Sectoral climate pathways: the key to credible transition plans

Companies need clearer guidance on how their sectors will need to decarbonise within national and regional contexts

The world’s most powerful finance ministers and central banks have issued a call for better corporate climate transition plans.

Meeting with the heads of the IMF, World Bank and OECD over the weekend, the G7 group said there was a need to enhance “the availability, comparability and credibility” of transition plans across the financial sector and the real economy.

In its official communique, the finance ministers and governors said forward-looking metrics will also be required, to “provide information on credible transition pathways for both the public and private sectors”.
These pathways are one of the biggest missing pieces in the transition landscape so far.

The UK’s Transition Plan Taskforce has put out a comprehensive set of guidelines for what firms in different sectors should disclose about their net-zero strategy, and the EU’s advisory body is about to follow suit; but when it comes to making sure the plan is actually credible, guidance is thinner on the ground.

In the latest sign of confusion about what an adequate transition plan should look like, a fifth of Shell’s shareholders voted against its revised strategy at its annual meeting last week. The oil major insisted it could still get to net zero by 2050 using the new version, which had been significantly watered down since it was first approved two years ago.

France is leading the way

Bodies like the Transition Pathway Initiative and the Climate Bonds Initiative have created frameworks to enable investors to judge these plans, but things have been less clear for the firms themselves.

“Companies need help to understand how they can create a realistic transition plan – what their ambitions should be, and how technology and finance will influence what’s possible for their sector,” explains Corentin Le Hesran, a transition expert at Ademe.

Ademe is the French government agency charged with supporting the ecological transition, and it recently convened representatives from the country’s paper and cardboard industry to show them what their climate transition might realistically look like.

The presentation is part of a project co-funded by the European Commission to develop decarbonisation pathways for nine sectors – paper & cardboard, steel, cement, ethylene, sugar, chlorine, aluminum, glass and ammonia – all of which Ademe believes will be integral to France achieving its net zero goals.

For each, Le Hesran and his colleagues have assessed potential technological, regulatory and market developments that could impact the ability of the average company in the sector to decarbonise in time, as well as calculating the financial implications.

That information feeds into three net-zero scenarios: one based on lower growth and consumption in the sector, another on business-as-usual, and a third on turbo-charged innovation.

Then, the different levers that firms can pull to get to net-zero under each scenario are identified, along with an estimate of the extent to which each is likely to contribute to the goal.

“We hope these pathways can give a realistic picture to companies about what their entity-level transition plan should consider,” says Le Hesran, adding that they can also help companies work out which topics to lobby government on.

Existing sectoral pathways

Ademe’s pathways are much more granular than some of the other sectoral plans currently available, including those from influential global bodies like the International Energy Agency.

But, in order to nail down the details, they are heavily anchored in the context of the French economy – meaning it would be difficult for companies operating elsewhere to adopt them as a guide.

“France’s electricity supply largely comes from nuclear energy, so a French company can decarbonise quickly by shifting its processes from gas to electricity,” notes Le Hesran.

“But if you’re in Germany, the electricity supply is currently more carbon intensive, so you won’t achieve the same decarbonisation with the same shift.”

Other countries are developing equivalent pathways for their own key sectors.

Last month, the Australian Government closed a consultation to help it establish a plan for electricity and energy, under a commitment to publish pathways for six sectors. Agriculture & land, transport & infrastructure, industry, resources and the built environment are also included.

Japan was an early mover, producing roadmaps to “show the technologies that are expected to be necessary in order to make each hard-to-abate sector carbon neutral by 2050 with a scientific basis”.

According to a 2022 government document, the pathways – which cover iron & steel, chemicals, electricity, gas, oil, cement, paper & pulp, shipping and aviation – are aligned with government policy and “serve as a reference for companies to consider climate measures to be financed by transition bonds/loans”.

Advisors to the Dutch Government have come up with “decarbonisation options” for the country’s PVC industry.

The European Commission has developed what it describes as “a blueprint for the transition pathways of industrial ecosystems” containing “the most important elements that need to be addressed in an actionable plan to make the transition possible”.

The transition in this instance is both ecological and digital, and – although much less granular than other versions – the pathways cover everything from regulation and investment, to skills and competitiveness.

The 14 sectoral pathways (see image, right) that will eventually be developed as part of the Commission’s project will all be done in partnership with industry.

The EU’s standard setter, Cen Cenelec, is currently creating rules to govern how sectoral transition plans should be drawn up, to ensure that industry doesn’t have an outsized influence on the pathways.

Developing national plans

Governments are expected to introduce interim targets into their commitments under the Paris Agreement, known as NDCs, over the coming year; and there’s hope these new 2035 goals will give the private sector a clearer steer on the shape national transitions will take over the next decade.

“Most NDCs focus on economy-wide action, but they can also include sectoral targets and more specific measures and projects,” explains Carley Reynolds, a climate and energy policy analyst at NGO Climate Analytics, which explores how the NDCs can be translated into targets and policies.

“Having more specific details is always very useful, because the private sector needs to know what governments are thinking, and what changes are likely, so they can set their strategies accordingly.”