There are considerable disparities in the extent to which companies are prepared for the transition to a low-carbon future, with sectors such as oil and gas trailing behind. This is a key finding of the Transition Pathway Initiative (TPI) which recently released its TPI 2024 State of Transition Report.
Established in 2017 as a joint initiative by the National Investing Bodies of the Church of England and the Environment Agency Pension Fund, TPI is a global initiative that assesses companies' readiness for the transition to a low-carbon economy. FaithInvest has written previously about the TPI’s Sectoral Decarbonisation Pathways Report – which details the sectoral decarbonisation pathways that many investors use to judge whether companies are on track to transition to net zero by 2050.
The State of Transition Report 2024 gives in-depth analysis of the carbon performance of 409 companies and the management quality of more than 1,000 of the world's largest carbon-emitting public companies.
This assessment, which tracks progress across 23 key indicators, ranks companies from Level 0, indicating a lack of awareness of climate change, to the newly introduced Level 5, which reflects advanced transition planning. These companies, valued collectively at around US$39 trillion, are critical players for both investors and the future of the climate.
Credibility challenge
This year’s report showed that the number of biggest emitters with long-term climate targets aligned with the 1.5°C target of the Paris Agreement has increased from just 7% in 2020 to 30%. Most companies (57%) are at Level 3, indicating they recognise climate change as a business risk or opportunity, have made a policy commitment, set emissions reduction targets, and disclosed their Scope 1 and 2 emissions.
However, the majority have not reached the more strategic climate approach required at Level 4. Additionally, no company meets all Level 5 criteria, showing that none have developed a comprehensive, actionable transition plan aligned with decarbonisation goals.
As corporate science-based targets become more widespread, the true challenge lies in the credibility of their net zero commitments. Many companies still lack credible short- to mid-term targets, which raises questions about their ability to meet these long-term goals.
There are also sector and geographical disparities – whilst sectors like diversified mining (50%) and steel (46%) show strong alignment with climate goals, others, such as food producers (8%) and oil & gas companies (6%), lag behind.
Companies based in Europe, Australasia, and Japan lead the way in 1.5°C-aligned targets, with over 60% of firms on track. However, the report points to major gaps in China and other Asian countries, where a large proportion of companies either lack sufficient disclosure or are far off track.
Relevance for faith-based investors
Why might this report be of relevance to faith-based investors? Since the first State of the Transition Report was published by TPI in 2018, investor perspectives have evolved beyond primarily focusing on exclusion lists to putting greater emphasis on how companies are managing the transition to a low-carbon economy.
Sectoral disparities outlined in the report may present an opportunity to target underperforming industries through shareholder engagement and advocacy.
Faith-based investors may also wish to leverage the TPI universe to evaluate a broader segment of their portfolios, ensuring that investments align with their faith values. The report may also provide valuable insights into companies' transition plans and governance, and where to push for better corporate climate action in regions with weaker performance.
Faith-based investors may also want to ask their asset managers how they factor in the risks highlighted by the TPI in their security selection process. They could also inquire about the extent to which underperforming companies are included in their portfolio, how those companies' exposures to TPI-identified risks are assessed, and how the asset managers engage with underperforming companies whose securities they hold.
As always, FaithInvest is here to support faith-based investors navigate these issues as they seek to become more faith-aligned in their portfolios.
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