Environment Focus
An environmental lens on policies for better lives
Closing the credibility gap: Aligning corporate near-term actions with long-term net-zero targets
by Kern Fastrup, OECD Environment Directorate
Record-breaking temperatures and frequent climate disasters have become a new unsettling reality, causing billion-dollar losses and reversing global development. In response, corporates are stepping up action on climate change. Although still not ubiquitous, net-zero commitments are rapidly becoming commonplace in many companies. The Science Based Targets initiative (SBTi) estimates that companies with science-based targets now represent 34% of the global economy by market capitalisation.
While this may appear promising, not all of those with targets have interim ones. Only 26% of the combined assets under management of the 77 largest asset managers with net-zero pledges have set interim targets for 2030 or earlier. Moreover, less than one third of companies included in the CDP’s Corporate Environmental Action Tracker are on track to meet their climate targets. This gap between long-term targets and near-term actions calls into question the credibility of these commitments, underlines greenwashing risks and has the potential to compromise market integrity.
Supporting corporate transition plans
To ensure environmental integrity, there is a pressing need for pledges to be backed by credible and robust climate transition plans. The OECD’s Guidance on Transition Finance, released in 2022, helps corporates build credible and robust climate transition plans. Although there are many promising national developments in transition finance, such as the UK moving towards mandatory transition planning, less than 1% of companies included in the CDP’s Corporate Environmental Action Tracker have credible transition plans in place.
In the process of transitioning high-emitting sectors, industries and activities towards net-zero and sustainable practices, there is often a risk of creating “carbon lock-in”. In particular, carbon lock-in can occur when investing into technologies that represent a marginal or incremental improvement but are overall still emission-intensive and long-lived, or when investing into efficiency improvements of existing polluting assets thus delaying the transformation or replacement of those assets. Existing transition finance policies and frameworks emphasise the need to avoid carbon lock-in, but largely do not set clear guidance on how to do so. To navigate this challenge, the OECD report Mechanisms to Prevent Carbon Lock-in in Transition Finance proposes ways to strengthen mechanisms to prevent carbon lock-in and foster integrity and credibility to scale up transition finance.
Science-based scenario analysis can help transform long-term climate targets into a pragmatic series of steps to inform net-zero transition policies and underpin the credibility of net-zero commitments. New work by the OECD provides a framework for analysing the Paris-consistency of climate change mitigation scenarios and assesses their use in financial sector target setting and alignment assessment. The analysis shows that mitigation scenarios most frequently used in the financial sector do not sufficiently reflect the level of ambition in the Paris Agreement. In part, they also still lack the granularity needed for applications in the financial sector. The analysis provides action points for how policymakers, scenario providers and the financial sector can contribute to improved design and use of scenarios in the financial sector.
Looking ahead: The 10th OECD Forum on Green Finance and Investment
The pivotal issue of closing the credibility gap will be central to the discussions at the next week’s OECD Forum on Green Finance and Investment. The Forum will be held from 2-3 October 2023, in-person at the OECD Headquarters (2 Rue André Pascal, 75016 Paris) and virtually, with online streaming. Now in its 10th year, the Forum gathers senior policy makers and key public and private actors for action-oriented discussions on green and sustainable finance issues.
Forum sessions will cover a range of pressing green and sustainable finance issues, from accelerating the climate transition in emission-intensive sectors and the use of climate change mitigation scenarios in the financial sector to Responsible Business Conduct due diligence and financial sector net zero commitments and metrics. Leading experts will also discuss key challenges such as mobilising finance and investment for the energy transition in developing countries, scaling up finance for adaptation and resilience, and assessing biodiversity-related financial risks, among many others. Browse the Agenda to find out more about the 15 sessions held at the Forum.
Register here to attend the 10th edition of the OECD Forum on Green Finance and Investment.
Further reading
Centre on Green Finance and Investment
Key resources from this year’s Forum
Photo credit: Shutterstock / Andrey_Popov
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