New research published from the CFA Institute Research and Policy Center, titled Navigating Transition Finance: An Action List, explores the different stages of readiness and adoption of transition finance across a selection of industries and markets, as well as the challenges that need to be overcome to drive it forward.
It offers recommendations for corporations, investors, and policymakers to improve the environment for transition finance.
The report notes that key challenges for scaling transition finance include:
- Closing knowledge gaps among the investor community, noting that the lack of awareness and attention to transition finance hinders mainstream adoption and creates challenges in effectively communicating and implementing transition strategies.
- The lack of credible transition plans and fit-for-purpose disclosures.
- The absence of clear taxonomies and labelling standards, which it notes complicates risk evaluation and limits international capital flows.
- An unfavourable risk-return profile due to inadequate government support for improving the commercial viability of transition projects.
It offers recommendations at various levels, including net-zero investors, corporations, and policymakers.
For institutional investors, it recommends establishing portfolio decarbonisation targets and reporting on progress.
Also recommended are the development metrics dashboards and the use of attribution analysis to report how investment strategies promote lower emissions or emissions reduction, focusing on year-over-year change in the weighted average carbon intensity (WACI) of portfolios, adjusting for currency and inflation effects.
For corporations, the report encourages the disclosure of credible transition plans that align with the Paris Agreement and demonstrate the economic feasibility of meeting decarbonisation targets. Further, it recommends including decarbonisation performance as part of a balanced scorecard for executive remuneration to incentivise accountability and intentionality.
Finally, for governments and regulators, it recommends collaborating with industry stakeholders to create transition taxonomies, harmonise transition plan disclosures, and economic feasibility assessments.
Second is the allocation of additional public and blended finance to mobilise more private sector investment in transition projects, especially in developing markets.
Lastly is the use of labelling to help individual investors navigate the investment product landscape, thereby creating a more informed and sustainable finance ecosystem.
Read the full report here.