Governance & Compliance 12: Why the numbers must stack up behind your net zero plans

Will Chalk:

Hello, and welcome to Ashurst's Legal Outlook, and the latest in our series of governance and compliance focused podcasts. My name's Will Chalk, and I'm a Partner in Ashurst's Corporate Transactions practise focusing on governance. You're listening to a special series tackling our view of the top risk-related priorities for boards in 2026. In each episode, we explore a major risk, trend, or opportunity commanding attention when setting board agendas this year, and our next topic is sustainability.

Now, listeners who also read our AGC briefings will know that the FCA's consultation on aligning listed companies' climate disclosures with the recently published UK Sustainability Reporting Standards or UK SRS, proposed not to set requirements for transition plans for listed companies beyond those in UK SRS S2, the second standard. In other words, they're expecting the disclosure of any transition plan that an entity has, but not requiring the development of a transition plan in and of itself.

And there's also a requirement to make a comply or explain disclosure regarding the existence of a transition plan. So in other words, if you do have one, say so. If you don't have one, explain why not.

And it seems likely that the anticipated government consultation on streamlining or modernising corporate reporting, as part of which we expect them to mandate the use of UK SRS by large private companies, will take a similar approach. So against that background, why are many corporates still choosing to develop transition plans?

Now, we discussed the value of a credible transition plan at a recent client event, and I'm delighted that I'm joined by two panellists from that event now.

First, Jo Richardson, who's the MD and Head of Research at Anthropocene Fixed Income Institute, who leads a global team working to support fixed income investors as they align their portfolios to climate and sustainability goals or on what she and they do in a moment.

And second, an AGC pod regular, Ashurst's Becky Clissmann, who is one of our resident experts on so many things and, in particular, on transition plans. Thanks both for joining me.

Okay, let's jump in. Becky, so this event that we hosted on transition plans, can you give us a very quick overview of what the event was about before we dive into some of the detail?

Becky Clissmann:

Thanks, Will. Yeah. So the event really came about from a comment that I heard a TP or a transition plan preparer make. She was saying that companies often feel like they provide more and more information on sustainability and that investor's appetites for that kind of data seem impossible to satisfy. However, I knew from conversations that we've had with investor clients that they feel like they are not getting quality data, so there's a real disconnect going on. So together with Radley Yeldar, we decided to dig into that disconnect and find out what's going on.

And just to say, what we found I don't think will really surprise listeners, but I think what we have captured at the event and in the report that accompanies it are some really clear recommendations for producing a credible transition plan that delivers value. So in the report, there are nine key findings, and I'm not going to talk through all of them, but I'll just give you a few examples.

The one that came through really clearly in our conversations with investors time after time was the need for financial planning to be included within the transition plan. That's the idea that you need to properly cost the transition roadmap, that is the decarbonization actions that the company will take, and make it clear how you intend to finance the transition. And the thing is, if the transition plan is silent on this, investors will still infer an answer from whatever data they can find, and that might not be the answer that you want them to infer. So take control of that narrative and put the information in there.

What we found out is that investors really want to understand what proportion of CapEx or OpEx or R&D spend is linked to the transition plan. They want to know which decarbonization actions are the near term wins and dead certs that you'll do, and which are the longer term strategic plays, and also which remain contingent on things like government policy or technology costs.

Then another one of the key findings was that investors really want to understand how the transition plan creates value and reduces risk. They want an explanation of the actions in a transition plan that will unlock new low carbon markets or deliver specific cost efficiencies through perhaps process efficiencies. They want that understanding of how transition and physical climate risks are being managed, so this is probably going to involve explanations of things like how carbon pricing is used by the organisation, consideration of stranded assets and how technology disruptions will be managed. In terms of physical risks, how will climate impacts on the supply chain and business operations be managed? This is the kind of information they're looking for.

Another one of the key findings was that investors really want to understand the dependencies and uncertainties that could derail the transition plan. And for preparers, obviously that feels like a bit of a weakness. It's that sort of exam question or interview question, what's your weakness? And you have to turn it into a strength. But really, you don't need to even try because for investors, that information really is a strength. They see it as the authentic proof that a company's really got their head around what a transition might mean and that they'll be able to pivot when things don't go according to plan. So that'll involve talking about things like government policy, infrastructure development, market conditions and adaptation risks. There's a lot more in the [report], and I encourage listeners to get in touch and get a copy of our report, but I'll leave it there for now.

Will Chalk:

Jo, turning to you, Anthropocene FII has a philosophy on how fixed income markets can change the cost of capital in favour of a sustainable future. So specifically, what are the benefits from a financing perspective when corporates disclose a credible transition plan?

Jo Richardson:

Yes, absolutely. Hi, Will, and thanks very much for having me to discuss these topics. So maybe first, a little bit of background. I work for an organisation called the Anthropocene Fixed Income Institute, which is a philanthropically funded research firm, and we are working to support investors in public fixed income markets to align their portfolios with climate and nature objectives.

Now, why is that important and why is that philanthropically funded? Well, it all comes down to how the bond market works, the refinancing nature of that capital and the way it prices risk.

Where we can use research to identify the risks and of course the opportunities of sustainability, and I use that word very broadly, I'll expand a bit on that later. And where investors integrate these factors into their decisions, that will differentiate the cost of capital, and that can drive behaviour change, which underpins our theory of change.

Where borrowers understand that their financing costs are dependent on communicating and executing a credible transition plan, so it can create a real incentive to deliver on that. I mean, I'm not saying that regulation isn't also important, but I think we can all agree boards and executive teams will care about how and at what cost they can raise financing. And going even a bit further, I cannot overstate both how fixed income investors are the marginal provider of capital for the transition, but also that they hold the most powerful cards for change.

The fixed income market is the largest market in the world, over $130 trillion of financing. And through debt, you can influence a broad range of actors, including you mentioned already private companies, governments, municipalities, state-owned entities, and these companies and entities are disproportionately responsible for emissions. For example, one quick statistic. If you look at the top 100 emitters themselves responsible for over 75% of all emissions ever, only 30 are listed on the stock market. So shifting out to the power of fixed income, due to the refinancing nature of the product and the US corporate bond market turns over in entirety on average every five years, ensuring market access at an affordable price is a priority for many corporate borrowers, so those investors are given a powerful opportunity to influence.

Now, maybe focusing a little bit more specifically on transition plans and why these are of relevant for fixed income investors and therefore can influence the cost of capital. There are also a couple of points for me that came out of the session. Becky's already mentioned a few, but I would argue that there are a couple that are of particular interest for that credit risk assessment, which is then how investors will choose how and at what price to allocate their capital.

Firstly, this point, I think we talked about already showcasing the returns. It's both in terms of risk reduction, but also value creation, and this can be through better resiliency, driving perhaps lower insurance premia. It can be a more sustainable product offering, being better positioned for growth. But after all, businesses that have been able to lower their dependency on fossil fuels will have likely outperformed in this recent period. So it's clear there, to the extent that you can communicate how this transition plan is reducing risk, that will obviously drive invested capital towards you.

But the second point that's more specific to the bond market and that risk premium point that I would call out is this point about communication transparency. Fixed income investing is all about assessing risk premia in the face of uncertainty, and it can be likened to picking up your tiny pennies, your tiny coupons in front of a massive steamroller. The more information, the more disclosure, the more open communication and the more risk premia will reduce. Even if companies are being very clear that there are risks to their transition, if you can communicate about that and you can just reduce the risk premia of your financing costs, that will directly impact your financing costs.

And this is obviously all a bit hypothetical. However, there have certainly been some existing evidence so far that these things do influence costs of capital. There was a 2024 study from Oxford University and the utility and the energy sector specifically looking at bank loan spread, and it did identify a statistically significant reduction in those costs linked only to better transition plan disclosure, not even the contents, just the communication transparency.

Looking forward for me, as the financial relevance of transition becomes stronger and stronger, more and more investors are going to use this as a differentiating factor, and that will further the impact on cost of capital.

Will Chalk:

And are there sectors that are likely to benefit more from producing a transition plan and accessing this finance?

Jo Richardson:

Yeah, I think this point about accessing capital is also quite interesting because of course we've spoken here very much about the cost of capital impact for companies or governments who can already access the capital they need. I think if we look now at maybe where traditional green finance has been successful or what other products there might be that could be accessed with a credible transition plan, people talk a lot about green bonds. Green bonds have been extremely successful in raising finance for traditional green products or projects where they has been $3 trillion issued so far. I mean, to give a little background, this is a product where, I mean, usually a senior unsecured bond where the proceeds are ring-fenced to be used and reported on for eligible green expenditure.

Now, the reason I think this is relevant for identifying benefits for transition plans is there's a chance to broaden that financing. If you look at this product or where green bonds have historically been used, over 80% are from governments, financials, and utilities, and looking at the projects, they're dominated by renewable energy, clean transportation, and green buildings. Now these are obviously incredibly CapEx heavy projects where capital is needed, but as already Becky had mentioned, there's a larger number of sectors and CapEx and OpEx investments that are needed to affect people's transition.

So a core value proposition of these types of financing is the enhanced reporting, and we think that can be spread across. It's both by investors, but also there's quite a few surveys from CFOs maybe motivating why insurers are even looking at these products and why they're used, and they cite benefits both to the external communication, i.e. enhanced investor dialogue, but also that improved internal buy-in, which I think was another point that came out at the session. It's quite important within some of these companies to make sure that all the different areas of the business are equally committed to the transition plan and equally understand it.

There are a number of new products we've seen that might be available to broaden access to such finance, but it is becoming clear that a well-considered costed and communicated transition plan is a necessary first step. There is something called transition bonds rather enigmatically where the proceeds are used for additional categories of eligible expenditure. These have been used in Asia. The government of Japan has a large bond programme and investors in that region are becoming more familiar. However, a challenge with such products here that are still use of proceeds linked is they can't be directly linked to the trajectory or the outcomes of the transition. It's really just on the inputs.

We've seen a lot of interesting things coming from harder to abate sectors in a product called sustainability-linked bonds. Now that's a product where the proceeds are open. However, there'll be a commitment to a forward-looking transitional sustainability KPI, and typically the coupon of the financing will be linked to that. We've seen these used much more broadly across harder to evade sectors and transitioning sectors, for example, airlines, airports, and industrials. I think there, we've had a lot of positive investor focus on the outcomes of those objectives, but of course, ultimately, attractive pricing is dependent on the targets being both meaningful, but also ambitious.

But finally, and for me, this has also been mentioned briefly by Becky, but this may be the thing that's unfortunately in the near term going to tie a lot of these factors together is, of course, physical resiliency/ resiliency financing.

We've done a little bit of work into the cat bond market, the catastrophe bond market, which is one of the areas where the market can actually imply perhaps the risk, unfortunately, of physical perils increasing. And we've seen a lot of indications there, both that the pricing of these bonds has been going up, i.e. insurance companies are paying more to buy protection against certain climate perils, but also in fact that expected losses are not yet rising, so it does seem like this is an area where we can anticipate a lot more interest in protecting against physical resiliency. And there've been a couple of high profile World Bank-sponsored structures, for example, from Jamaica and the Philippines that have been affected by offering protection in some of these hurricane exposed areas.

But for me, I think the reason that physical resiliency may be the thing that's going to tie all these things together is it's just such a tangible way to identify that investing in physical resiliency or adaptation can lower risk premium, can improve the resiliency of supply chains, as already mentioned. And to the extent that these financial benefits can be more clearly communicated, then they will almost certainly lead more directly to impacts on the cost of capital.

Will Chalk:

Becky, we often hear from clients that they worry about the risks of voluntarily disclosing forward-looking information of this nature. And I think the event explored greenwashing and what companies can do to reduce it.

Becky Clissmann:

Yes, absolutely. I mean, it is a real concern. We're back to that strength and weaknesses point, aren't we? It can feel very uncomfortable when you are used to disclosing backward-looking information to suddenly be trying to forecast in the future. And by the way, on something that people haven't traditionally done, and you're expected to do that in the public realm, that feels very uncomfortable for most corporates. So at the event, we did unpick some of the potential greenwashing red flags, bit of a mix of colours there, but that can arise in the context of transition plans.

A key one is whether the emissions targets are actually adequate to achieve the company's long-term vision for its transition. Transition plans that aren't specifically aligned with a credible transition pathway, such as the Paris 1.5 degrees goal or that don't include things like Scope 3 targets, may well raise greenwashing concerns or claims or certainly questions.

Similarly, picking up on that assumptions and dependencies point that I mentioned earlier and also the financial planning point, if those items aren't articulated in the transition plan, the transition plan lacks depth, and it gives an impression that it's a marketing exercise rather than a serious assessment of how a company is going to get from where we are today to a net-zero future by 2040, 2050, whatever they've set.

Another key point on greenwashing is the need to disclose trade association memberships and lobbying activities. Again, we're back to that authenticity point. You can't really say one thing with your transition plan - that you are committed to a net-zero future and then be actively lobbying in the background for another future. That disconnect just undermines credibility, so you need to disclose those activities and hopefully that they won't be misaligned.

Other indicators include things like use of offsets, the link between executive remuneration and climate targets. There are more, but hopefully that gives you a bit of a flavour of the sorts of things that we look for, for example, when we're reviewing transition plans for clients and thinking about greenwashing risk in that context.

Will Chalk:

And Jo, a final thought from you on this vast topic?

Jo Richardson:

I think I would just say transition is happening, and there will be winners, there will be losers, but ultimately the market is moving to pricing these risks more efficiently. So where companies can be forward-looking and communicate their plans, the market will reward that.

Will Chalk:

I mean, my take is that transition plans really have moved beyond corporate virtue signalling and are increasingly important for companies seeking corporate finance. And of course, if you'd like to know more, please get in touch with Ashurst's transition plan team.

Thanks so much, Jo, for that tour de force on the world of transition financing. I'm sure that'll provide our listeners with a lot of food for thought. And as always, thanks Becky.

And thank you for listening to this episode of Ashurst Legal Outlook. To listen to more episodes in this Board Priorities mini-series, just search for Ashurst Legal Outlook on Apple Podcasts, Spotify, or through your favourite podcast player, or visit our Board Priorities homepage to read more about our top priorities for boards in 2026. You can find our relevant contact details on that page too, and do feel free to get in touch.

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