Without a way to harmonize the content of transition plans, such as those GFANZ outlines as current standard practice, banks are likely to ignore most of what their customers are doing, which erodes the effectiveness of their own Net Zero finance strategies.

  • With a proliferation of Net Zero pledges, financial institutions are grappling with how they will evaluate the plans they receive from customers without adding substantial time and cost to the process
  • GFANZ guidance on financial institution reviews of customer transition plans will help lay the groundwork for greater harmonization — at least of format if not content — of transition plans
  • The process of routinizing submission and review of transition plans to receive financing will help make the exercise worthwhile much sooner and for a much wider range of customers, without it becoming a box-checking exercise

How should companies plan their transition plans in a way that will help them to more easily access financing? How are banks currently assessing the credibility of the transition plans they have received? The Glasgow Financial Alliance for Net Zero (GFANZ) has released another resource paper on transition planning to clarify some of the common expectations that financial institutions have when evaluating their customers’ plans. As the number of companies making Net Zero pledges proliferates, it raises a significant concern that financial institutions won’t be able to effectively assess the information they are presented by customers.

If financial institutions aren’t able to assess the credibility of what they are receiving, they may resort to simpler yes/no metrics about whether customers have a plan. This risks it becoming only a check-box to fill, which would substantially reduce the value for companies in developing transition plans relevant to how they do business, and companies that do have credible transition plans would see that value eroded substantially.

The role for a transition plan is to outline how a company — having taken the first step of committing to Net Zero by a particular date such as one in line with the national Net Zero target — can operationalize that commitment. The commitment itself makes up just part of the first step in a transition plan, and it needs to be more completely described beyond the objective (of Net Zero) by outlining priorities based on materiality analysis to determine which are the most urgent outcomes that the plan will need to address.

The objective is all that many companies have released so far; few have outlined priorities within their Net Zero transition planning. The remainder of what financial institutions expect from non-financial companies provides the information that is needed to assess the credibility of the plans. The final elements lain out of metrics, targets and governance provide no surprises and follow from the framework laid out by the Task Force for Climate Related-Financial Disclosures (TCFD).

The core of transition plans, and one of the ways in which the GFANZ’s common-ground framework is most useful, lies in collecting the current experiences in this new topic. By defining the different elements relating to strategies linking long-term objectives and priorities, it will enable companies to have interim metrics and targets in line with those strategies and objectives. The guidance is divided into two parts: one focused on a company’s own activities (its ‘implementation strategy’); and the other on its relationship with other stakeholders (its ‘engagement strategy’).

Each of these components of strategy guiding the transition planning is divided into three separate parts, which provides a much clearer basis for review of the transition plan depending on the strategy of the financial institution reviewing it. The value of this type of breakdown of a transition plan is that a company following this type of process should be able to derive a few of the most material issues relating to each element of the strategy and its governance and metrics & targets will follow from these material topics.

From the perspective of a financial institution reviewing a transition plan, if it has already followed GFANZ guidance on their own Net Zero strategy, it will already have defined its policies relating to high-emissions assets needing managed phase-out, activities that are or have transitioned, and then activities supporting decarbonization (climate solutions). The transition plan of a company can be viewed first through the products & services of the customer to see whether its activities need to be phased out, transitioned or are already aligned or enabling others to transition. And then the most material climate-related elements within its value chain can be similarly mapped.

A financial institution will then be able to compare the company’s transition plan mapping with its own priorities to see whether there is any discontinuity, and if not, make sure the customer’s transition plan has the material issues identified reflected in its decision-making process on a strategy level, within its governance, and included in the metrics it tracks.

With these elements in place, the financial institution can track the maturity level of its customers’ Net Zero transition plans based on whether the plans exist, whether they have internal consistency, whether they have been validated as ‘science-based’ and, eventually, whether they are showing results through the metrics that confirm that progress is in line with the plan’s targets.

The implementation of climate transition planning into decision-making about financing, whether relating to cost of financing or availability of financing, will be successful if it can be simplified without losing too much detail. The GFANZ outline of what financial institutions expect from non-financial companies’ transition plans is a helpful stepping stone towards simplifying the process.

Until the financial institutions’ own understanding and processes evolve so that transition plan review becomes an expected part of the process obtaining financing, it will still be seen by the financial institution and its customers as a large hurdle. GFANZ guidance on the subject, such as its latest report, will help in laying the groundwork for greater harmonization, at least of format if not content, of transition plans and can help make the exercise worthwhile much sooner and for a much wider range of customers.

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Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.

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Blake Goud

Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.