Growth in climate change ambitions

In recent years, corporate and investor concern regarding the financial impacts of climate change has escalated. Approximately one in five of the Forbes Global 2000 have established net-zero or other long-term decarbonisation targets. Research by FCLTGlobal indicates that 84 of the world’s 100 largest companies have set climate change goals, with the majority announced or updated since January 2020. On the investor side, over 450 financial firms, representing more than $130 trillion in assets, have committed to net-zero transition outcomes. Furthermore, 615 of the world’s largest investors are actively engaging companies on their climate strategies. Despite these commitments, transforming intentions into actionable strategic plans remains complex, and many organisations are slow to provide details on how these goals alter their vision for long-term value creation.

Financial implications are not reflected in climate change disclosures

While 95% of S&P 500 companies report on their climate and environmental, social, and governance (ESG) performance, investors remain sceptical due to a lack of specifics. An October 2020 survey of nearly 3,000 investment professionals found that while 40% factor climate risk into decision-making, half lack the necessary details, such as scenario analysis and carbon-emissions pricing. Additionally, a 2021 Edelman survey found that 79% of institutional investors were concerned that companies were not effectively executing their net-zero pledges. C-suite executives also acknowledge this gap, with 45% stating that their company’s approach to sustainability was primarily motivated by brand management rather than risk reduction or value creation.

Research findings: a gap between climate change and long-term corporate strategy

FCLTGlobal’s assessment of the 100 largest public companies by market capitalisation reveals a significant disconnect between climate goals and strategic planning. Although 84 companies have set goals and 90 have stand-alone ESG reports, only 27 referenced climate change in their long-term strategy presentations to investors. Of these, only eight provided substantive disclosures. Furthermore, while 79 companies discussed climate change in their annual reports, the discussions were largely high-level or retrospective. Only 25 companies disclosed plans to take advantage of climate-related business opportunities, and a mere 13 provided details on planned capital allocation in support of these efforts. Over half of the companies with climate goals have yet to disclose the integration of climate into their strategic plans.

Building investor confidence through integrated climate transition plans

To establish credibility, companies must demonstrate how their climate change approaches are integrated into long-term strategic plans. This involves communicating how climate ambitions are supported by capital allocation, research and development (R&D) efforts, and specific key performance indicators (KPIs). Developing integrated plans allows investors to assess how a company’s strategy contributes to their own net-zero goals, fostering long-term support and stock retention.

Climate transition conversation guide

FCLTGlobal developed the Climate Transition Conversation Guide to help companies assess how climate change affects every aspect of their long-term strategy. The guide is structured around six core elements: corporate purpose; external environment; strategy, goals, and KPIs; capital allocation and investments; risks; and accountability and incentive alignment. This tool is designed to drive internal deliberations and assist investors in engaging with portfolio companies on the details of climate integration.

Corporate purpose

A well-defined corporate purpose aligns with long-term financial performance and motivates stakeholders. Companies are encouraged to update their purpose statements to feature their role in the climate transition explicitly. Leading practices are observed in organisations like BP, which aims to help the world reach net-zero, and Tesla, whose mission is to accelerate the transition to sustainable energy. Unilever also incorporates sustainability into its core strategy to make sustainable living commonplace.

External environment

Understanding how the market context has evolved is critical for maintaining a competitive advantage. Climate change affects core drivers of growth, supply chains, and customer preferences. BlackRock’s strategic plan highlights sustainable investing as a critical driver, while Dow identifies an $800 billion addressable market driven by climate and sustainability factors affecting its market verticals.

Strategy, goals, and KPIs

A long-term strategic plan should translate purpose into specific goals and KPIs across three, five, and ten-year horizons. Companies such as Enel have centred their plans on the energy transition, aiming to become a major player in the renewable sector. Shell’s plan provides milestones for its 2050 net-zero goal, including specific 2030 transition targets. Honeywell International has directed approximately 60% of its new product R&D activity towards ESG-oriented outcomes.

Capital allocation and investments

Effective capital allocation indicates how a company intends to distribute financial resources to execute its plan. Only 13% of the assessed companies showcased capital allocation in support of climate priorities in their annual reports. BP has committed to increasing the proportion of capital expenditures in transition growth businesses to more than 40% by 2025 and 50% by 2030. Volkswagen is deploying capital towards becoming a software-driven mobility company, focusing on electric vehicles and hybrid powertrains.

Risks

Robust risk management identifies threats to strategic execution. While 57% of companies noted exposure to climate risks in annual reports, the narratives were often boilerplate. Unilever uses scenario analysis to adapt strategies for agricultural commodities, while Prosus and Taiwan Semiconductor have integrated climate as a source of risk to financial and natural capital within their risk matrices.

Accountability and incentive alignment

Organisational structures must allow for the integration of climate change at all levels. Only 10% of companies discussed how climate is integrated into compensation plans. Verizon serves as a leading example, linking 10% of its short-term incentive awards for corporate employees to ESG metrics, including climate change and diversity targets.

Alignment with climate disclosure frameworks

Thinking through the elements of the guide positions companies to provide detailed information across major disclosure standards, including the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) climate change exposure draft.

Communicating climate transition strategies to investors

Details of integrated strategies should be shared through strategic plan communications, financial reporting, annual reports, and direct investor-corporate dialogue. Highlighting progress in capital allocation and meeting long-term goals is essential for building trust.

Conclusion

To remain resilient, companies and investors must be responsive to climate challenges through the historic redeployment of capital. Those who credibly establish and communicate robust climate-responsive strategies will distinguish themselves from peers and gain investor trust, ensuring capital is deployed for long-term prosperity.