Investor Networks Distil Transition Guidance
Demand for transition-focused products grows as 1.5°C pathway falls out of sight.
Several investor networks have consolidated their respective guidance on climate transition to help financial institutions measure investee company plans more robustly.
Building on foundational work launched last year, the Climate Bonds Initiative (CBI) partnered with the Institutional Investors Group on Climate Change (IIGCC), the Sustainable Markets Initiative (SMI), the Glasgow Financial Alliance for Net Zero (GFANZ) and Climate Art to put the document together.
Specifically, the guide outlines a methodology for a new tool that will help investors assess and categorise corporates by their transition credibility and maturity.
“We didn’t want to create another separate piece that would just sit alongside what has already been developed – rather, we wanted to display a consolidated, shared view,” Anna Creed, Director of Thought Leadership at the CBI, told ESG Investor. “This work aims to serve as a tool for financial institutions to track climate transition progress – from the very basic plans to the more developed.”
Creed said the guidance would also support investors in tailoring their climate engagement strategies with high emitters. It sets out five categories of corporate decarbonisation maturity – commitment, emissions targets, delivery strategy, governance, and performance – which are then paired with key indicators.
“It’s possible to standardise all the expectations surrounding transition plans, except the target-setting,” she added. “Requesting disclosures on decarbonisation levers, governance and internal processes is all quite generic – although how they are interpreted will of course vary depending on the sector.”
Although standardising the evaluations of transition plans would help investors cater engagement to individual investee companies, focusing on areas where they may fall short, ongoing issues with data and industry expertise continue to make the process challenging, the guidance acknowledged.
“A lot of sector knowledge is needed for investors to really be able to understand and evaluate corporate transition plans,” said Creed. “They need to have an idea of viable [low-carbon] technologies, expected costs and timelines, as well as other decarbonisation levers the industry can pull.”
An additional issue is that investors aren’t always getting reliable or consistent information from portfolio companies.
“Many of these plans may only focus on the short term, failing to consider the medium-to-long-term, so investors can’t truly evaluate whether their strategy is going to help them achieve net zero,” Creed explained.
The proposed guidance is due to undergo consultation with the finance industry and will be pilot-tested against the investment portfolios of select financial institutions.
Crowded stage
Last year, the CBI mapped existing corporate transition frameworks as a first step to creating a tool to help financial institutions orient their portfolios towards climate goals.
The exercise revealed a high degree of alignment between the frameworks designed by each organisation involved, both in terms of the categorisation of corporate transition maturity and the principles underpinning transition plans. However, the report also identified variations on more specific indicators and metrics.
In the UK, a government-backed initiative has been tasked with designing a ‘gold standard’ transition plan introduce more alignment and standardisation across corporate strategies. In April, the country’s Transition Plan Taskforce (TPT) published a final set of transition plan resources, which included tailored guidance for seven industries – including asset owners and asset managers – and 30 sectors of the global economy.
A few months earlier, the taskforce published its disclosure framework to help companies develop transition plans as part of their annual reporting. This framework was aligned with components of GFANZ’s own transition planning guidance and the International Sustainability Standards Board’s sustainability reporting standards.
But despite movements being made in the right direction, corporate transition planning remains too limited, with accountancy firm EY having found last year that just 5% of FTSE 100 companies had published credible plans under the TPT’s disclosure framework.
The TPT’s mandate has been extended until the end of July to support HM Treasury’s Transition Finance Market Review.
Under pressure
There is also growing demand among investors for transition-focused disclosures and products.
A recent survey by asset manager Robeco showed that over 75% of 300 surveyed institutional investors expected the climate transition to be disorderly in some way. Only 37% of them had invested in strategies targeting companies with credible transition plans, although 63% said they intended to do so in the next couple of years.
“We believe the key question for transition-focused investment strategies is how to identify credible transition leaders with robust transition plans,” Lucian Peppelenbos, Climate and Biodiversity Strategist at Robeco, told ESG Investor. “Clear guidance from the authorities will help this, but investors then also need to apply [it] in bottom-up issuer analysis.”
In a separate piece of research, Aviva Investors noted that demand for other climate-focused products is also continuing to grow. Climate- and Paris-aligned fund launches have increased by 18% and 11% respectively over the past two years, it found. In addition, the number of new funds prioritising positive impact increased by 8% and products targeting UN Sustainable Development Goals by 5%. Fifty-three percent of the 60 surveyed asset managers – collectively managing £31.9 trillion (US$40.6 trillion) – also reported an increase in client interest in sustainability-focused solutions.
Nevertheless, the possibility of a Paris-aligned future could still be slipping out of the world’s grasp. This week, research firm BloombergNEF outlined the actions that needed to be taken by carbon-intensive industries – such as transport – to align with three climate transition scenarios.
“We did not calculate a 1.5°C scenario because we could not find a credible pathway,” said David Hostert, Head of Economics and Modelling at BloombergNEF, during a webinar launching the report. “A 1.75°C degree scenario requires action now, but it’s extremely narrow. However, if we conduct this analysis in a year’s time and emissions haven’t come down, it’s going to be even harder to find ways to stay below [that].”
Those results further highlighted the importance of these early years in the carbon-intensive sectors’ transition towards net zero, Hostert explained.
To align with BloombergNEF’s best-case 1.75°C temperature pathway, a fully decarbonised global energy system would cost US$215 trillion – only 19% lower than the expected costs in line with BloombergNEF’s 2.6°C scenario.
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