GFANZ publications on transition planning
On June 15, GFANZ, a private sector-led initiative to reach net-zero emissions, proposed the Net-zero Transition Plan framework that is open for public comment until the end of July. The goal of the proposal is to help the financial sector prepare net-zero transition plans and support ‘real-world’ decarbonisation. In addition, GFANZ has published interconnected tools and resources relevant to financial institutions, real-economy companies, the public sector, and civil society with guidance to support a global effort towards net-zero.
The resources include:
- Guidance on Use of Sectoral Pathways for Financial Institutions [3]: Can support financial institutions’ use of sectoral pathways, in line with institutional and/or client goals, for the: creation of net-zero transition plans, alignment of their portfolios, and engagement with real-economy firms.
- Concept note on Portfolio Alignment Measurement [4]: Sets out the goals of the Portfolio Alignment Measurement workstream, outlines the work plan for the current year, and identifies remaining barriers to adoption of portfolio alignment metrics.
- Introductory note on Expectations for Real-economy Transition Plans [5] (work-stream co-chaired by NatWest): Seeks to help companies understand how to navigate the existing transition plan guidance landscape and bring together real economy transition plan frameworks.
- Report on the Managed Phase-out of High-emitting Assets [6]: Proposes “Managed Phaseout” as a net zero-aligned approach for the operation and financing and eventual retirement of high-emitting assets.
Key considerations for sustainable finance market participants
Whilst many of the recommendations are in line with already established best practices, GFANZ’s recommendations can help instil the consistency of approaches to be potentially embedded in national legislative and regulatory frameworks to drive the next-zero transition (e.g. as covered in our May newsletter [7], the UK Government has recently launched the Transition Plan Taskforce (TPT) to develop a “gold standard” for climate transition plans in the UK).
While the focus of the plan requires financial institutions to detail the actions they will take, metrics to report on progress and evidence that their decisions are aligned with limiting global warming to 1.5oC, there are obvious implications for non-financial corporates as well.
Investors / Lenders
Requirements to prepare transition plans under the recommended guidelines, paired with the standards for transition planning for the real-economy, could help re-shape and re-direct capital flows from finance providers in alignment with the respective net-zero pathways – where the latter would be expected to be tailored to national/jurisdictional considerations and government policies.
For asset managers of all sizes, the guidance should be helpful in setting up a transition plan, as well as in doing more of this work in-house. Their end-clients (asset owners) may expect this type of plan as part of periodic reporting.
The robustness of climate financing frameworks would be measured in relation to, and in the context of, the issuer’s/borrower’s transition plans. For example, the assessment of key performance indicators (KPIs) in sustainability-linked finance transactions will likely be viewed through the lens of the issuer’s/borrower’s transition planning to ensure consistency – i.e. that the fulfilment of the particular KPIs would contribute to the realisation of the broader plans. Similar rigour would be applied to the use of proceeds instruments – where investors would seek to understand how the financing of certain projects/assets/capital expenditures will fit into the issuer’s/borrower’s wider transition strategy.
Issuers / Borrowers
Clearly documenting a transition plan would promote accountability and would help signal the expectation on how funding may be provided towards climate solutions, such as renewable energy; how companies that are already aligned with a 1.5oC future will be supported, as well as those that aren’t, including those from high-emitting sectors; and provide transparency on the managed phase out of high-emitting assets.
Issuers are likely to face more scrutiny from their investors, many of whom will be GFANZ signatories. Companies of all sizes across all sectors and industries that do not have credible transition plans may face higher cost of capital as well as potential constraints accessing financial products and services (e.g restricted insurance); whereas companies with credible transition plans may be able to differentiate themselves and access products and services at lower cost and under more business tailored terms.
While the recommendations and guidance are voluntary and focused on financial institutions, corporations should focus on the expected disclosures and metrics that financial institutions themselves will disclose. A key aspect of the transition plans is that financial institutions will rely on benchmarks of companies and overall portfolio performance against sectoral pathways. Therefore, corporates should understand how their sector is measured in terms of transition to net zero and while pathways are not predictions, corporate issuers can align their carbon reduction disclosures and targets to these pathways to help communicate to financial institutions how they are aligned to those goals.
Transparency on the scope, ambition and assumptions of net zero plans and receiving validation from parties like the Science-Based Target Initiative (SBTi) are all actions that can be taken to highlight to financial institutions alignment with net zero ambitions. To support hard-to-abate sectors such as oil and gas, steel and aviation, GFANZ will be publishing sector-specific briefs ahead of COP27. In short, the GFANZ frameworks may dictate to corporates the requirements around their real-economy transition plans whilst corporates should still review the eventual guidance against other disclosure regimes to ensure they are meeting key stakeholder expectations.
