The Institute for Sustainable Finance (ISF) and Accounting for Sustainability (A4S) have introduced an innovative transition finance playbook designed to bolster efforts by financial institutions in Canada and globally to curtail greenhouse gas emissions and reach net zero. This strategic guide was revealed at the Responsible Investment Association conference in Toronto, aiming to equip financial institutions with pragmatic guidance on capital deployment to drive carbon-intensive industries towards emission reduction.
The 32-page document acknowledges the current market challenges, including a dearth of high-emitting companies with solid transition plans, the absence of consistent high-quality metrics for plan assessment, and a lack of a clear definition of transition finance activity. Yingzhi Tang, a lead author of the playbook and senior research associate with ISF, emphasized the absence of a universal approach to transition finance, highlighting the playbook’s role in offering diverse strategies for financial institutions to customize based on their mandates and contexts.
Key Recommendations and Practical Examples
The playbook lays out 14 strategic tips, enriched with real-world examples from institutions like Caisse de dépôt et placement du Québec, Ontario Municipal Employees Retirement System (OMERS), and the Co-operators Group, all of which contributed to developing these recommendations.
Among its recommendations, the playbook underscores the importance of engaging top-level executives within financial institutions. Securing senior-level support, it suggests, can be achieved by presenting a compelling business case that illustrates how transition finance can create value and manage risks.
Another pivotal tip involves leveraging third-party taxonomies and frameworks to craft a bespoke definition for transition finance, ensuring transparency in communicating the frameworks upon which this definition is predicated. OMERS, for instance, developed its internal climate taxonomy by drawing insights from external frameworks like the International Capital Markets Association’s Green Bond Principles and Climate Bonds Initiative Taxonomy.
Acknowledging that high-emitting companies are in nascent stages of decarbonization, the playbook recommends employing a spectrum of metrics to monitor progress. These include emissions intensity metrics, which quantify emissions per unit of activity or output, and temperature scores that estimate the global temperature rise associated with a company’s emissions or those of a portfolio.
Strategic Portfolio Management
The playbook also advocates for segmenting portfolios based on transition maturity. This strategy aims to identify investments that are more advanced in supporting a low-carbon economy transition and those requiring further development. Additionally, embedding decarbonization targets in underwriting strategies and collaborating with policymakers to stimulate further action are recommended.
Tang emphasizes a step-by-step approach through the investment cycle, underscoring the importance of strategic, phased actions in achieving transition goals.
Complementary Initiatives
This new playbook coincides with the launch of Business Future Pathways, an initiative designed to inspire Canadian financial institutions and companies to formulate credible climate transition plans. Supported by ISF, this initiative is intended to work synergistically with the playbook to propel Canada towards its 2050 net-zero target.
Despite these efforts, Canada is reportedly short $115 billion annually in transition-aligned investments necessary to meet its net-zero aspirations. Tang stresses the critical importance of managing climate-related financial risks and seizing long-term value in the transition to net zero, emphasizing that these activities form a comprehensive strategy for deploying capital to assets with robust transition plans.
Note: This article is inspired by content from https://www.investmentexecutive.com/news/industry-news/new-transition-finance-playbook-offer-tips-for-financial-institutions/. It has been rephrased for originality. Images are credited to the original source.