New CFA Institute research on transition finance uncovers investment industry challenges

by | Mar 27, 2024

New research published today by the CFA Institute Research and Policy Centre analyses the many challenges implicit in transition finance as a mechanism for the decarbonisation of carbon-intensive sectors such as aviation, shipping, trucking, steel, cement, aluminium, 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.

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

“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 standardised definitions, appropriate metrics, and transition finance instruments that are endorsed by international organisations.”

“Enhanced comparability and standardisation 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 decarbonisation targets, and collaboration among stakeholders will be essential. Put simply, policy frameworks must support the financing of decarbonisation 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.”

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 unfavourable 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 decarbonisation 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 decarbonisation targets
  • Include decarbonisation performance as part of a balanced scorecard for executive remuneration to incentivise accountability and intentionality

Governments and Regulators

·        Collaborate with industry stakeholders to create transition taxonomies, harmonise transition plan disclosures, and economic feasibility assessments

·        Allocate additional public and blended finance to mobilise 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

Related articles

ECB holds rates but signals first cut could come soon

ECB holds rates but signals first cut could come soon

So now we have it, the ECB's latest interest rate decision has been announced, and it's another 'hold'. Richard Carter, head of fixed interest research at Quilter Cheviot has shared his reaction to the news as follows: “The European Central Bank has predictably opted...

Trending stories

Join our mailing list

Subscribe to our mailing list to receive regular updates!

x