Building Investor Trust in Net Zero

Ariel Babcock, Allen He and Veena Ramani

Journal of Applied Corporate Finance, 2022, vol. 34, issue 2, 52-59

Abstract: In the past five years, a growing number of investors have been taking more serious account of climate change in their investment decision‐making. Meanwhile, companies have been responding by making bold net zero commitments. But if it seems reasonable to expect that companies making such commitments would see a subsequent market reaction, the authors' recent analysis found no significant abnormal stock price reaction in the days immediately following a corporate net zero announcement. One interpretation of this lack of investors' response is that it reflects their skepticism and desire to see more evidence of planning and execution, including details of changes in capital allocation plans. Climate transition planning could be the missing piece in this puzzle. In 2019, FCLTGlobal issued a report called “Driving the Conversation: Long‐term Roadmaps for Long‐term Success,” which provided a tool to help corporations when building long‐term strategic plans. In this article the authors extend that reporting framework by presenting the outlines of its new “Climate Transition Conversation Guide.” Designed to help companies develop a robust climate transition plan that is integrally linked with their long‐term strategy, the Guide addresses a number of important questions about how key pillars of the business are likely to affect—and be affected by—climate change: How does climate change affect the way that the company intends to create value now and in the future? How does climate change impact the company's core drivers of growth, competitive environment, and management's view of the market? What goals and KPIs would best showcase the integration of climate into the company's strategic plan? How does climate change affect the company's capital allocation plans? How has climate change been reflected in the company's risk management efforts? Is the company structured to allow for the integration of climate change into its strategic plan at all levels? By integrating climate change into their long‐term strategic plans—and perhaps drawing inspiration from some of the corporate best practices showcased in this article—companies are urged to begin the process of making good on their bold climate commitments with plans for action, thereby helping investors to move past their skepticism and recognize and support the plans.

Date: 2022
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