Dive Brief:
- The lack of a uniform standard on eligible activities and the absence of a transition plan disclosure requirement represent challenges to scaling transition finance, according to a recent report from the CFA Institute.
- Transition finance, or financial support to help decarbonize high-emitting activities or allow for the decarbonization of other economic activities, is seen as critical to help organizations achieve net-zero greenhouse gas emissions.
- Despite commitments to reach net-zero from governments — through transition financing among corporations, asset owners, and asset managers — the lack of uniform standards stand in the way of broader adoption, the report said.
Dive Insight:
The report’s authors said institutional investors, corporations and governments all have roles to play in growing transition finance.
Institutional investors should disclose both portfolio emissions and decarbonization progress; corporations should provide transition plans to assure financiers of their commitment to achieve transition targets; and governments and regulators could develop transition taxonomies and set forth transition plan disclosure frameworks, according to the report.
“While sustainability investing gains traction, the funding gap for decarbonization of high-emitting assets remains substantial,” the report said. A potential path forward includes increasing awareness of transition finance’s role in achieving net-zero; improving disclosures of transition plans; and all parties providing additional clarity around transition activities.
The report cited a 2022 survey conducted by Ninety One (formerly Investec Asset Management) of asset owners and advisers, in which 60% of respondents cited the lack of corporations with credible and feasible transition plans as a barrier to transition finance. The CFA Institute recommended that corporations disclose transition plans that align with the 2015 Paris Climate Accords and, in those disclosures, demonstrate the economic feasibility of meeting their decarbonization targets.
Paul Andrews, managing director for research, advocacy and standards at the CFA Institute, told ESG Dive that several obstacles stand in the way of the growth of transition finance. Among these are the lack of standardized definitions for transition finance and corresponding metrics, high-risk perceptions of technologies needed to decarbonize high-emitting sectors and other broader knowledge gaps among investors.
“The absence of endorsement of transition finance instruments from a reputable international organization has created an undefined landscape, making it difficult for investors to align on net-zero investment strategies,” he said over email. “Improving transition plan disclosures will require collaboration across investors, corporations and policymakers.”
The standardization of transition plan disclosures at the national, regional and global levels will drive progress in the transition finance sector, Andrews said, adding that relying only on market forces is unlikely to deliver decarbonization targets.
Actions governments, regulators and other industry stakeholders could take include authorizing additional public and blended financing and using reverse auctions and climate bad banks to enable the phase of of high-emitting or stranded stranded assets. A “climate bad” bank is one that would buy back assets at risk of depreciation during a transitional period.
Transition finance has gained prominence as a way to help various industries — including hard-to-reach sectors such as the fossil fuel industry — move toward decarbonization.
Transition financing was also a prominent theme at the COP28 global climate conference in December. While global governments’ landmark agreement to transition away from fossil fuels was the headliner, the rollout of climate finance funds dedicated to transition efforts was also announced.
Investment vehicle Alterra, for example, was launched at COP28 with a $30 billion commitment from the United Arab Emirates. The fund aims to accelerate the transition to a net-zero economy, as the world faces a $41 trillion mitigation investment gap before 2030, according to research from McKinsey.
