Key Takeaways
- Globally, across various sectors, only 40% of companies disclose their decarbonization measures and simultaneously quantify their contribution to achieving emission targets. Both criteria are essential for assessing credible transition plans.
- Companies in Europe and Japan quantify their measures significantly more often than companies elsewhere.
- The controversial use of carbon credits and negative emission technologies to achieve emission targets does not seem to be widespread practice among many high-emitting companies.
- We observed significant differences between sectors, which could be of interest to investors in their own assessment of credible climate transition plans.
Download Report
Current Challenges in the Assessment of Climate Transition Plans
Investors are increasingly focused on analyzing corporate climate transition plans due to their expected impact on long-term financial performance and sustainability. As the world grapples with climate change, corporate strategies for managing carbon emissions, adapting to regulatory changes, and transitioning to a low-carbon economy are becoming crucial indicators of resilience and competitiveness.
However, sustainability teams tasked with evaluating the credibility of these plans may face many challenges. They include inconsistencies in the data format, terminology, and metrics used by companies in their climate disclosures or variations in data quality and completeness across reports.
Additionally, some companies may provide selective data or exaggerate their climate commitments. In this regard, evaluating climate transition plans can be challenging because it requires assessing many aspects of corporate climate action. These include a company’s net zero vision, the ambition of its emissions reduction targets, its decarbonization measures, and the financing needed for the transformation (see Figure 1).
Figure 1: Typical Elements of a Credible Climate Transition Plans
Given this challenge, the use of Large Language Models (LLMs) can support the research process. LLMs can efficiently extract relevant information from vast amounts of unstructured data contained in corporate reports, automating the data collection process.
The models also offer powerful capabilities for understanding and interpreting complex language patterns. This allows them to identify key aspects of climate transition plans across multiple reports. In this study, we present key findings from our AI-driven evaluation of companies’ implementation strategies, with particular focus on their decarbonization measures.
As part of this research, we also examined two controversial approaches to corporate emissions management: the use of carbon credits and the use of negative emissions technologies.
Corporate Decarbonization Measures and the Need for Quantification
In general, companies have a range of measures at their disposal to decarbonize their operations and value chain. These include purchasing or producing renewable energy, increasing energy efficiency, using new technologies for lower-carbon processes and products, switching to new business areas, or influencing suppliers and customers.
To assess the credibility of these measures as part of a climate transition plan, we leveraged the CA100+ Net Zero Company Benchmark 2.0 for our analysis.
This framework requires that companies disclose relevant transition measures and quantify how these measures contribute to achieving emission reduction targets in order to make credible statements about their actions.1 This seems reasonable, as the quantification of measures increases transparency and accountability towards stakeholders by providing better insights into the sources and drivers of emissions reductions.
Based on these two specific assessments criteria, we trained an LLM and applied it to analyze a sample of high-emitting companies. To select the sample, we focused on large-cap companies with an emissions reduction target for which a current Corporate Social Responsibility (CSR) report was available, taking into account regional and sectoral diversification.2 Overall, our sample included 319 companies.
The model’s task was to determine how many companies reported and quantified their decarbonization measures to assess how common this practice is among high-impact companies.3 We did not explicitly differentiate between emission scopes but found that measures were more often tied to Scope 1 and 2 emissions than to Scope 3.
Our model suggests that while over 80% of companies in our sample reported on decarbonization measures, less than 40% of all companies also made a clear quantification of their measures. The level of quantification was higher among Japanese (67%) and European (48%) firms, together making up about one third of the sample.
Figure 2: Share of companies disclosing decarbonisation measures and their impact by sector (top 10 sectors, n = 230)
Continue reading
Unlock the full article and gain exclusive insights.
However, the average rates of quantification per sector were mostly low, especially in the sectors that made up a large portion of the sample, such as utilities and oil & gas (see Figure 2).4
These low compliance rates occurred even though our model had flexibility in interpreting quantification. For example, quantifying impact could include reporting past contributions of specific measures or providing sub-targets, such as future renewable energy procurement or improved recycling rates.
However, the model found many instances where no quantification towards target achievement was made and subsequently dismissed the disclosure as noncompliant with the assessment criterion (see Figure 3).
Figure 3: AI-generated assessment of the quantification of decarbonization measures by a South Korean chemical company in its CSR report
The company’s report outlines several initiatives aimed at reducing Greenhouse Gas (GHG) emissions, such as the transition to renewable energy, development of plastic recycling technologies, and the introduction of an Internal Carbon Pricing (ICP) system to accelerate the transition to a low-carbon business model. However, the report does not provide specific quantifiable contributions of these decarbonization actions towards achieving its GHG emissions reduction targets. While the commitment to securing 260 GWh of renewable energy and offsetting emissions through cookstove distribution projects are mentioned, the direct impact of these actions on the company’s overall GHG emissions reduction targets is not quantified.
It should be noted that in positive cases, we did not perform a qualitative assessment of the information collected by the LLM. This means that quantifications were acknowledged even if the measures possibly referred to non-material emissions. Therefore, the share of positive cases could be even lower after such a qualitative analysis.
In conclusion, our model suggests that the majority of companies worldwide, across sectors, have not fully met the examined criteria for credible transition plans. Better results were achieved by companies from Europe and Japan, which may be related to the wider adoption of Science Based Targets (SBTs) and more developed disclosure regulations in these markets.
However, our findings reveal persistent gaps in corporate disclosures outside of these regions. More companies need to move away from ‘cheap talk’ and focus on disclosing quantifiable achievements and actions to meet their shareholders’ growing demands for credible transition plans.
How Carbon Credits and Negative Emissions Technologies Fit in Climate Transition Plans
Another aspect of our analysis related to the intention of companies to use carbon credits and negative emissions technologies (e.g., Carbon Capture and Storage, or CCS) to achieve their emission reduction targets. While these approaches can contribute to climate protection, their use by companies for target achievement is often criticized.
For example, many critics argue that the quality and effectiveness of carbon credits are often low. They also point out that companies may use them to distract from their own carbon emissions and insufficient efforts to reduce them.
This criticism recently became louder when the leadership of the Science Based Targets initiative (SBTi), the authority on corporate emissions targets, publicly considered allowing carbon credits as an instrument for achieving targets. This was a shift from previous comments, where they rejected this idea.
Furthermore, our model did not distinguish whether companies intend to use carbon credits as a primary tool for achieving their targets or merely to offset unavoidable residual emissions.
The latter can be justifiable under certain conditions, and it is assumed that some companies follow this approach. Therefore, the proportion of companies in the study that pursue carbon offsetting as a core measure could be even lower. Still, at over 32%, the share was higher among Asian companies, particularly Japanese firms.
Additionally, companies in certain sectors, including aerospace & defense and oil & gas, were found use carbon credits more heavily. Their usage was higher compared to other sectors (see Figure 2). This indicates that investors concerned with the use of carbon credits as part of companies’ climate transition plans may want to pay particular attention to firms in these regions and sectors.
The potential for specific risks to arise was highlighted by a recent EU investigation into greenwashing practices among European aviation companies, which are being asked to clarify the extent to which their claims about emission reduction through offsetting can be supported by scientific evidence.
Like carbon credits, controversies also exist around the use of negative emissions technologies such as Carbon Capture and Storage (CCS) or reforestation.
These technologies are still in the early stages of development or have not yet been proven at scale. Critics often fear that companies overstate the role of these technologies in their climate transition plans to create a positive image without making substantial changes to their emission intensive operations.
The reasons for this can vary. It can be reasonably assumed that the willingness for genuine decarbonization is relatively low in the oil & gas sector, and that CCS is used to legitimize the existing business model.
In other sectors, breakthrough technologies, such as green hydrogen or electric arc furnace steelmaking, are in early stages of development or too expensive in the foreseeable future. This is why CCS may be seen as an important alternative for emission avoidance.
Figure 4: Reported use of carbon credits and negative emissions technologies for target achievement by sector (top 10, n= 230)
In summary, while carbon offsetting and negative emissions technologies can play an important role in mitigating global warming, they are not without their challenges and controversies.
Critics often say these methods should complement genuine efforts to reduce emissions, not replace them. They argue real progress comes from reducing emissions through direct actions and sustainable practices.
For this reason, an overly strong reliance on these approaches by companies could affect the credibility of their climate transition plans. Our quantitative analysis showed that these measures are not very common for achieving targets among global high-impact companies. However, the associated risk of greenwashing may be higher in certain regions and sectors.
How Clarity AI Can Help You Assess Climate Transition Plans
At Clarity AI, we leverage our advanced technology to deliver the only solution in the market that tracks Net Zero progress in a simple, comprehensive manner based on the five criteria of the IGCC’s Net Zero Investment Framework (NZIF).
We help market participants integrate temperature alignment metrics into portfolio analysis to understand the true ambition behind companies’ emissions targets.
To ensure the relevance and timeliness of our insights, we automatically process corporate transition plans through the use of LLMs that help us analyze and synthesize the information in a scalable manner.
- A similar, albeit weaker, requirement for determining the contribution of measures to target achievement can also be found in the Transition Plan Taskforce Disclosure Framework.
- We considered CDP reported targets, Science-based targets, net zero commitments or other quantified GHG emissions targets. The sample comprised companies from North America (36%), Europe (27%), Asia ex Japan (21%), Japan (8%), and others (8%).
- For quality assurance, manual validations of the results were conducted.
- Sample sizes per sector: Utilities: 54, Oil & Gas: 50, Chemicals: 36, Automobile Manufacturers: 18, Trading Companies & Distributors: 13, Diversified Metals & Mining: 13, Aerospace & Defense: 13, Industrial Conglomerates: 12 Steel: 11, Construction Machinery: 10.
