Investment industry needs 'new mindset' amid net zero challenges with transition finance

CFA Institute has today (27 March) published a report analysing the challenges implicit in transition finance as a pathway to net-zero.

In the 'Navigating Transition Finance: An Action List' report, its authors Winnie Mak and Andres Vinelli said that while the UK and EU are among the markets which have sought to define transition finance and provide a clear pathway for the decarbonisation of high carbon-emitting sectors, transition finance still a relatively new market concept and institutional investors are finding that there is much progress to be made, with a number of complex considerations requiring navigation.

The CFA Institute Research and Policy Center research found there are key challenges to scaling transition finance across various sectors, markets and regions.

These include:
• Knowledge gaps among investors are hindering mainstream adoption & effective communication of transition strategies, despite substantial net zero commitments.
• Lack of credible transition plans, fit-for-purpose disclosures, and greenwashing concerns are actively discouraging financial institutions from transition finance.
• There are unfavourable risk-return profiles due to inadequate government support for improvement of the commercial viability of transition projects.

The report also outlined recommendations for institutional investors, governments and regulators and corporations to address these challenges and advance transition finance including disclosing portfolio company emissions, establishing decarbonisation targets, and collaboration with industry stakeholders.

Real-world thinking about society’s path to net zero is calling attention to the pivotal role transition finance can play in decarbonizing high carbon-emitting sectors. Some investors and practitioners are considering directing capital toward transition projects and new technologies. The economic, regulatory, environmental, and technological landscape is complex, however, and financing options are nascent.

All stakeholders within the transition finance system must cultivate new skills, establish fresh priorities, and embrace a new mindset. Collaboration synergy is crucial to achieving change and enabling transition finance to play a bigger part in supporting net-zero goals.

The report makes several recommendations for those interested in incorporating transition finance into their net-zero considerations, in summary:

• Institutional investors should establish portfolio decarbonization targets and disclose portfolio emissions and year-on-year reduction of portfolio emissions.
• A dashboard with multiple metrics could be used to track progress.
• Corporations should provide feasible and credible transition plans. They should provide inflation- and forex-adjusted carbon intensity per revenue and include decarbonization targets for executive remuneration.
• Governments and regulators should work with industry stakeholders to harmonize transition plan disclosures and labeling. They could allocate additional public and blended financing and consider using reverse auctions/climate bad banks to manage phaseout.