GFANZ Launches Consultation on Transition Finance Strategies and Measuring the Impact on Emissions
Originally posted on GFANZ on September 19, 2023
The Glasgow Financial Alliance for Net Zero (GFANZ) Secretariat today launched a consultation on its work to further refine the definitions of its transition finance strategies and support financial institutions to forecast the impact of these strategies on reducing emissions.
In 2022, GFANZ identified four strategies necessary for financing a whole economy transition to net zero, which collectively comprise “Transition Finance.” These are defined as financing or enabling:
- The development and scaling of climate solutions;
- Assets or companies already aligned to a 1.5 degrees Celsius pathway;
- Assets or companies committed to transitioning in line with 1.5 degrees C-aligned pathways; and
- The accelerated managed phaseout of high-emitting physical assets.
Achieving a whole economy transition will require common definitions of transition finance across the four strategies and common methodologies for measuring their impact on emissions. Creating consistent definitions that are applicable across markets and sectors will help to scale transition finance to ensure real-economy decarbonization, help financial institutions independently identify their risk exposure and the investment opportunity ahead. They can also serve as safeguards to verify that the reduction of emissions in their portfolios corresponds to actual emissions reductions in the real world, rather than being achieved solely through divestment from high-emitting assets.
The consultation paper issued today seeks market feedback on a principles-based approach to segment portfolios by the four key strategies and highlights potential approaches to estimate associated decarbonization contribution impact, drawing on existing methodologies and concepts. The principles outlined in the consultation document are designed to be voluntary, pan-sector and globally applicable. They build on previous GFANZ publications, existing practices, transition finance frameworks, and potential decarbonization contribution methodologies.
The work also highlights the importance of real-economy transition plans, part of a suite of attributes, for entities, assets, and activities to be considered transition finance by the financial sector. For example, proposed attributes for aligning entities may encompass a net zero by 2050 commitment, the presence of a transparent net-zero transition plan and the inclusion of low-carbon capex plans.
To provide further clarity around transition finance activities, this consultation proposes emerging technical approaches for measuring the decarbonization contribution of transition finance activities. It also introduces the concept of Expected Emissions Reductions (EER). This concept is applicable across the four key financing strategies but employs distinct approaches for each, allowing financial institutions to quantify the “emissions return” of their transition finance activities more effectively.
The public consultation begins today and will run for six-weeks until November 2, 2023. Feedback from all stakeholders will be considered and can be provided here. The final report will be published by COP28.
Michael R. Bloomberg, GFANZ Co-Chair and UN Special Envoy on Climate Ambition and Solutions: “GFANZ is working with the financial sector to tackle climate change and helping financial institutions to make their net-zero transition plans a reality. But more needs to be done to ensure that their impact is measured accurately, and today’s consultation aims to do that. The more the market has accurate and transparent data, the more capital will flow to climate projects, reducing emissions, improving public health, and growing the economy.”
Mark Carney, GFANZ Co-Chair and UN Special Envoy on Climate Action and Finance: “To achieve the largest and most rapid reduction in emissions possible, transition finance must be mobilized – urgently and at scale. Trillions of dollars are required to bring emissions down and private finance will need to play a central role. We need to be able to track impact by measuring the expected decarbonization contribution of financing. This consultation links decarbonization contribution methodologies to the GFANZ financing strategies as a proposed approach to measuring the impact of transition finance over time. We strongly encourage all stakeholders to take part in the consultation.”
Mary Schapiro, GFANZ Vice Chair: “Transforming the global economy to achieve net zero is the biggest challenge facing this generation. To move forward, we must apply more rigor to how we finance the transition and how that investment is truly driving decarbonization over time – but we must do this thoughtfully and in broad consultation. We encourage everyone who is committed to the net-zero transition to provide feedback and we welcome insights from the public and private sectors, civil society and academia to help us address the really difficult issues that are part of the net-zero transition.”
About GFANZ
The Glasgow Financial Alliance for Net Zero (GFANZ) is a global coalition of financial sector net-zero alliances working together to support the world’s transition to net-zero emissions by 2050. Through the net-zero alliances, GFANZ has united over 650 institutions across the financial sector, including banks, insurers, asset owners, asset managers, financial service providers, and investment consultants, spanning 50 countries and representing 40% of global private financial assets. To help unlock transition investment in developing economies, GFANZ regional networks work to support capital mobilization, expand participation, and reflect the diverse needs of financial institutions around the world.
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