A persistent disconnect between companies and investors limits capital flows into decarbonization projects. Effective climate transition planning can help close the divide.
Corporate climate action is at a critical juncture. While companies increasingly understand their climate-related risks and impacts, and many are setting ambitious targets to address them, businesses still find it difficult to convert targets into operational actions that create commercial value. One major roadblock is securing financing for decarbonization projects, such as installing new energy technologies and developing new low-carbon products and services.
In their inaugural whitepaper Reimagining company-investor engagement to catalyze climate action, the Council on Sustainability Transformation (convened by ERM) argues that putting business-investor relationships on a new footing could accelerate the private sector’s response to climate change. This is more important than ever, considering the increasingly dire climate science and inconsistent policy responses across regions and governments. A robust investor-company vision to reduce risk and seize opportunity over short to long-term time horizons is urgently needed. Transition planning can help get us there.
The disconnect between investors and companies has two key components: valuation and communication.
Regarding valuation, many investors do not have all the skills and methodologies in place to accurately assess and compare the financial value of the climate risks or market opportunities faced by the companies in which they invest. This is exacerbated by investor short-termism, given that the commercial upside of decarbonization projects often materializes over a longer timeframe—what Mark Carney, the UN Special Envoy for Climate Action and Finance and former Governor of the Bank of England, described as the “tragedy of the horizons.”
In terms of communication, many companies know where to find individual cost efficiencies and low-carbon market opportunities. However, they struggle to package these into the kind of robust, data-driven business cases investors look for when assessing the risk-reward profile of any new opportunity.
Companies need to do a better job of convincing investors of the potential commercial value of decarbonization projects. While much time and attention has been devoted to the urgency of net zero targets, many investors still find it hard to grasp the commercial benefits of corporate decarbonization initiatives and fit them into their long-term investment strategies.
It is up to companies to show investors that decarbonization is not only about individual projects but entails a strategic reset touching every aspect of their operations. They will need a clear vision of how decarbonizing their business will deliver value and create new growth opportunities and how they plan to execute it in a systemic way. Most companies aren’t there yet.
Done right, climate transition planning is a great tool for bridging the valuation and communication gap between companies and investors
First, it pushes companies to develop concrete roadmaps for achieving climate goals by identifying and quantifying the risks, dependencies, and commercial opportunities related to decarbonization and then financially quantifying them. Having risks and opportunities in clear view helps companies create strong business cases that optimize CapEx and OpEx investment decisions. Secondly, transition planning content can support companies in building compelling narratives explaining where their transition journeys will lead and how that trajectory will increase commercial resilience over time.
Both these factors can make investor engagement easier. Companies can show individual business cases for decarbonization projects, including the financial value they will deliver, and they can also explain how these projects fit their larger transition story. This last element is especially important for projects that require more time to deliver results. Investors need clarity on how today’s decarbonization investments will grow future returns, thus warranting longer timelines.
Like anything of value, getting climate transition planning right takes focus, effort, and time. Truly embedding climate goals into corporate strategy, operational plans, and budgets is a multi-year process. To implement transition plans well, corporate functions must effectively work together, and senior leadership and operational managers must be supported by training, clear mandates, individual targets and incentives, and rigorous accountability. If companies treat climate transition planning as a compliance exercise, its potential won’t fully materialize, and planning efforts will risk leaving investors unimpressed.
Investors also need to step up by investing in the skills and capacity required to understand the value of the climate transition plans and decarbonization business cases they are assessing. Investors are increasingly moving in that direction, supported by various frameworks and transition planning guidance to encourage a robust flow of climate transition finance. Increasing regulatory demand for climate transition planning applies additional pressure.
On the policy side, a wave of new requirements for companies has put climate transition planning firmly on the map. Beginning in 2025, the EU Corporate Sustainability Reporting Directive (CSRD) expects 14,000 companies to state whether they have a climate transition plan and provide details if they do, while the EU Corporate Sustainability Due Diligence Directive (CSDDD) wants 6,000 companies to have transition plans ready by 2027. The International Sustainability Standards Board (ISSB), whose framework has been adopted by regulators worldwide, also increased its focus on transition planning by incorporating the Transition Plan Taskforce (TPT). The TPT is widely recognized as a trailblazer in transition planning disclosures.
Momentum among investors is growing as well. Several investor organizations, like the Glasgow Financial Alliance for Net Zero Banks (GFANZ) the Institutional Investors Group on Climate Change (IIGCC), have published climate transition planning guidance for investors and financial institutions to help them understand the climate-related risks, opportunities, and dependencies of their clients. GFANZ saw strong adoption of the Net-Zero Transition Planning framework and expects more than 700 financial institutions to apply it.
Assessing and measuring the value of carbon in the pre-investment stage is another way for investors to identify viable decarbonization opportunities. For this purpose, ERM and The Private Equity Taskforce (PESMIT), part of the Sustainable Markets Initiative, have developed a methodology to help investors map the financial value of the carbon emissions their investment would avoid over time.
Companies are increasingly recognizing the strategic value of transition planning and the positive role it can play in attracting capital for decarbonization. In 2023, almost 6,000 companies reporting to CDP disclosed their climate transition plan, a 50 percent jump compared to 2022, and 8,200 more reported that they expected to create a plan by 2025.
Climate transition planning is not a silver bullet that will solve all the complexities of the transition to a low-carbon economy. However, if companies and investors put in the work, transition planning can lay the foundation for capturing the commercial value of decarbonization and improving communication and mutual understanding between companies and investors. The capital flows this would unlock could bring a net-zero future much closer.
