Greening the economy through transition finance

Time is running out if we are to transform our economy and cap global warming at 1.5% by 2050. It is estimated that a reduction of 45% in carbon emissions will be required by 2030. This in turn will require $32 trillion of investment to decarbonise our industries, of which 70% will have to come from the private sector (TheCityUK).

The challenge for the financial sector

The challenge for the financial sector is how to channel and focus that financing and help execute the transition to net zero. And to do so while continuing to maintain financial stability and build confidence and trust in the financial system. We discussed these issues in a recent panel event in Brussels. COP27 in Egypt reiterated the messages heard at COP26 in Glasgow on the importance of private finance.

The City of London Corporation is hosting the Net Zero Delivery Summit on 24 May 2023, in partnership with the Egyptian COP presidency. The event, a mainstay in the sustainable finance calendar, will have a strong focus on the practical delivery of climate goals through finance.

What can financial services do to finance the transition?

At COP27, the Net Zero Banking Alliance, NZBA, launched a guide with the United Nations Environment Programme (UNEP) exploring the role of the banking sector in financing this transition and meeting their own net zero commitments. This guide gave an honest account of the scale of the challenge.

How does a bank committed to net zero work with clients all over the globe, subject to different reporting rules and different national approaches to net zero? And how to handle firms at very different stages of decarbonisation?

The guide recommends taking four approaches: 

• investing directly in climate solutions
• financing companies who are already aligned with net zero
• financing companies who have a transition plan aligned with net zero
• financing the phase out of high-carbon industries and activities 

It stresses the importance of working together with clients on their transition plans and being clear about how bank financing can help achieve net zero objectives. But the guide also acknowledges the complexity of transition for many clients and the reputational risk to banks, especially in working with high-carbon industries.

Investors, such as fund managers and private equity, face similar challenges. They too are keen to work with the companies they invest in to help them transition. But issues like the availability and comparability of corporate data are crucial to an asset manager investing in a particular sector across multiple jurisdictions.

Asset managers also face the additional challenge of labelling the funds they manage, particularly, if they are sold to retail customers. Again, rules will likely differ between different regulators, and managers run the risk of being accused of greenwashing. This is acute when investing in a heavy carbon-use industrial sector that is trying to decarbonise.

Our recent panel event on transition finance

We discussed many of these issues during our recent panel event and interviews in Brussels. Speakers were realistic on the scale of the challenge but were clear that the financing for transition was available and the will to deploy it was there. Chris Hayward, Policy Chairman of the City of London Corporation, recognised climate change as the biggest crisis facing the world and stated the need for a global response to tackle it.

One example given by Ilan Jacobs from Citi was how to help finance the transition in the steel sector, where the risk of being seen to finance a "brown" industry is clear.

Several common themes emerged, notably the need for transparency by the corporate sector, as highlighted by Aleksandra Palinska from Eurosif and Jane Gimber of FleishmanHillard. This in turn raised the question of reporting standards and disclosure and the need for comparable metrics.

An EU-specific challenge was seen in the EU's relatively undeveloped capital markets, which, apart from some exciting developments in green bonds, means corporates are very dependent on traditional bank financing for investment when compared to the US. Dr Apostolos Thomadakis of the European Capital Markets Institute, praised the work of the European Commission on its taxonomy and green bond standards. At the same time, he also described the need for further standardisation and clarification on what is green and what is sustainable and for a clear definition of the role of ESG (Environmental, social, and corporate governance) rating providers.

The UK Transition Plan Taskforce

Another theme at our panel, and one echoed in the NZBA/UNEP paper, is the need for clear transition planning guidelines for the financial sector. The UK, the leading global centre for sustainable finance, launched its Transition Plan Taskforce in Glasgow and then just before COP27 issued its detailed consultation plan on how UK firms should prepare and communicate their own NZ transition plans in good time.

A vision for the UK sustainable finance sector

The scale of investment required globally requires a mix of private and public sector funding, or so-called blended finance. A recent report by the UK Sustainable Investment and Finance Association (UKSIF) explores what this means in the UK, but the lessons surely apply globally. In addition to the need for clear national plans, a sustainability disclosures framework, and shifting the whole financial sector and economy to net zero, the paper notes the need to strengthen investors’ stewardship role in the economy and perhaps most important of all the need to adopt a comprehensive carbon pricing system. All of these are topics I will return to in future blogs.

About the author

Nick Collier joined the City of London Corporation as Managing Director of the Brussels office in March 2019. He was previously Global Head of Government Relations at Refinitiv (Thomson Reuters). Before that he worked at a range of organisations in the financial services sector, including Morgan Stanley and the Bank of England and, until recently, served as Chair of TheCityUK’s Public Affairs Group as well as Deputy Chair of the International Regulatory Strategy Group. Nick is chair of diplomatic engagement at the International Business and Diplomatic Exchange. He holds a MSC in Economics and Finance from the London School of Economics and a BA from Oxford.