Transition finance suffers from a plethora of challenges, hampering its ability to support the decarbonisation of carbon-intensive sectors such as aviation, shipping, trucking, steel, cement, aluminium and petrochemicals production, according to research from the CFA Institute.
The research, Navigating Transition Finance: An Action List, discusses different stages of readiness and adoption of transition financing across a selection of industries and markets, offering recommendations for corporations, investors and policymakers to improve the environment for transition finance investors.
Existing fiscal policies, such as green public procurement – where authorities direct spending on goods, services and work with a reduced environmental impact – are “inadequate”, according to the report, which also considers the role of blended finance facilities and other policy interventions.
“Transition finance can play a key role for investors who intentionally seek to incorporate net zero into their strategies. However, financing for the reduction of emissions requires navigating a complex landscape of economic, regulatory, environmental and technological factors. This is particularly challenging given the absence of standardised definitions, appropriate metrics and transition finance instruments that are endorsed by international organisations,” said CFA Institute’s managing director for research, advocacy and standards, Paul Andrews.
Challenges and recommendations
Among the key challenges hindering the scaling of transition finance is a distinct lack of awareness of, and attention given, to the subject. According to the report, this creates issues in effectively communicating and implementing transition strategies, while putting up a barrier to mainstream adoption.
Additionally, CFA Institute’s analysis cites a lack of credible transition plans and fit-for-purpose disclosures, an absence of clear taxonomies and labelling standards, and an unfavourable risk-return profile due to inadequate government support for improving the commercial viability of transition projects as further challenges.
Therefore, governments and regulators are urged to collaborate with industry stakeholders to create transition taxonomies, while harmonising transition plan disclosures and economic feasibility assessments.
The report also encourages them to allocate additional public and blended finance to mobilise more private sector investment in transition projects, especially in developing markets, and use labelling to help individual investors navigate the investment product landscape, thereby creating a more informed and sustainable finance ecosystem.
Andrews added: “Enhanced comparability and standardisation of disclosures at national, regional and global levels will be important to facilitate progress in the transition finance sector. Relying solely on market forces is unlikely to deliver on decarbonisation targets, and collaboration among stakeholders will be essential. Put simply, policy frameworks must support the financing of decarbonisation strategies in the real economy.”
Elsewhere, institutional investors should establish portfolio decarbonisation targets and develop metrics dashboards using attribution analysis to report how investment strategies promote lower emissions or emissions reduction.
Corporations, meanwhile, should disclose credible transition plans that align with the Paris Agreement, demonstrate the economic feasibility of meeting their decarbonisation targets, and incentivise accountability and intentionality by including decarbonisation performance as part of a balanced scorecard.
Andrews concluded: “All stakeholders within the transition finance system will need to cultivate new skills, establish clear priorities and work together if transition finance is to play a meaningful role in supporting net-zero targets.”
