A report published by the CFA Institute Research and Policy Centre has highlighted the challenges implicit in transition finance as a mechanism for the decarbonisation of carbon-intensive sectors.
According to the report, Navigating Transition Finance: An Action List, the UK and EU have taken steps to define transition finance and outline a clear path for decarbonising high carbon-emitting sectors. However, as transition finance remains a relatively new concept, institutional investors are discovering that there is still progress to be made.
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According to the report, the challenges in navigating complex considerations in this evolving market landscape include knowledge gaps among investors hindering mainstream adoption despite substantial net-zero commitments, lack of credible transition plans, suitable disclosures, and concerns about greenwashing in transition finance initiatives.
Moreover, unfavourable risk-return profiles arising due to insufficient government support for enhancing the commercial viability of transition projects adds to the problem.
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The report also discussed the inadequacy of existing fiscal policies, such as green public procurement, where authorities direct spending on goods, services and works with a reduced environmental impact, and the role of blended finance facilities and other policy interventions.
Finally, the report recommended strategies for those interested in incorporating transition finance into their net-zero considerations. For instance, institutional investors ought to set portfolio decarbonisation targets and disclose emissions alongside year-on-year reductions, utilising a dashboard for tracking progress.
Additionally, corporations must offer feasible transition plans, including carbon intensity per revenue and decarbonisation targets for executive remuneration.
Governments and regulators should collaborate with industry stakeholders to standardise transition plan disclosures, allocate additional financing, and explore innovative mechanisms like reverse auctions and climate bad banks for managing phaseout.
Paul Andrews, MD for research, advocacy and standards, CFA Institute, commented: “Enhanced comparability and standardisation of disclosures at national, regional and global levels will be important to facilitate progress in the transition finance sector. Policy frameworks must support the financing of decarbonisation strategies in the real economy.”
