Transition finance hindered by knowledge gaps and lack of global alignment | CFA Institute

New research published by the CFA Institute Research and Policy Center analyzes the many challenges implicit in transition finance as a mechanism for the decarbonization of carbon-intensive sectors such as aviation, shipping, trucking, steel, cement, aluminum, and petrochemicals production.

The research, Navigating Transition Finance: An Action List, discusses the different stages of readiness and adoption of transition finance across a selection of industries and markets, and offers recommendations for corporations, investors, and policymakers to improve the environment for transition finance investors.

The report also discusses the inadequacy of existing fiscal policies, such as green public procurement, where authorities direct spending on goods, services, and works with a reduced environmental impact, and 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 standardized definitions, appropriate metrics, and transition finance instruments that are endorsed by international organizations.”

“Enhanced comparability and standardization 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 decarbonization targets, and collaboration among stakeholders will be essential. Put simply, policy frameworks must support the financing of decarbonization strategies in the real economy.”

“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.”

-Paul Andrews, Managing Director for Research, Advocacy and Standards, CFA Institute

Key challenges remaining for scaling transition finance include:

• • Closing knowledge gaps among the investor community concerning transition finance. The lack of awareness and attention to transition finance hinders mainstream adoption and creates challenges in effectively communicating and implementing transition strategies.
  • The lack of credible transition plans and fit-for-purpose disclosures.
  • The absence of clear taxonomies and labelling standards complicates risk evaluation and limits international capital flows.
  • An unfavorable risk-return profile due to inadequate government support for improving the commercial viability of transition projects.

Key Recommendations for net-zero investors, corporations, and policymakers include:

〉Institutional Investors

• • Establish portfolio decarbonization targets and report on progress
  • Develop metrics dashboards and use attribution analysis to report how investment strategies promote lower emissions or emissions reduction, focusing on year over year change in the weighted average carbon intensity (WACI) of portfolios, adjusting for currency and inflation effects

〉Corporations

• • Disclose credible transition plans that align with the Paris Agreement and demonstrate the economic feasibility of meeting decarbonization targets
  • Include decarbonization performance as part of a balanced scorecard for executive remuneration to incentivize accountability and intentionality

〉Governments and Regulators

• • Collaborate with industry stakeholders to create transition taxonomies, harmonize transition plan disclosures, and economic feasibility assessments
  • Allocate additional public and blended finance to mobilize more private sector investment in transition projects, especially in developing markets
  • Use labelling to help individual investors navigate the investment product landscape, thereby creating a more informed and sustainable finance ecosystem

To access the report Navigating Transition Finance: An Action List, visit: https://rpc.cfainstitute.org/en/research/reports/2024/navigating-transition-finance

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