TFMR: Metrics Needed to Drive UK Transition Market
Finance sector and government policy action required to build on recommendations of Transition Finance Market Review, says chair.
The development of forward-looking metrics for financial institutions is the next step in the UK’s positioning as a global transition finance hub, according to the Chair of the Transition Finance Market Review (TFMR),
Vanessa Harvard-Williams said the task of creating a set of metrics for measuring transition-related risks should fall to the Climate Financial Risk Forum (CFRF), in parallel with government efforts to incentivise investment in the climate transition.
Speaking at the CFRC’s annual symposium, Harvard-Williams said the forum should build on the TFMR’s recent recommendations with robust metrics to ensure that financial institutions are able to fully measure and account for transition-related risks and opportunities in their investment decision-making.
“The homework question we [TFMR] were given was to work out what was needed to make the UK a hub for a high-integrity transition finance market,” she said.
“Our ask of the CFRF now is that the forum should develop transition finance metrics that the market is comfortable with. These should be workable metrics – forward-looking metrics – that involve really granular engagement.”
The CFRF was established by the UK Financial Conduct Authority and Prudential Regulation Authority in 2019 to develop guidance to help the financial sector develop its approach to climate-related financial risks and opportunities.
Published in October, the TFMR’s final report emphasised the need to move towards mandatory Transition Plan Taskforce-aligned transition plans for companies and financial institutions, and to build out supporting assessment, verification and assurance processes. This includes the introduction of a transition finance classification system.
Oversight and innovation
In Chancellor Rachel Reeves’ first Mansion House speech earlier this month, she committed to some of the reforms proposed by TFMR – specifically, the establishment of a Transition Finance Council.
“We [the UK] need to build capacity and communicate transition-related opportunities and risks much better than we are currently doing,” Harvard-Williams said.
The development of the transition finance market in the UK cannot be done by individuals “at the side of the desk pro bono”, she added.
“Yet this is how it is currently being done, as transition finance doesn’t yet sit in its own vertical product or silo. This is why establishing the Transition Finance Council is so important.”
The TFMR report noted that decarbonising the global economy will require an estimated annual investment of US$3.5 trillion to US$9.2 trillion of transition-focused investment by 2050. Finance going to emissions reduction projects alone will need to increase by 300-600% to put the world on track for a 2°C or 1.5°C pathway by the end of this decade, it added.
To sufficiently scale transition finance to support a sustainable, low-carbon future, transition-focused investments also need to be made more attractive.
“We need the market and government to work together to generate a pipeline of investable and attractive opportunities,” said Ingrid Holmes, Executive Director of the Green Finance Institute (GFI), also speaking at the symposium.
The TFMR review also recommended establishing a Transition Finance Lab to develop and test targeted financial solutions.
Policy enabler
Any frameworks and guidance developed and issued by the finance sector must be supported by the policy environment, according to TFMR’s Harvard-Williams.
“Finance is an enabler of transition, but it’s not the core driver – the market is framed by the policy environment, which needs to be changed to enable transition,” she said.
The TFMR has asked the UK government to demonstrate its commitment to the review’s recommendations and publish a forward-looking roadmap outlining how and when it will implement transition plan disclosure requirements aligned with the TPT framework.
In her Mansion House speech, Reeves noted there will be a consultation on transition plans in 2025.
Building blocks
The CFRF has broadened its work in line with member need, recently publishing guidance on nature-related risks, short-term climate scenarios, and mobilising adaptation finance to build resilience.
Billy Suid, Head of Climate Risk at Barclays, said the CFRF had recognised the importance of accounting for the “short-term relevance” of transition-related risks on portfolio decisions, with its guide to short-term climate scenarios covering use cases for banks, asset managers and insurers.
“Focusing on the short-term was a way to align the discipline of scenario analysis and materiality assessments with decision-usefulness,” Suid said.
The shorter-term impacts of climate change are increasingly on the mind of sector bodies and regional authorities.
Short-term climate scenarios were published this year by the Network for Greening the Financial System. Earlier this month, the results of the first EU-wide climate risk scenario analysis were released, focused on potential impacts by 2030, with the European Supervisory Authorities warning that banking, insurance and investment fund sectors all face double-digit losses under higher temperature scenarios.
In addition, the CFRF’s issuance of a handbook on nature-related risk aims to serve as an introduction for financial institutions looking to frame nature as a risk in their portfolios, outlining emerging practices and drawing on existing frameworks such as the Task Force on Nature-related Financial Disclosures (TNFD).
Meanwhile, the CFRF adaptation working group has focused on how to improve data, deals and disclosures related to climate adaptation and resilience.
“Unlike carbon accounting, there isn’t a methodology or rulebook for resilience,” said Catherine Bremner, Chief Strategy Officer at Impax Asset Management.
“We don’t know what good resilience looks like, and there aren’t sector roadmaps like there is for climate mitigation.”
The CFRF guide on mobilising adaptation finance outlines how the finance industry can assess physical risks to facilitate increased levels of investment into climate adaptation.
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