The chickens are coming home to roost: Companies admit their climate promises were unrealistic

In a bold strategic move, BP announced in 2020 its ambitious plan to slash oil and gas production by some 40% by 2030 as part of a strategy to combat emissions and transition towards more sustainable energy sources. 

However, the company has recently undergone a notable shift in direction, revising and reducing its initial targets. BP is now anticipating a 25% reduction in oil and gas output by 2030. The shift follows a period of skyrocketing fossil-fuel prices, leading BP to report record-breaking annual earnings for 2022. Recently, Nestlé gave up on its carbon neutrality goals for some brands, and Rio Tinto announced that it will likely fail to reach its 2030 targets.

As the global push for sustainability gains momentum, stakeholders are increasingly emphasizing the importance of corporate transition plans, such as BP’s, as a crucial tool for assessing the impact of the green transition on companies.  This need is growing increasingly urgent as we approach COP28 in Dubai at the end of this month, where business and policy leaders face mounting pressure to accelerate the shift away from fossil fuels and cut emissions by half within this decade.

However,  research conducted by multinational consultancy EY reveals that a mere 5% of FTSE 100 companies’ transition plans are deemed “credible”, raising doubts about the genuine commitment of these businesses to reducing their emissions. 

Despite approximately 80% of those large public companies disclosing some form of transition plan, the lack of sufficient detail highlights the substantial amount of work still required to outline a comprehensive path toward net zero. 

In response to the lack of transparency and inadequate transition plans, regulatory measures in the UK are on the horizon. The government is considering rules that will require large companies to publicly disclose decarbonization plans, explicitly outlining how they intend to reduce their emissions and the associated costs involved. Meanwhile, the EU and the US are introducing or proposing stricter accounting rules.

The question arises: How can companies develop credible and effective transition plans?

Too much reliance on unproven technologies 

One of the key obstacles is companies’ reliance on overly optimistic forecasts regarding the costs of climate change. For instance, some oil and gas majors have presented carbon capture and storage (CCS) as a solution to sustain fossil fuel production while simultaneously mitigating greenhouse gas pollution. 

However, despite significant investments and years of research, CCS has not lived up to its potential. The high costs associated with implementing this technology have hindered its large-scale deployment, limiting its impact on global emissions. Although the US is taking steps to incentivize CCS through the Inflation Reduction Act’s tax breaks, relying heavily on unproven technologies undermines the credibility of transition plans. Rio’s CEO Jakob Stausholm recently admitted: “There is a lot of technology that doesn’t exist and has to go through an R&D funnel, and that just takes a long time.” 

An imperfect incentive system 

Meanwhile, companies across various sectors often fail to make the necessary investments to decarbonize their operations due to concerns about short-term profitability. Although the long-term consequences of climate change, including potential “stranded assets”, may outweigh upfront costs, executives, driven by bonuses tied to earnings or share prices, are often reluctant to take the necessary actions.