenwashing is to ensure that transition plans contain key elements for decarbonizing the company and ending its most harmful practices and activities. This could be done by identifying “red flags”, i.e. elements that automatically show that a company’s strategy is incompatible with limiting global temperature rise to 1.5°C.
In its report on corporate climate transition plans, Reclaim Finance identifies a series of red flags concerning climate strategies. These can be leveraged by regulators and supervisors, auditors and financial players to quickly identify transition plans that are clearly inadequate.
Such red flags include, for example: decarbonization targets that cover only part of a company’s activities or that do not cover all emission scopes; significant volumes of capex devoted to activities with high greenhouse gas emissions and/or the absence of financial metrics to support the deployment of sustainable activities… For companies active in the fossil fuel sector and for financial institutions, support for developing coal, oil and gas is a clear red flag given the scientific evidence available.
Demanding quality: towards effective regulation
To make transition plans really work for the transition means going beyond simply identifying red flags.
To make transition plans really work for the transition means going beyond simply identifying red flags. Thus, the work of Reclaim Finance – based on a review of the main public methodologies related to transition plans – provides a list of essential criteria for robust plans. These generic criteria should ideally be supplemented – notably by taking into account sectoral specificities.
Net-zero alliances, climate coalitions and other organizations can already draw on these elements to produce clear, demanding standards to guide corporate behavior. Financial institutions, which finance these companies, have an essential role to play in disseminating these good practices. They must also use them to set an example in defining their own transition plans.
While these actions are important, only a standardized approach to transition plans can limit the risks of systemic greenwashing. The European Union is well on the way to becoming a pioneer in the adoption of transition plans, but should go further by clearly defining the minimum criteria required for them to be considered sufficiently robust. At the same time, supervisors and regulators must demand that financial players draw up robust plans that minimize financial risks and impacts on the climate and the environment. While this may seem a difficult task, robust transition plans can help financial institutions to meet both CSRD and climate risk supervision requirements.
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