Investors are moving beyond headline targets to scrutinise company transition progress. Alicia White, director of climate and nature solutions at Morningstar Sustainalytics, explains how the ability for investors to quantify the gap between climate ambition and real-world progress is becoming increasingly important.
Environmental Finance: Why are investors shifting from focusing on climate ambition alone to scrutinising whether actions match stated goals?
Alicia White: Demand for climate-aligned investment strategies remains strong – we continue to see sustained inflows into climate transition funds through 2025. Around 70% of asset owners we surveyed in our 2025 Voice of the Asset Owner survey say that climate is core to their investment strategy, and more than half view climate transition readiness as the most material environmental factor.
At the same time, global emissions are still rising. Despite the proliferation of corporate climate targets since the Paris Agreement, real-world outcomes have yet to align with those ambitions. That gap is prompting investors to ask tougher questions.
Broader dynamics are also shaping this shift. Falling renewable energy costs, energy security concerns, and geopolitical developments are all influencing how investors assess transition risks and opportunities.
Coupled with increasing regulatory pressure – such as ISSB-aligned disclosure frameworks – investors increasingly want to know whether companies are actually delivering on their commitments.
EF: How are investors adapting their use of climate data to reflect this more nuanced approach?
AW: We're seeing a clear evolution from reliance on top-line metrics or headline ratings to demand for granular, underlying data. Transition pathways, for example, vary widely across sectors and geographies. A single score, whether an ESG rating or implied temperature rise, cannot capture that complexity.
As a result, investors are increasingly working with raw data and, in many cases, building proprietary frameworks to assess transition readiness, often drawing on initiatives like the Science Based Targets initiative.
This level of granularity allows investors to differentiate between companies more precisely, tailor strategies, and engage more effectively. It shifts the focus from broad assessments to actionable insights.
EF: When it comes to transition readiness, how does comparing ambition with actual performance provide a clearer picture?
AW: We approach this using two metrics. The first is ambition alignment, which assesses where a company would land on a decarbonisation pathway if it achieved all its stated targets. This reflects intent, but not credibility.
The second is performance-based implied temperature rise, which evaluates how the company is managing transition risks in practice through governance, strategy and investment decisions. This indicates where the company is heading.
The gap between these two metrics is highly revealing. A narrow gap suggests credible, well-supported targets. A wide gap may indicate that a company is not on track.
For investors, this gap is a powerful signal that highlights where engagement, closer scrutiny or even exclusion may be warranted.
EF: Are investors increasingly focused on identifying this ambition-performance gap?
AW: Yes. Initially, the focus was on whether companies had set targets at all. Now that many have, attention has shifted to delivery.
Enough time has passed since the first wave of target-setting for investors to begin assessing progress. In some cases, companies have made commitments without backing them up with meaningful action or investment that align with those targets. Being able to quantify the gap between execution and ambition is increasingly important for investors.
EF: What role do transition management indicators play in this context?
AW: Transition management indicators feed into our performance-based metrics and show how transition considerations are embedded within a company.
We assess around 85 indicators across governance, risk management, strategy, metrics and targets. For example, does a company use an internal carbon price? Are board members trained on climate issues? Is transition planning integrated into capital allocation or business operations?
These indicators help assess how embedded or "sticky" the transition is within operations. This is especially important in hard-to-abate sectors like industrials and materials, where decarbonisation is complex and long-term.
These indicators can enable investors to distinguish between companies that are genuinely transforming and those that are lagging.
EF: How are investors using this data in practice – particularly in stewardship and engagement?
AW: Transition data is increasingly central to stewardship. Investors use it to identify priority companies for engagement, particularly those with strong ambition but weak performance.
It also shapes engagement itself. Detailed indicators allow investors to pinpoint specific gaps and tailor expectations accordingly.
We're also seeing greater use of escalation strategies. Where companies consistently fail to align actions with targets, investors may vote against management or reduce exposure.
In addition, many investors are conducting credibility assessments aligned with frameworks such as the UK Transition Plan Taskforce. These often incorporate capital expenditure alignment, ensuring that financial decisions support stated climate goals.
Regulatory reporting is another key application, with transition data supporting disclosures across multiple jurisdictions.
EF: Finally, how is Sustainalytics supporting investors as they navigate these challenges?
AW: Our core solution is the Climate Transition Toolkit, developed in close collaboration with investors. It combines forward-looking metrics, emissions data and transition indicators.
The toolkit includes measures such as ambition alignment, implied temperature rise, value at risk, green revenues, and Scope 1, 2 and 3 emissions, alongside more than 2,000 underlying data points.
The aim is to provide decision-ready tools that support a range of use cases from portfolio screening to proprietary model development and regulatory reporting.
Ultimately, we want to help investors move from intention to action by providing the transparency and insights needed to assess what companies are actually doing, not just what they say.
For more information, see: https://www.sustainalytics.com/investor-solutions/climate-solutions/climate-transition-toolkit
