Ethical Partners is very pleased to share our new Credible Transition Plan Framework

March 12, 2024
Major Reports

Ethical Partners notes that whilst there has been a welcome increase in carbon emission reduction targets and commitments across the ASX over the past few years, there is wide variation in the detail included in these plans, as well as the credibility of the transition planning by ASX listed companies. In fact, in our own internal and detailed assessments of the credibility of ASX listed companies’ transition plans through Ethical Partners proprietary in-house ESG analysis and investment process, not one company assessed met all key elements of what Ethical Partners deems credible for a transition plan.  

These findings are backed up by similar research from the CDP, who have reported that only 0.4% of organisations reporting through them disclose a company transition plans that sufficiently meets their own key indicators of a credible transition plan. A further recent report by Climate Integrity has found that the no company they analysed had “a fully comprehensive, quantified, climate allocated and independently verified plan for reducing emissions in line with a scientific pathway.”

While we recognise that all companies are at different stages of developing and implementing transition plans, we firmly believe that the urgency at which both the climate crisis, and the potential climate risk in investments is escalating, warrants that portfolio companies urgently implement and disclose credible transition plans. Further, the increasing focus on greenwashing places means that it is incumbent on companies and investors alike to be able to robustly show alignment between the company’s transition plans, their real-world actions towards decarbonisation, and their stated carbon reduction targets and climate statements.

Ethical Partners also firmly agrees with Climate Energy Finance that this “lack of transparency around the basic information that is required to evaluate company pledges’’, as well as an “absence of the kind of clear and concise presentations of progress made against core elements of a transition plan” make comparability between transition plans, as well as clear investment signals difficult to impossible. We also agree that increased transparency and accountability on transition planning is absolutely crucial to allowing investors to allocate capital to climate solutions and to avoid investment risk.

At present, the level of detail in ASX listed companies’ engagement plans is inadequate for investors to fully understand and analyse the alignment between the companies’ statements and their actions, as well as the progress which companies are making towards their targets, and how they are fully understanding and using their levers available, seizing their opportunities and addressing their impacts. This then markedly limits the ability of the market to allocate capital to those leading in their decarbonisation strategies, avoid investment in those companies misaligned with a credible transition plan, and ensure the rapid and genuine decarbonisation of their portfolios.

As such, Ethical Partners has committed to developing and publicly disclosing our clear, robust framework for what we consider a credible transition plan, which includes the 16 indicators/disclosures we consider critical to our ability to truly understand the credibility of a companies transition plan. This framework serves to provide transparency for both our portfolio companies, as well as our clients, on what our analysis and direct company engagement are focussing on when we both assess for, and advocate for improvement in the transition plan disclosures from all portfolio companies.

As such, this best practice credible transition plan framework serves to guide Ethical Partners:

  1. Own internal analysis on a company’s progress on understanding and managing their climate related risks and opportunities.
  2. Own internal assessment of those companies both leading or lagging in their current disclosures on credible transition plans.
  3. The identification of areas of concern with potential investee companies who, through their transition plan disclosures demonstrate either clear red flags, or a demonstrable lack of progress, regarding the credibility of their transition plans.
  4. This in turn does influence Ethical Partners overall analysis of investment risk and opportunity and our subsequent investment thesis, valuations, and portfolio decisions, including the construction of our investable universe, as appropriate. This best practice credible transition plan framework furthermore serves to guide:
  5. The identification of areas of improvement required by portfolio companies.
  6. Our communication of expectations with portfolio companies and clients
  7. Our direct company engagements, stewardship, proxy voting and wider advocacy activities

Accordingly, this formal definition of, and our framework of assessment for best practice credible transition plans will be formally shared with the Boards and Management of all portfolio companies in March 2024, along with a formal written engagement continuing our expectation that companies will:

  • implement and publicly disclose detailed and credible transition plans as a matter of urgency.
  • increasingly improve their disclosures and transparency in line with this best practice framework

Ethical Partners furthermore hopes that this framework will encourage wider market conversation and attention to the lack of disclosure and credibility in transition plans across the ASX as a whole. These areas of focus are also the areas we are advocating for greater disclosure and transparency on in our wider policy and legislative advocacy.

We look forward to discussing this framework further with our clients, portfolio companies and other stakeholders over the coming year.

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