Relatively few companies have published transition plans detailing the investments they are making to support net-zero targets. So it's surprising that investors are using the 2024 voting season to demand more information about companies' climate change plans and how exactly they're being financed. isn't it.
ESG-focused shareholder proposals related to greenhouse gas emissions reduction targets and climate change plans have been the dominant category of resolutions filed so far this year, according to a March 25 analysis by the nonprofit organization Ceres. There is.
Funds that can be used to decarbonize high-emission activities that support climate change plans fall into the category of “transition finance.”
According to a report released in March by the CFA Institute Research and Center, while there are still no universal standards for eligible activities, transition financing generally “creates significant impacts and supports the creation of a net-zero economy.” We support projects that have an overarching goal of contributing to the realization of their goals. Policy Center.
How to recognize “transition finance”
So far, transition financing has mainly come in the form of debt financing through corporate bonds and loans, the proceeds of which have been used to fund emissions reductions for companies. or through equity investments in energy transition projects addressing high-emission sectors, primarily led by private equity funds. These investments could include renewable power plants, carbon capture facilities, electric vehicle factories, and more.
Examples include BlackRock's investment in Occidental Petroleum to build its first carbon capture plant and helping Texas raise $10 billion in private financing to strengthen its power grid. This is another proposal from an asset management company.
'Transition finance' differs from other forms of capital deployed for environmental, social and governance objectives in that it focuses on phasing out high-emission energy sources and processes. .
The table below helps illustrate the boundaries between the different types of finance that businesses may use.
No transition plan or transition funds
There is a wide gap between companies' sustainability efforts and the funding available to support them, with 93 per cent of senior leaders across many industries saying sustainability is commercially important. Only 23 percent allocate significant capital to sustainability.
Access to transition finance is essential for sustainability professionals at high-emitting companies who are highly exposed to transition risks, such as government-introduced carbon taxes and mandates to transition to renewable generation.
The World Economic Forum estimates that an additional $370 billion in annual capital investment will be needed between now and 2050 to finance the transition to heavy industrial activity and the transport sector.
Of 500 senior executives in high-emission sectors, 40 percent plan to be net-zero by 2050, according to a study cited in the CFA Institute report. The majority of the 60 percent who do not have a plan cite lack of reliable financing as the reason. Main obstacles.
High-emitting companies without net-zero targets and plans to get there will find it difficult to secure transition funding. This is because financial institutions that implement transition funds may increase emissions from lending, increasing the risk of being accused of greenwashing.
“Financial institutions with net-zero commitments can only justify capital allocation consistency if high-emitting borrowers/investors present credible transition plans in line with the Paris Agreement,” the report said. ing.
Start where you are
The International Capital Markets Authority, which provides education to capital market participants, has published principles for green bonds, social bonds and sustainability-linked bonds, but not for transition bonds.
Instead, we provide a handbook that provides guidance and common expectations regarding the practices, conduct and disclosures that should be made when raising capital in the debt markets for transition-related purposes.
For example, the International Sustainability Standards Board's IFRS S2 Standard and the Transition Planning Task Force's Disclosure Framework Guidance recommend that companies disclose decarbonization targets along with projections of potential financial impacts. Masu. By incorporating economic feasibility analysis into transition plans, companies can directly address investor and lender concerns and increase confidence that their goals are realistic.
As investors become more sophisticated in identifying which companies have plans to ensure and respond to climate change risks, companies that need access to transition finance will start building their transition plans. There is a need to.
