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The Sustainability Story
Carmen Nuzzo: Insights from the Transition Pathway Initiative Centre
00:33:04
In this episode of the Sustainability Story podcast, host Nicole Gehrig welcomes Dr. Carmen Nuzzo, executive director of the Transition Pathway Initiative Centre (TPI Centre) at the London School of Economics and Political Science. The conversation...
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- [00:00]
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- [00:30]
Nicole Garrick
So hello everyone and welcome to the Sustainable Podcast. This podcast explores critical sustainability issues and trends on a global scale. I'm Nicole Garrick, one of three co hosts and I'm excited to have Carmen Nuzzo from the Transition Pathway Initiative center or TPI center with me today as my guest. Carmen is professor in Practice and Executive Director at the TPI Center. She leads on setting and delivering the strategy of the TPI center as well as overseeing its research and operations. So prior to joining the TPI center in 2023, Carmen was head of fixed income at the UN Principles for Responsible Investment, which is actually where we first connected and met since I was working then at PGM Fixed income. And since 2014 she has focused on sustainable economics and finance, leveraging her extensive experience in economic and market analysis research since 1993. So welcome Carmen. It's great to connect again and I look forward to our discussion.
- [01:32]
Carmen Nuzzo
Yeah, thank you Nicole. Thank you for the invitation. I'm thrilled to be here and delighted to be reconnected.
- [01:38]
Nicole Garrick
So for those of you that might not be familiar with the TPI center, the center is the academic partner of the Global Investor Initiative led by asset owners and supported by asset managers. And its TPI tool offers an independent authoritative research and really an open access data to research corporates, banks and sovereign entities to assess their progress that they're making in the transition to a low carbon economy. So carbon to start. Can you maybe provide our audience with an overview of the TPI tool that assesses this progress in transitioning to a low carbon economy and the different ways that investors can utilize this information?
- [02:23]
Carmen Nuzzo
Yeah, sure Nicole. First of all, let me explain briefly how the Transition Pathway Initiative as such came about before telling you how investors use the tools and data that we produce at the TPI center at the lse. So as you rightly said, the TPI is a global asset owner led initiative supported by asset managers. Today it counts with over 150 supporters who collectively manage about 80 trillion in US dollar terms in assets and advice. Take this number with a pinch of salt because it inevitably contains some double counting and is the result of self reported figures and it can also be subject of course to market fluctuations. But it gives you a sense of the magnitude of the initiative and is a testament of the traction that the initiative has got since it was launched after the signing of the Paris Agreement in 2015. Back then it was a much smaller group of investors who approached the Grantham Research Institute on Climate Change and the Environment at the London School of Economics because these investors had no way to assess whether the net zero targets that companies were only just beginning to set were ambitious enough and more importantly, if they were aligned with the Paris goals to limit the global temperature rise this century to well below 2 degrees Celsius or even better, 1.5. Fast forward to today and there is now a TPI dedicated center at the LSC at the London School of Economics which is still part of the Grantham Institute. And we provide independent, rigorous forward looking research and data through which we monitor and track the progress that non financial corporates, banks, as you mentioned, and sovereigns make in the transition towards a low carbon economy. And how do we do that? By developing pioneering methodologies, sectoral ones specifically in the case of companies. And we have a bespoke one for banks and one for sovereigns. And we also use the assessment data and leverage our academic strength to distill insights and explore relationships between entities and sectors. So at the end of 2024 we have been assessing over 2000 companies across 24 sectors. We also have assessed more than 35 banks and 70 sovereigns using different frameworks as I mentioned. But for all three categories we essentially look at the overall performance in managing the low carbon transition and mitigating the impacts of climate change, covering their decarbonization strategies and policies, their climate risk practices and emission disclosures. And we complement all this analysis through more in depth quantitative assessments of their carbon performance. In the specific case of companies, we look at the pace at which they're decarbonizing and whether this pace and the company's targets are aligned with Paris gold scenarios. So back to your original question. And Nicole, how do investors use these resources? Well, in many ways they use to inform first and foremost their investment decisions. For example, as part of their due diligence, when they allocate assets and capital, they use them to identify transition risk hotspots in their portfolio. Sometimes they use it to define their investment universe. For example, some may decide to exclude certain entities because they do not perform sufficiently well in the TPI assessments from their investment universe. Or maybe they can include them because they show progress, they use them for reporting purposes. We've seen more and more that recently. And the TPI data are also used by our data partner FTSE Russell to create indices into which investors allocate part of their assets. But I would say that most importantly our tools are thought for and are used for active ownership. In other words, they can help investors inform their proxy voting decisions and more broadly their engagement activities both on the equity and even more so we're seeing on the fixed income side. As you said, all our resources are open access and it's important to note that all the analysis that we conduct is based on publicly available information. So we do not ask companies to fill any questionnaire or sovereigns or banks. And this is because really what we want to do is to encourage entities to be accountable and transparent. So the engagement activities are very important because they allow investors to use the information that we provide to discuss perhaps gaps in disclosure or challenges and opportunities that the individual companies or sovereigns in which they invest may encounter as they transition to a business or in the case of countries, a growth model which is compatible with a low carbon economy.
- [07:12]
Nicole Garrick
Thank you. That was a very detailed and in depth analysis and answer in regards to the different ways investors can use this information. So it sounds like a lot of analysts, you know, more in the, like you said, the active ownership area, they're using this to effectively engage with issuers and companies and sovereigns in regarding to the credibility maybe of their commitments to Net Zero and their decarbonization targets to really make them accountable for their actions. And like you said, using publicly available information to so that hopefully as companies are and as asset managers continue to engage with these individuals to bring more forward looking information that will also help you guys be able to prepare, you know, and provide more research in your analysis as well. So I wanted to talk about the State of the Industry report. In your State of the Industry report, most companies that you assessed still don't align with any of the low carbon benchmark scenarios and the share of those aligning with global temperature goals in the short and medium term still remains pretty low despite recent emerging and encouraging improvements. So what are some of the challenges companies are facing and the hurdles they need to overcome in order to really align with those low carbon benchmark scenarios?
- [08:32]
Carmen Nuzzo
Yeah, sure Nicole. So let me say the state of Transition report takes stock of the developments that we have been seeing in the two dimensions that I described very briefly earlier through which we assess companies performance on the management quality side and on the carbon performance side. And this September we published a new report after a three year gap and we were pleased with the results because the report shows progress, for example, on our Management Quality framework, which tracks thousands of companies, carbon management and governance from across six levels, ranging from level zero that designs a company that is completely unaware of climate related risks and opportunities. Luckily, there are very few in our sample that score zero at the moment, but all the way to level five that indicates that a company is looking at transition planning and implementation. And then the result shows that level three functions now as the new parscore. This means that really the corporate acknowledgment of climate change and the case for low carbon transition is probably now almost universal and that on average companies are now in the process of integrating climate change into operational decision making. This was definitely not the case a few years ago, let alone when the TPI started back in the day. And at the same time, based on our carbon performance framework, which evaluates the extent to which the emission pathways of companies in high emitting sectors are aligned with the Paris Agreement goals, there has been a marked increase in the alignment over time. For example, since the result of our previous state of transition report in 2021, we have seen the share of companies that aligned with a 1.5 degree scenario in 2050 increasing to 30%. This was 7% in 2021, so a marked increase and about 14% are aligned with a below 2 DE scenario. However, as you rightly said, the majority of the companies that we assess still do not align with the low carbon scenarios. And this is down to several challenges. The very first practical challenges in really setting ambitious targets, not just in the long term, but also in the short and in the medium term. I would say this is due to a complex web of factors which can either support or hinder a company's ability to set such targets. And they're often sector or in some cases even regional specific. And many of these fall under for example technology, economic policy or social challenges. To give you a concrete example, in the electricity sector for instance, we see around 80% of the assessed companies aligning with the below 2 degree scenario or the 1.5 degree scenario in 2050. And much of this has to do with the clear technology roadmap available to these companies already to transition away from fossil based energy generation and into renewables. This is also the result admittedly of the various policy instruments that many governments have put in place to enable to transition and make it economically feasible. Therefore, companies are more perhaps comfortable setting these commitments. However, for example, if you take a sector like the airline sector, there we see only 25% of the companies aligning to the below 2 degree scenario, 1.5 degree scenario, because operators there are bound by the technology available in the market. And for example DC operators lease jet engines and planes from other companies. Therefore active in house solutions such as the use of sustainable aviation fuel can only take a company so far. And to solve this, there is clearly the need for wider industrial engagement throughout the supply chain to work on new technologies. So many of the questions that we often hear from these companies is, or the investors for that matter is should an airline company be spending its profit on research and development, for example, or should it only be the upstream provider of products? Is there a blended way maybe of addressing these challenges? So these are all live questions that companies face in practice. And finally, I would also mention that many companies need to balance near term, very high cost of transition, which may yield and will yield long term benefits. But these costs are upfront. Why they need to remain competitive and generate cash flow to continue to fund the transition. So that's also a big challenge, right?
- [13:09]
Nicole Garrick
Yeah, no, that obviously makes perfect sense. You need to stay in business in order to fund the long term benefits of climate change and transitioning to a low carbon economy. So it's very hard for companies to put those the money, like you said up front, there's a lot of costs associated with transitioning the technologies that are needed, research and development, that's needed to really move the needle forward in that transition. So it is going to be a while obviously for some of these sectors, like airlines that you mentioned, they can only move so far right now and that there needs to be more work to be done in order to be able to achieve that net zero.
- [13:49]
Carmen Nuzzo
And sometimes the technology might not be there yet. So there is more work to be done on that front too?
- [13:56]
Nicole Garrick
Yes, definitely. So in the TPI evaluation of the company's management quality, I think you mentioned you were talking about carbon performance as well as the management quality. So the management quality evaluates the governance of the greenhouse gas emissions and the risks and opportunities arising from the low carbon transition. What areas do you find most concern in the transition planning and the implementation that hinders them from moving to that highest level that you talked about, Level five assessment.
- [14:25]
Carmen Nuzzo
Yeah, sure. As I mentioned earlier, we assess companies across six levels, so ranging from level zero, meaning that a company has not disclosed sufficient information in the public domain at least for the climate change to be merely acknowledged as a business issue. All the way to level five, which we launched at the end of last year and looks at transition planning and implementation. And in looking at the results, companies really continue to struggle on key indicators at the interface between corporate and public policy, which in many cases prevents them from moving above level 3, which, as I mentioned earlier, is now the new PAR. The next area in line where they face a particular challenge is in disclosing material Scope 3 emissions, which is a challenge that many integrated companies face on how to quantify emissions pertaining to their supply chains and to their customers. And to achieve the highest level, level five, almost all companies struggle to score against the five indicators that we assess as part of this level. And for example, one of the indicators that they struggle really to meet is the one that looks at whether the company quantifies the key element of its emission reduction strategy, which is aimed bring to light whether companies have a detailed plan behind their targets. So what we see is that integrating climate change into operational decision making, as I mentioned earlier, is common ground. But what's really missing and where companies are struggling is the details of their plans and the implementation. So we're still lacking a lot of public disclosure here, which is, I would say, really concerning because we should already be at the stage to measure progress against credible commitments and not measuring whether companies are disclosing commitments in the first place.
- [16:13]
Nicole Garrick
Yes, no, I agree with you in that. And I found that in conversations that I've had with analysts when I was doing some research on transition plans as well, they found that it is extremely challenging to find data on these underlying companies. And the information is dispersed all across so many different documents. A lot of companies don't have a specific transition plan document where they, you know, host all the information that's relevant to how they mitigate climate risks and the opportunities they take to achieve net zero. So you're right in that I think there is a lack of a lot of the data and the action plan in order to quantify the key elements of those plans and how it could be incorporated into the business model.
- [16:58]
Carmen Nuzzo
Sometimes there's also maybe a lack of confidence by companies to talk about this, or at least in the public domain for fear, maybe of competitive issues, but also because it's the first time that they're dealing with this problem and there is a lot of uncertainty that also they have to factor in. So that's why the role of engagement and this dialogue that I mentioned at the start of the conversation is very important to dig deeper and better understand how companies intend to transition.
- [17:27]
Nicole Garrick
Yes, no, I agree. Investors, analysts need to, you know, tell the corporates this is the information we need. This is what's most material to Just in, in, in risky, in, in your business model. And that's, this is the things that you need to be sure that you can provide us transparency on. So I think that communication is definitely important between the corporates and the asset managers. So one sector that I did want to discuss more on is the banking sector and the role that they play in driving the transition to net zero. So global banks have joined initiatives such as the Net Zero Banking alliance, which is a bank led and UN convened alliance of global banks committed to aligning their lending, their investment, their capital markets with net zero greenhouse gas emissions by 2050. Can you provide us some more information on maybe the shifts that you're seeing in the banking industry and the role that they'll play in driving the transition to net zero based on some of the analysis that you guys have done?
- [18:27]
Carmen Nuzzo
Yeah, sure. This is a relatively new area of research for us because we launched our Net zero banking assessment framework in 2023. And so we've just completed the second round of bank assessments this year and we've published the State of Transition report in banking in October. And I would say banks are really integral to the transition to a low carbon economy because they provide direct financing and financial services and so they can actively promote low carbon activities and support businesses that are striving to reduce their carbon footprint. However, the transition also presents significant challenges for the banks because their involvement in financing high emission sectors contributes to climate change and exposes them more and more to transition risks that stem from the increasing regulatory and market pressures on polluting industries to decarbonize. Interestingly enough, our new research has generated quite a lot of interest, not just by investors, but by the regulators as well as a form of reality check or checking what's happening on the ground to inform their thinking. And I would add lastly that the physical risks associated with climate change can also affect negatively the credit worthiness of banks clients. And so there might be there also knock on financial risks for the the banks that are a bit more indirect. And in the state of transition report in the banking sector that I just mentioned, the latest results clearly show that the overwhelming majority of banks are still in the early stages of their transition to a low carbon economy. We assessed 38 banks overall, of which 26 are among the major global banks. And there was a dedicated section in the report on U.S. local regional banks and custodian banks. And so I was saying the banks are really at an early stage of their transition. And this is despite the fact that many of them are now publicly disclosing Some of their financed emissions and half are committing to reducing them to net zero by 2050. But apart from the general lack of concrete and, how can I say, well defined climate disclosures, a key aspect preventing banks from scoring higher in our frameworks is that their commitments, targets and policies often cover only a limited number of their business activities and a very few economic sectors. It must be said though, that overall, even if the performance is weak, there is considerable variation across banks and also regions that we have seen.
- [21:03]
Nicole Garrick
You mentioned that the banking sector, since it is more complex than some of the other sectors and their balance sheet is more complex, it's much harder for them to provide transparency into the emissions of their full business model. And what I found in some of the report that you did state is that I read one of the reports that 85% of banks are still open to financing new coal and a lot of them are lacking the necessary disclosures, such as, like I mentioned, financing emissions. So, and especially when you look at the banking sector in developing markets or emerging markets like Africa, they're still reliant on fossil fuels. So it's definitely necessary to finance those fossil fuels. And it's much harder, I guess, to evaluate the different banks based on the region that they are in the world. Right. And even when you look at regional US banks versus global US Banks, they're much more aligned or aligning with net zero. And then you look at European banks, which are much more advanced too in their disclosures, least from what I've read and looked at.
- [22:11]
Carmen Nuzzo
That's right. In fact, to disseminate the report, we hosted recently a webinar that I encourage the listeners of this podcast to take a look at because the recording is available on our website where we discussed precisely this, that there may be good reasons for the slow progress that banks are making that are linked to regional considerations. And the pace of the transition in certain instances cannot also be too fast because there are elements of the just transition that need to be taken into account. So it's a very complex area on which we plan to do further research. But as I said, it's one of the research projects that is generating, partly because it's new, more attention at the moment.
- [22:55]
Nicole Garrick
Yes. So I know you attended COP 29 last month and there was a lot of focus on sovereigns and the role that sovereign plays in that and as well as really how governments are going to be able to agree on financing a lot of the developing countries in their transition to net zero. So I wanted to see if you could maybe provide what you think is the role that you see sovereigns in driving the transition to net zero forward?
- [23:24]
Carmen Nuzzo
Yeah, sure. I think the COP really brought back to light the relevant role that sovereigns play in the transition. And from an investor perspective, there are probably two aspects to be considered. First, countries have their own net zero targets. And in some countries these are even legally binding. And so similar to companies to transition to a low carbon based growth model, they need not only to decarbonize but also to put in place a range of policies to support such a transition. And here at the TPI center, we also the academic partner of the ASCOR project, ASCOR standing for Assessing Sovereign Climate Related Opportunities and Risk, a project also supported by asset owners and asset managers. And we produced a methodology through which we assess sovereigns on their climate action. So we look at carbon emission trends and many of the policies that countries put in place, ranging for example from their climate legislation or carbon pricing fossil fuels, whether they have sector transition or adaptation policies or even policies to manage the transition in a just and equitable way. And we also, in the case of sovereigns, look at what we call climate finance, where we look for indications of transparency in climate costing and climate spending. From an investor perspective, this is important because monitoring and tracking the performance of sovereigns, particularly for sovereign bondholders, needs that. They need to know how this transition is implemented and also how it is funded. In other words, is it funded through higher taxation or through a reallocation of expenditures, or is it financed through deficit spending and if so, how this is going to affect a country's sustainable fiscal path. And at the same time, it's also important for corporate investors because they need to understand which government policies are in place that could enable or hinder progress in the jurisdictions in which the companies that they invest in operate. And I'm pleased to say that even in the case of sovereigns, now we produce a state of transition report, we just published our first one in November where we assessed 70 countries. So on the positive side, there were as ever, good and bad news. On the positive side, 40 of the 70 countries that we have assessed have reduced their emissions over the past five years and almost all have established medium term targets. But for example, on the negative side, we find out that countries perform extremely poorly on commitments to phase out fossil fuel subsidies and production, making finance flows really inconsistent with a 1.5 degree future. And there is more to be looked at in the report. So I encourage again the listeners to dig deeper into latest resource that we have produced.
- [26:20]
Nicole Garrick
So I wanted to ask a Follow up question on that. When you, you know, considering factors such as government policy and the country income level and corporate governance structures, for example, looking at state owned enterprises versus those that are dispersed ownership. When you're evaluating companies climate actions from different developing nations versus developed nations, how do you, how do you take that and factor that into your analysis?
- [26:47]
Carmen Nuzzo
Yeah, let me say something really important that we assess at the TPI center listed companies, at least for now. These are companies that we select by market capitalization and the level of their emissions. So at the moment we're not assessing private companies and this is not because we do not have the right methodologies to do so, but because really we lack the relevant disclosure that would enable us to conduct the assessment. However, this may change in the future. For example, I live in London and here in the uk large private companies are now required to report climate related financial disclosures within their non financial information statement. But you mentioned the company structure, Nicole. And in addition to that it is also important to take into account the regional aspects. So being able to link the country analysis undertaken through this new ASCOR framework that we've produced and that I mentioned earlier with the corporate analysis is now a particular boost to TPI's work because it adds really a new dimension that enables perhaps a more nuanced assessment of how regional differences may impact how companies address transition planning. And this is definitely an area of our research that we really just began and that we will continue to develop and investigate further.
- [28:10]
Nicole Garrick
Okay, that's. I think we've talked a lot about the research that you've done in regards to the sovereigns and corporates and the banking sector. How about policy and regulation? And how has regulation accelerated corporate climate action? And do you believe that the new mandated corporate disclosure requirements such as CSRD will lead to more credible transition plans in line with the Paris Agreement? Yeah.
- [28:36]
Carmen Nuzzo
Let me say that regulation has been useful to an extent in enhancing disclosure, particularly the one that has been spearheaded by the European Union. One we could debate about whether we're getting disclosure that is material or investment decision useful. And we also have to bear in mind that often this type of disclosure is backward looking. So it can convey a very static picture of an entity, be it corporate or sovereign entity. However, I would say it certainly has played a role to get entities attention to focus on climate related risks and opportunities as well as perhaps sustainability topics, maybe more broadly. I think that importantly when it's relevant, this disclosure offers a great opportunity for a company's management or a government in the case of sovereigns to communicate insight and foster engagement. In other words, the dialogue that is really needed and as I mentioned earlier, to assess if an entity transition plan is credible, recognizing that there are many ways to reach the net zero goal and not just one in many instances. So we at the TBI center, we need disclosure to conduct our assessments, but also investors need to ask themselves how willing they are to support an issuer transition, maybe at what cost and over which time horizon. And at the same time on the issuer side, as they continue to strive to meet net zero targets, they need to clarify their transition plans and be more open to communicate these to investors, more open to talk perhaps about external dependencies or what are the strategic trade offs that they face and how do they intend to address them or not to align with the Paris Agreement goals. So I think that this need for such transparency should not be seen as a burden, but rather maybe as an opportunity to address systemic challenges, maybe collaboratively. And definitely the dialogue should not be just a two way street between investors and the entities, but it could be also at the industry associations and policymakers level.
- [30:48]
Nicole Garrick
Now that's a great point, that it shouldn't be just a two way street and that industry traits as well should be involved in it. And that regulation, you know, as it might be a burden and a cost to the entities themselves, it will be beneficial in the long run to get more transparency from how they're mitigating these climate risks. So I think we might have time for one last question. What innovations and advancements and methodologies does the TPI center envision for the next five years?
- [31:17]
Carmen Nuzzo
Yeah, that's a long shot. I'd be really quick, Nicole. And firstly, I would like to invite the audience to check our website for regular updates of the entities that we assess and to read our reports, new research blogs or attend our webinars. They're all open access. The website is transitionpathwayinitiative.org and as for your question, Nicole, we're really excited because we're working on a new methodology that will allow us to produce company carbon performance assessments at scale. And furthermore, we will also increasingly focus beyond the ambition assessments to the action that is on transition planning and implementation. This is probably a natural evolution of our work to keep it investor relevant. And finally, as I mentioned earlier, we will try to increase our research at the regional level to capture the nuances that you also mentioned between developing and developed markets and the different challenges that these face. So, quite a lot ahead of us. Stay tuned.
- [32:22]
Nicole Garrick
So it sounds like there's going to be more to come and you have an ambition to continue and advance a lot of the research that you have available. So, Carmen, thank you so much for your insightful discussion regarding the important research that the TPI center has put forth for companies climate transition, as well as sovereign research and assessments that you're producing that really help the investment industry provide transparency and just a better playing field in comparing different companies in different sectors. I encourage everyone listening to check out your comprehensive state of the Transition reports that you mentioned. There's one for the banking sector, sovereigns and corporates, and additionally the CFA Research and Policy center website as well. We've published a lot of different research regarding Net zero from external as well as some internal authors, so be sure to check that out as well. And Carmen, thank you again for your participation and I hope that we can collaborate again in the near future.
- [33:19]
Carmen Nuzzo
Thank you for having me. Anytime.