From commitments to performance: assessing the evolution of climate governance amongst London-listed companies

In recent years, the number of companies making net zero commitments has risen significantly, with 93% of global GDP now covered by some form of net zero target.^[1] However, emissions are still rising with fewer than six years to meet the Paris Agreement goals of reducing emissions by nearly half by 2030.^[2] Mitigation efforts will impact investors and their portfolios, in the short and long term, representing both risks and opportunities. 

Traditionally, allocations to low-carbon strategies have dominated approaches to climate investing, but investing in climate solutions alone will not be enough to reach net zero. Increasingly investors are allocating capital to transition strategies, focusing on high-emitting companies with credible plans to reduce emissions.

In October, LSEG celebrated the launch of the Transition Finance Market Review.^[3] This independent review, commissioned by the UK Government, outlines key actions necessary to accelerate the transition, emphasising the need for effective policy frameworks, public capital, and innovative public-private partnerships. The recommendations call for a shift towards entity-level transition finance, anchored on credible transition plans that are aligned with the Transition Plan Taskforce (TPT).

Transition plans enable a shift from ambition to action. As strategic planning tools, they help organisations across the economy identify barriers and opportunities, including where to collaborate to achieve progress. LSEG welcomed the announcement in June that the International Sustainability Standards Board has now assumed responsibility for the Transition Plan Taskforce Disclosure Framework and supporting materials.

The London Stock Exchange has a climate transition offering to support issuers during their transition journey. A key element of the offering is the Climate Governance Score, an assessment of a company’s carbon management practices and incorporation of climate change considerations into business strategies. Rather than analysing a company’s carbon emissions trajectory, it focuses on metrics that measure climate governance.

Based on publicly available information but provided privately to issuers on the Issuer Services platform, the Climate Governance Score is a measure of the governance around climate and the seriousness of approach, two metrics which enable a company to set appropriate targets and achieve their emissions reduction performance.  

The score applies the methodology of the Transition Pathway Initiative’s (TPI) Management Quality (MQ) Score. TPI^[4] is a global, asset owner-led initiative to which 153 investors – jointly representing over US$80 trillion in combined assets under management – have pledged their commitment to using the TPI framework to assess transition risk.

Over 500 London Stock Exchange listed issuers are currently provided a Climate Governance Score and those that are not included within the current universe may use the online tool to estimate their score using the same methodology. 

Climate governance faces growing investor interest and is increasingly being incorporated into global frameworks such as the Climate Action 100+ (CA100+) and the Net Zero Investment Framework (NZIF). Companies looking to comply with current climate governance recommendations may consider implementing governance measures such as board oversight of climate-related risks and opportunities, linking executive remuneration to climate performance, or ensuring senior leadership have adequate climate skills. Globally accepted reporting guidelines such as the International Sustainability Standards Board (ISSB), Task Force on Climate-related Financial Disclosures (TCFD) and Corporate Sustainability Reporting directive (CSRD) require disclosures on the governance processes an entity uses to monitor and manage climate-related risks and opportunities. Available evidence suggests climate governance measures are positively associated with progress towards net zero. 

Using the Climate Governance Score, we explore how London-listed companies are responding to climate-related risks and opportunities – and how this has evolved over the past 12 months. 

We have witnessed an increase in the number of companies that are integrating climate change into operational decision making. Level 3, which refers to companies that have integrated climate change into their core operational decision-making, is now the par score for London listed issuers. Our latest review found 70% of companies within the universe are now classified as Level 3, up from 63% last year. Only 4% of companies are at Level 1 or below, down from 8% last year. 

To achieve Level 4, companies must undertake climate scenario planning, incorporate climate change performance into executive remuneration, disclose an internal price of carbon, and set quantitative long-term targets for reducing greenhouse gases amongst other metrics. Using our Climate Governance Score and TPI methodology, 19% of London-listed companies have been assessed to achieve Level 4 or above, up from 15% in the previous year. 

Overall, London listed issuers continue to improve their climate governance practices, albeit the level of incremental improvement is slowing. In total, 12% of companies within the research universe have demonstrated an improvement since the previous review. Over a third of companies had improved for the period of 2022 to 2023, most likely because 2022 was the first full year of reporting against the TCFD recommendations, which are closely aligned with the TPI framework.  As London-listed companies have become accustomed to mandatory TCFD disclosures, it was inevitable that this improvement slowed.

When London Stock Exchange began these assessments in 2019, we saw large sectoral variations. In the latest assessment however, all industries are averaging similar Climate Governance Scores (Level 3), reflecting economy-wide action. The consumer discretionary and financials sectors demonstrated the largest improvements over the period; the former has been a leading sector for the past two years, whilst the latter was the worst performer in the previous review.  

Companies perform well on the same indicators: over 90% of listed companies are acknowledging climate change as a significant business issue, implementing policy commitments to action on climate change, disclosing Scope 1 and 2 emissions and nominating a board member to be responsible for climate change. Scope 3 emissions often make up a significant proportion of a company's footprint and are usually the most challenging to reduce. London-listed issuers are leading the way on Scope 3 disclosures, with 83% of companies in the research universe disclosing their Scope 3 emissions, compared to 45% of medium and large listed companies globally as highlighted in LSEG’s ‘Solving the Scope 3 conundrum’ research report published earlier this year.^[5]

On the other hand, issuers typically stumble on the same metrics, most notably the indicators that evaluate a company’s involvement in the broader climate policy sphere. Companies can better demonstrate their impact by including additional disclosures about how they support domestic and international efforts to mitigate climate change and their involvement in organizations engaged in climate issues. 

Investors increasingly engage with companies on their climate governance and view it as a key element in managing risk within their portfolios. Adopting strong climate governance processes not only helps meet compliance obligations but also can improve access to capital and support companies in pivoting business models to create and protect long-term value.^[6]

[1] Net Zero Tracker | Welcome

[2] UNEP Emissions Gap Report 2024

[3] Transition Finance Market Review

[4] History and investor network - Transition Pathway Initiative

[5] Solving the Scope 3 conundrum

[6] The role of boards in climate governance - WTW