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Report Overview
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.
In “Navigating Transition Finance: An Action List,” CFA Institute Research and Policy Center explores actions investors, asset managers, corporations, and policymakers may consider to improve the disclosure of transition plans, provide clarity on transition activities, and mitigate risks associated with transition finance.
The objectives of this report are to enhance comprehension of transition finance, pinpoint obstacles to widespread implementation, and explore collaborative initiatives required from the investment community, high-emitting corporations, and policymakers to overcome these obstacles. We conducted intensive individual interviews with more than 20 market participants working on transition finance issues and organized an ESG Virtual Roundtable in May 2023.
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. Here is a 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.