An economic foundation for assessing the credibility of corporate net zero transition pathways

Abstract

The G20 has highlighted the urgency and importance of financing net zero transition. Investors, however, lack a systematic framework to assess the credibility (incentive‐compatibility) of corporate transition claims. As such, negative screening based on current GHG emissions or even sectors remains a dominant climate investment strategy. In response, this paper develops an economic foundation for credible corporate net zero transition. Our model shows that, besides its current emissions, both a firm's transition capacity and urgency should be considered when assessing its likelihood of attaining net zero; interestingly, it shows how the concavity of its transition pathway may serve as a litmus test. Finally, we discuss how the Task Force on Climate‐Related Financial Disclosures (TCFD) framework can be utilized for credibility assessment of corporate transition pathways. Our findings and recommendations are one of the first attempts to address the market call for systematic approaches to evaluate forward‐looking climate mitigation claims.