Sustainability Assembled

The critical role of the private sector in transitioning to a sustainable future is emphasised by the Transition Finance Market Review in the UK and the Clean Transition Dialogues in the EU.

Transition Finance Market Review

The Transition Finance Market Review (the Review) will consider which market tools are most impactful, how to create the conditions for scaling credible transition focussed capital and how to maximise the opportunity for UK based financial services and position the UK’s professional services as a global hub. The LMA’s response to the Review's Call for Evidence can be accessed here.

Clean Transition Dialogues

The Commission’s Communication – “The Clean Transition Dialogues – Stocktaking” (published in April 2024) emphasises the crucial role of private capital in strengthening and supporting the European Clean Deal contributing to what is referred to as a reinforced industrial approach. To date, nine clean Transition Dialogues have taken place with easier access to finance being highlighted as key building blocks including:

the continued need to mobilise private sector capital including facilitating cross-border investing and emphasising the need for European institutions to strengthen their engagement with institutional players to mobilise private funding;
reduce the cost of capital; and
focus on diversity of funding options, propose new innovative financial tools and use public funds to catalyse private investment.

NGFS: Transition Plan Reports

On 17 April 2024, the Network for Greening the Financial System unveiled three significant reports for banks developing transition plans to meet mandatory prudential requirements. The publications delve into the critical role of transition plans in facilitating the mobilisation of capital within the financial system, managing climate-related financial risks, and their relevance to micro-prudential supervision.

The cover note summarises the key findings of the work based on the following three reports:

Tailoring Transition Plans: Considerations for EMDEs: the needs and challenges of emerging markets and developing economies related to transition plans;
Connecting Transition Plans: Financial and non-financial firms: links between the transition plans of real economy and financial institutions; and
Credible Transition Plans: The micro-prudential perspective: the credibility of the transition plans of financial institutions from a micro-prudential perspective.

TPT publishes sector-specific guidance on climate transition plan disclosures

The Transition Plan Taskforce (TPT) has issued the final versions of its sector specific guidance. The TPT Sector Deep Dive Guidance provides sector-specific guidance for preparers to interpret the Disclosure Framework for seven sectors – asset managers, asset owners, banks, electric utilities and power generators, food and beverage, metals and mining, and oil and gas. In making its selection, the TPT sought to identify sectors for which additional guidance would be beneficial in kickstarting transition plan disclosures, while also identifying opportunities to leverage existing sectoral guidance and consolidate it into the context of the Disclosure Framework.

The package of measures also includes:

TPT Sector Summary: provides an overview of transition plan guidance for 30 financial and real economy sectors. The guide includes a brief “Sector Summary”, including recognised decarbonisation levers, metrics & targets, and key sources of guidance for a transition plan in that sector;
TPT Transition Planning Cycle: an illustrative guide to continue transition planning journey which sits alongside the TPT Disclosure Framework; and
a paper on the opportunities and challenges relating to the use of private sector transition plans in emerging markets and developing economies.

The sector-specific guidance is intended to build on and be complementary to the TPT Disclosure Framework and related implementation guidance and users are advised to review those materials. All TPT guidance and material can be accessed here.

Ben Caldecott, Co-Head, Secretariat, TPT:

“We need to back up net zero targets with firm plans. Climate transition plans, if suitably ambitious and delivered with appropriate actions and with proper accountability, can help society allocate capital to companies and assets that are actually contributing to meeting the aims of the Paris Agreement, and away from those that aren't. The Transition Plan Taskforce has made available a globally applicable set of resources to help companies to build their transition plan and successfully raise transition finance.”

Target Setting Protocol

In April 2024, the UN-convened Net-Zero Asset Owner Alliance (NZAOA) comprised of 89 institutional investors and managing $9.5 trillion assets has released the fourth edition of its Target-Setting Protocol (the Protocol). The Protocol is a comprehensive guide setting out a pathway for investors to reduce portfolio emissions in line with the Paris Agreement. The fourth edition of the Target-Setting Protocol features a revised structure in two key parts: (1) Target-Setting Protocol (consolidating all pertinent information for NZAOA members regarding target setting and reporting requirements) and (2) the Background Document (a supplementary resource, providing additional insights on content related to target setting for NZAOA members, allowing for detailed explanations and discussions not directly reflected in target setting requirements).

With this latest iteration of the NZAOA target-setting protocol, the alliance is leveraging on Assessing Sovereign Climate-related Opportunities and Risks database (ASCOR database).

Background

ESG and micro-prudential supervision

For the first time, from next year, banks will be required to draw up transition plans under the prudential framework which are consistent with sustainability commitments undertaken under other law and regulation (such as CSRD). Bank supervisors will, for the first time, oversee how banks handle ESG risks and include ESG considerations in the context of annual supervisory examination review. In addition, ESG reporting and disclosure requirements will apply to all EU banks and co-legislators have agreed to allow banks to enjoy a favourable risk weight treatment where they finance an infrastructure project that has a positive or neutral environmental impact.

Transition Planning and Transition Plans

The NGFS defines “transition planning” and “transition plans” as follows:

“Transition planning”: the internal process undertaken by a firm to (i) develop a transition strategy to deliver climate targets that firms may voluntarily adopt or that are mandated by legislation or the appropriate authority, and/or (ii) prepare a long-term response to manage the risks associated with its internal strategic planning and risk management processes undertaken by a financial institution to prepare for risks and potential changes in business models associated with the transition to a low emission and climate-resilient economy.

“Transition plans”: a key product of the transition planning process and are an external-facing output for external audiences, such as investors, shareholders and regulators.