electrify transports and heating, and will likely determine the fate of the transition. intermediaries should discriminate between the various companies on the basis of their transition plans, thus allowing committed companies find the necessary financial resources easily and at low cost, relative to less climate - aware firms. to this end, intermediaries will increasingly need new skills, capable of screening and monitoring long - term investment projects aimed at improving sustainability. figure 2 shows that there is a positive relationship between sectoral greenhouse gas emissions and the share of firms in each sector that made sustainable investments. in the three highest emission sectors, that account for 55 per cent of total emissions, on average 16 percent of firms made investments aimed at increasing their own sustainability, against a sample average of 10 percent. this suggests that the abovementioned exclusion strategy may be a poor choice for financial intermediaries not only as a means to support the transition, but also to mitigate transition risk in their own portfolios. there is increasing awareness that portfolio decarbonization – especially if carried out in a non - forward - looking manner – may actually be ineffective to decarbonize the economy as well as to manage transition risk. recent initiatives aimed at developing forward - looking tools and metrics, the so - called portfolio alignment tools, build on non - financial firms transition plans. 5 progress on this crucial front is ongoing. 6 overall, a trade - off between simplicity and effectiveness emerges. decision - making processes relying on forward - looking information, such as transition plans, offer the most effective incentives and do not suffer from the pitfalls often marring those based on historical information. at the same time, they introduce complexity and uncertainty : at present the legal framework, the statistical apparatus and the reporting requirements for firms largely rely on historical, backward - looking data ; only a relatively small group of large non - financial firms worldwide has elaborated transition plans ; 7 furthermore, reliance on transition plans is warranted only if they are ambitious and credible ( and possibly validated ). 3. possible trade - offs between sustainability and returns a second important theme concerns the relationship between the environmental objectives of firms and their traditional business objectives. this issue can be framed within the academic debate about whether firms should stick to a narrow mandate – maximize profits to the benefits of shareholders – or rather be concerned with a broader set of targets – loosely speaking, maximize the welfare of stakeholders. in the latter see e. g. portfolio alignment team ( 2021 ), “ measuring

. the transition plans of financial intermediaries ( banks and institutional investors ) can represent a powerful tool both for managing climate risks and for steering the economy on a sustainable path. however, we are moving our first steps in this area. in what follows i will discuss two issues and draw some conclusions. 2. current vs expected emissions an intermediary can implement a net zero transition plan in many ways. to simplify, consider two opposite alternatives. the first would entail changing the composition of its portfolio by moving from high to low carbon intensity sectors / firms, identified based on their current emissions. this is the so - called “ exclusion ” strategy, according to the usual taxonomy of sustainable investment. 4 the second ( the so - called “ best - inclass ” strategy ) would entail overweighting firms that, despite being carbon intensive, have committed to an ambitious and credible decarbonization plan over the coming decades. the first approach, if applied on a vast scale, would suffer from a fallacy of composition : it would be feasible for the individual intermediary, but not at the aggregate level, short of a “ miracle ” in the form of a technological breakthrough allowing carbon intensive firms to transition without financial support, or a quick and radical change in households consumption patterns that causes a fall in demand for high carbon products and services. the second approach avoids this problem and appears capable of providing carbon intensive firms the finance they need to implement their transition plans. figure 1 reports data for eu listed non - financial companies, aggregated by sector. for each sector, the horizontal axis measures the current carbon intensity ; the vertical axis reports the expected decline in carbon intensity over the next decade, as envisioned in each firms ’ published commitments. the figure shows that firms in the more carbon intensive sectors plan to reduce their emissions relatively more aggressively. this suggests that these firms, arguably the most exposed to transition risk, will need substantial flows of finance in the coming years for their transition plans to succeed. the figure also highlights that financial firms could face a difficult choice : in the short - to - medium term financing the transition might even entail an increase in the carbon footprint of their portfolios. while this might seem at odds with a net zero pledge, it could be worth doing. consider e. g. firms operating in the business of power generation, often characterized by very high emissions. their investment choices will global sustainable investment alliance ( 2021 ), “ global sustainable investment review ”. be key to