As COP27 came and went, one message rang abundantly clear: Global investment in decarbonization is falling far short of what is needed to get the world on track to limit warming to 1.5 degrees C. Transition planning could play a big part in meeting climate objectives.
Although we need by 2030 to be spending four times our fossil fuel investment on expanding the low-carbon energy supply, today we are barely matching it. Another study puts the investment gap between now and 2050 at more than $270 trillion in energy, transport, buildings, and other industrial sectors. We have a long way to go.
So it was a welcome jolt when the United Nations’ High-Level Expert Groupon Net-Zero Emissions Commitments for Non-State Entities (HLEG) admonished global financial institutions to “dramatically” scale-up their financial commitments to the climate — a message echoed by the UN Secretary-General. The group called on regulators to introduce new rules and standards around net-zero pledges.
Many standard setters and regulators anticipated this call and have in the past couple of weeks been issuing a range of new guidelines on net-zero claims and key considerations around carbon markets. The problem: We can’t keep waiting for the next COP to mobilize around the planet’s existential threat.
For the financial sector to scale up, financial supervisors and regulators across jurisdictions must step up and coalesce around the immediate actions that are needed now. Probably the most helpful focus for the regulatory community would be to become champions of transition planning.
Why transition planning? Because when it comes to emissions, many countries and businesses are making promises that they haven’t figured out how to deliver on. Pledges do not equate to action, and while COP27 was billed as the implementation COP, there remains a significant implementation gap. The missing element is transition planning — a set of goals, actions, and accountability mechanisms that align corporations’ strategies and missions with a pathway to net zero. These plans provide the roadmap to lower emissions, and ultimately, net zero.
How financial regulators and supervisors embrace transition planning may vary by jurisdiction, at least initially. Regardless of the approach taken, the regulatory community must insist that standards around transition planning are ambitious, coherent, and interoperable across jurisdictions. Ideally, regulators will embrace existing voluntary initiatives that have picked up steam in the private sector, such as those promoted by the Glasgow Financial Alliance for Net Zero, the Task Force on Climate-Related Financial Disclosures, the Task Force on Nature-Related Financial Disclosures — and the climate-related disclosure standards being drafted by the International Sustainability Standards Board (ISSB).
Regardless of how transition planning is formally embraced within the financial system, many will benefit. Take investors as an example. Transition planning endorsed by regulators will help investors to more effectively allocate capital to enterprises with viable plans for low-carbon operations. They will have more confidence that their investments are not being greenwashed.
Financial regulators and supervisors will also rest easier, as transition plans can clearly show if and how climate risk is being managed. Early engagement on the data provided by transition plans should help supervisors to shape best-in-class climate-risk management more effectively and proactively.
At a micro-prudential level, disclosures of financial institution transition plans enable a clear view as to which firms are left vulnerable. At a macro-prudential level, widespread disclosures can provide a window into potential systemic risk. The good news is that jurisdictions are beginning to embrace transition planning. Last week, the United Kingdom’sTransition Plan Taskforce launched its definition of a “gold standard” transition plan, and the UK’s Bank of England and Financial Conduct Authority have embraced transition plans as a way of enabling an orderly transition to net zero and managing climate risk.
Momentum is also building around tools and utilities that can help track progress against net-zero commitments and transition plans. For instance, the Climate Data Steering Committee outlined the foundational data upon which the planned Net Zero Data PublicUtility (NZDPU) should be based, and a beta version of the NZDPU is expected to be launched in the third quarter of 2023. The CDP also agreed to apply the ISSB’s climate disclosure standard in its work, ensuring that the largest environmental disclosure platform is aligned with global guidelines.
An Urgent Gap
Yet in most jurisdictions, the need for transition planning is too often overlooked. This is a missed opportunity and a gap that is urgent to fill. Without clear expectations of what these plans should include, as well as careful considerations around, coordination and interoperability of requirements, the data from transition plans risk being disparate across firms and sectors — preventing them from painting a full picture of progress. A lack of clarity will also prevent supervisors and regulators from effectively managing climate risks in line with their mandates.
If we are to limit temperature increases in accordance with the Paris Agreement and mobilize the financial system to reach net zero, then supervisors and regulators need to step up and explore how they can enable an orderly transition that supports financial stability and avoids climate catastrophe. Transition plans — ideally made mandatory and disclosed at scale — may end up being the light that enables them to proceed with confidence.