INSIGHT by the CFA Institute

“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.
〉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
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