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1、 2024 CFA Institute.All rights reserved.March 2024SUSTAINABILITYNavigating Transition Finance:An Action ListWinnie Mak and Andres VinelliREPORTEXECUTIVE SUMMARYTransition finance is any form of financial support that helps decarbonize high-emitting activities or enables the decarbonization of other

2、economic activities.The pivotal role played by transition finance in achieving net-zero goals,however,is not universally recognized.Currently,no standardized definition of eligible activities and entities exists,no international organization has endorsed transition finance instruments,and high-risk

3、perceptions associated with the novel technologies involved in decarbonizing high-emitting sectors are common.Consequently,many investment strategies that incorporate net-zero considerations exclude or underweight high-emitting sectors for the creation of low-emission portfolios.Navigating the compl

4、ex landscape of economic,regulatory,environmental,and technological considerations,transition finance requires a collaborative effort for success.This report explores actions that investors,asset managers,corporations,and policymakers should consider to enhance awareness of the role of transition fi

5、nance in achieving net zero,to improve the disclosure of credible transition plans,to provide clarity on transition activities and transition finance products,and to mitigate risks associated with transition finance.Traditionally framed as green and clean,sustainability requires a significant paradi

6、gm shift to incorporate transition finance.All stakeholders in the transition finance system must cultivate new skills,establish fresh priorities,and,above all,embrace a new mindset.Collaboration synergy is crucial to achieving change and enabling transition finance to play a bigger part in supporti

7、ng net-zero goals.We make the following recommendations to advance transition finance.Navigating Transition Finance:An Action ListCFA Institute|2Summary RecommendationsInstitutional investors that wish to intentionally incorporate net-zero considerations into their investment strategy and process sh

8、ould disclose both portfolio emissions and decarbonization progress(year-on-year reduction of portfolio emissions)and establish portfolio decarbonization targets.Institutional investors could use a dashboard with multiple metrics and attribution analysis to report to clients on how their investment

9、strategies promote low emissions or emissions reduction.This approach would improve transparency and awareness of portfolio decarbonization goals.Corporations should provide feasible and credible transition plans to assure investors/financiers of their steadfast commitment to attaining transition ta

10、rgets.Further,corporations should provide inflation-and forex-adjusted carbon intensity per revenue so investment managers can better measure the impact to the real economy of their portfolios and should include decarbonization targets as part of a balanced scorecard for executive remuneration to in

11、centivize accountability and intentionality.Governments and regulators should work with industry stakeholders to develop transition taxonomies,harmonize transition plan disclosures,and require economic feasibility disclosures.They should also allocate additional public and blended finance to better

12、mobilize private sector investment,consider using reverse auctions/climate bad banks to manage phaseout,and use labeling to help individual investors navigate the investment product landscape,thereby creating a more informed and sustainable financial ecosystem.Navigating Transition Finance:An Action

13、 ListCFA Institute|31.INTRODUCTION1Go to https:/netzeroclimate.org/what-is-net-zero/.Transition finance facilitates the decarbonization efforts of high-emitting industries,such as steel,cement,chemicals,aviation,and shipping,with the ultimate goal of reaching net zero.According to Net Zero Climate,n

14、et zero is“a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere,”and the scientific consensus is that“global net human-caused emissions of carbon dioxide need to fall by about 45%from 2010 levels by 2030”to reach net zero by 2050.1 Currently,t

15、he production of steel and cement contributes to approximately 14%of global emissions(World Economic Forum 2023).Achieving a net-zero world is unattainable without decarbonizing high-emitting industries(UNIDO 2023).Efforts to decarbonize high-emitting industries require a collaborative approach.High

16、-emitting corporations must strategize and implement environmentally sustainable practices;investors and financiers have to facilitate emissions reduction through capital allocation and stewardship;and governments need to incentivize decarbonization and foster the development of the transition finan

17、ce market.Based on a survey of 500 senior executives working in the high-emitting industries by Masdar(2023),however,only 40%of respondents have developed plans to achieve net zero.According to Goldman Sachs research(Tylenda,Chen,Aggarwal,and Corbett 2023),transition strategies totaled USD50 billion

18、 in assets under management(AUM)in July 2023,representing less than 0.2%of AUM by investment funds promoting or targeting sustainability that are sold in the EU.In addition,many governments have yet to clarify what constitutes transitional activities and transition finance.The additional capital exp

19、enditure(CAPEX)needed for decarbonization of steel,cement,aviation,shipping,trucking,aluminum,and ammonia(for fertilizers and as a clean fuel)totals USD370 billion per year between 2024 and 2050,according to the World Economic Forum(2023).The objectives of this report are to enhance comprehension of

20、 transition finance,pinpoint obstacles to CONTENTS1.Introduction p.3|2.The Current State of Transition Finance p.5|3.Challenges in Transition Finance p.18|4.Empower the Transition Finance Storytelling p.23|5.Credible and Feasible Transition Plans for Forward-Looking Investing p.34|6.Additional Gover

21、nment Support to Derisk Transition Finance p.42|7.Conclusion p.49|Appendix A.Actor Mapping p.52|References p.53Navigating Transition Finance:An Action ListCFA Institute|4widespread implementation,and explore collaborative initiatives required from the investment community,high-emitting corporations,

22、and policymakers to overcome these obstacles.To identify obstacles and possible solutions,we conducted intensive individual interviews with over 20 market participants working on transition finance issues,and we organized an environmental,social,and governance(ESG)virtual roundtable in May 2023.Sect

23、ion 2 of this report outlines the present status of transition finance,and Section 3 examines the impediments to transition finance as derived from interviews with investment professionals and desk research.In Sections 46,we offer solutions for addressing transition finance challenges.Navigating Tra

24、nsition Finance:An Action ListCFA Institute|52.THE CURRENT STATE OF TRANSITION FINANCE2According to UN Climate Change,each party to the Paris Agreement is required to establish an NDC,which is a climate action plan to cut emissions and adapt to climate impacts,updated every five years.See www.un.org

25、/en/climatechange/all-about-ndcs.3See the European Commissions EU Taxonomy Compass:https:/ec.europa.eu/sustainable-finance-taxonomy/taxonomy-compass.Transition finance can be used to describe financing the decarbonization of high-emitting activities and financing developing countries/regions as they

26、 develop while tackling environmental and social challenges(Caldecott 2020).This report focuses on the former.Funds committed to transition finance are used to improve economic activities that are not currently green(transitional activities)and to support innovation and infrastructure that will enab

27、le economic activities to achieve net zero(enabling activities)(Cesaro 2023).The transition of high-emitting industries includes managed phaseout,where applicable,and must be substantiated by borrowers and investees credible transition plans that align with the Paris Agreement.The overarching object

28、ive is to generate material impact,contributing to the realization of a net-zero economy.2.1.Countries/Regions Are at Different Stages of Transition Finance ReadinessIn this section,we discuss the complexities in transition finance that arise from the varying conditions in different regions.2.1.1.No

29、 Universal Standard of Eligible ActivitiesMany countries/regions use taxonomies to define eligible activities for green or sustainable finance.These taxonomies act as a common language between investors,issuers,policymakers,and other actors and help prevent greenwashing.Different countries/regions u

30、se different approaches to develop their taxonomies,which may define only green activities but not transitioning activities/entities at this stage.Japan diverges from using a taxonomy and instead provides technology roadmaps to shape corporate transition strategies of high-emitting sectors for trans

31、ition finance.Examples of national/regional taxonomies and roadmap that help define eligible activities for transition finance are shown in Exhibit 1.Given the spatial and temporal variations of transition pathways of different countries/regions and taking nationally determined contribution(NDC)targ

32、ets2 into consideration,the divergences of approaches,criteria,and levels of granularity used to screen and thus label eligible activities/entities are wide.For instance,there are only 78 transitional/enabling activities in the EU taxonomy3 but 422 in Indonesia(classified as“Amber”activities;Larasat

33、i and Mafira 2022),and focus sectors vary depending on the countrys or regions Navigating Transition Finance:An Action ListCFA Institute|6composition of emissions,which means an economic activity can be eligible for transition finance in one but not another taxonomy.For example,in China,while the na

34、tional taxonomy is still pending,the local governments of Huzhou and Chongqing have published local taxonomies.In Chongqing,clean production and efficient use of coal are classified as transitional,whereas in Huzhou,they are not.Separately,disclosure of taxonomy-aligned activities is currently requi

35、red in the EU.In countries/regions with no transition taxonomy,there is no clear definition or scope of transitional and enabling activities,which may lead to underinvestment in promising technologies and greenwashing probes(Ma and Terada-Hagiwara 2022;Baraldi,Chitre,and Khaykin 2022).For instance,A

36、sia accounts for half of the worlds greenhouse gas(GHG)emissions and approximately 85%of the energy consumed in Asia comes from fossil fuels,but China(the worlds largest GHG emitter)and India(the worlds third-largest GHG emitter)have yet to create a national transition taxonomy.In countries/regions

37、with a taxonomy,the lack of interoperability in the“jungle of taxonomies”could be a barrier to international capital flows(Ehlers,Gao,and Packer 2021).To facilitate international capital flow,in 2021,China joined the EU in building the Common Ground Taxonomy for areas of commonality between the EUs

38、and Chinas green taxonomies.Currently,China is in discussion with Singapore to achieve taxonomy interoperability,which will enhance understanding of transition activities defined by China and Singapore.Exhibit 1.Examples of Taxonomies and a Roadmap for Transition Finance in Different Countries/Regio

39、nsTransition TaxonomiesRoadmapCountries or regionsEU,UK(pending),Canada(pending),South Africa,Association of Southeast Asian Nations(ASEAN),Indonesia,Thailand,Singapore,China(national taxonomy pending,governments of Huzhou and Chongqing published local taxonomies)MalaysiaJapanScreening methodologies

40、Activities by technical screening criteria or thresholdsActivities and entities by principlesAssets and entities by sectoral technology roadmaps(with technologies,emission thresholds,and timeline)EligibilityList of transitional and enabling activities by EU;catalogs of eligible activities by Huzhou

41、and Chongqing;list of“Amber”activities under a traffic light system adopted by ASEAN,Indonesia,Thailand,and SingaporeTier 2 and 3 activities in the“Transitioning”class under a three-class,five-tier systemNine high-emitting sectorsNavigating Transition Finance:An Action ListCFA Institute|72.1.2.No Ma

42、ndatory Transition Plan DisclosureTo support transition finance,financial institutions will likely experience a short-term increase in their financed emissions(referring to the GHG emissions linked to their investment and lending activities).Financial institutions with net-zero commitments or decarb

43、onization targets can justify the consistency of their capital allocation only if high-emitting borrowers/investees present credible transition plans aligning with the Paris Agreement(Menon 2023).A credible transition plan delineates how a corporation intends to translate its net-zero ambition into

44、actionable steps,which involves aligning not only its assets but also its operations and overall business model.The plan also serves as a tool for stakeholders to monitor and track the progress of the corporations efforts.While the justification for transition finance relies on borrowers and investe

45、es transition plans,there is no universally defined standard for what qualifies as a credible transition plan.According to the European Securities and Markets Authoritys(ESMAs)progress report on greenwashing risks and the supervision of sustainable finance policies,one of the identified high-risk ar

46、eas is issuers net-zero commitments and“so-called transition plans,”given that these commitments to future performance rely on judgments and projections,which,when misstated,may provide misleading information(ESMA 2023).For corporations and financial institutions to mitigate this risk,the harmonizat

47、ion of definitions,standards,and frameworks for a credible transition plan is needed to help differentiate genuine efforts from those that might be misleading or nothing more than window dressing.In October 2023,the UK Transition Plan Taskforce(TPT)published a disclosure framework.The TPT also aims

48、to make the framework a globally transferable standard,and the UK and Singapore governments are exploring a collaboration to drive international consistency in design and disclosure of transition plans(HM Treasury 2022).However,it is more likely that different countries/regions will continue to deve

49、lop their own frameworks with differing approaches(Fergusson,Strachan,and Purdie 2023).The UK Financial Conduct Authority(FCA)plans to adopt the TPT framework as disclosure requirements for listed companies,asset managers,and FCA-regulated asset owners(FCA 2023a).Meanwhile,the Hong Kong Stock Exchan

50、ge plans to require listed companies to reveal details of their transition plans in alignment with the IFRS Foundations IFRS S2 Climate-related Disclosures starting in 2025.2.1.3.Scaling Blended Finance Is Important for Developing Countries/RegionsTo finance the net zero transition,a collaborative e

51、ffort across the financial system is required.This effort must encompass both public and private finance,as well as domestic and international capital flows.In developed markets,Navigating Transition Finance:An Action ListCFA Institute|8governments can use various mechanisms and instruments,such as

52、budget allocations,grants and subsidies,tax incentives,and sovereign sustainable bonds,to mobilize private sector investment.For developing markets,where public resources for climate investments are often limited,the role of development financial institutions and blended finance becomes crucial.Deve

53、loped markets use a variety of these techniques.In the United States,for example,the Inflation Reduction Act(IRA)earmarks USD369 billion for climate and energy investments,including generous tax credits for hydrogen and carbon capture,utilization,and storage(CCUS).In Japan,the government plans to is

54、sue USD150 billion in sovereign bonds,with USD60 billion earmarked to build clean hydrogen and ammonia capacity,including investment in production in Australia and the Middle East,to be shipped back to Japan for storage and use(Komachi,Neilson,and Voss 2023).In the EU,ArcelorMittal(the worlds second

55、-largest steel maker by production volume)requires USD10 billion to achieve its 2030 decarbonization target and expects public funding to cover 50%of the total cost of decarbonization.The European Investment Bank(EIB)has granted a combined USD388 million loan to ArcelorMittal through the EUs various

56、 initiatives and funding programs,including the following:The European Fund for Strategic Investments,an initiative launched by the European Commission(EC)and the EIB to support the implementation of strategic projectsInnovFin,a joint initiative of the EC and the EIB that offers a range of financial

57、 instruments designed to support research and innovation activitiesHorizon 2020,the EUs research and innovation funding programNER 300,the EUs initiative to support innovative low-carbon energy demonstration projectsFor developing markets,national and international development financial institutions

58、 are funded by governments of developed countries/regions with mandates to mobilize financial support for social and environmental objectives.For instance,the Just Energy Transition Partnership is an agreement announced at COP26 in which the United Kingdom,the EU,and the United States pledged USD8.5

59、 billion to support South Africas plans on climate action and energy transition(UK PACT 2020).The World Bank,together with the Canadian Clean Energy and Forest Climate Facility and Energy Sector Management Assistance Program,extended USD497 million in loans and grants to decommission and repurpose a

60、 coal-fired power plant in South Africa(World Bank 2023).The USD13.5 billion Green Climate Fund,a fund established under the United Nations Framework Convention on Climate Change,cofinances such projects as the innovative mechanisms for industrial energy efficiency in Indonesia and the e-mobility pr

61、ogram in India(Green Climate Fund 2023).The term“innovative”is frequently associated with the decarbonization of high-emitting activities because it often requires the development and adoption Navigating Transition Finance:An Action ListCFA Institute|9of new technologies and solutions.However,the te

62、chnological uncertainties inherent in these innovations can make investment in low-carbon and other climate-related innovations risky.The risk is further heightened for transition projects in developing markets due to regulatory and political risks,long transaction lead times,large startup capital,a

63、nd limited access to expertise in project development and financing(Menon 2022a).In both developed and developing markets,blended finance plays a crucial role by bringing different sources of public and private capital together.Public financial resources and philanthropic activities help reduce and

64、mitigate the upfront risks for such investments to mobilize private sector investments,particularly in developing markets(Prasad,Loukoianova,Feng,and Oman 2022).Despite the challenges,there are a number of promising initiatives.For instance,Breakthrough Energy Catalyst(over USD1 billion committed ca

65、pital),founded by Bill Gates,funds demonstration projects using emerging climate technologies,including clean hydrogen to decarbonize industry and transportation,sustainable aviation fuel,direct air capture,and manufacturing for cement,steel,and plastics decarbonization,through a blended finance mec

66、hanism.Breakthrough Energy Catalyst will provide selected projects with equity investment,grant funding,and/or an offtake agreement for the purchase of upcoming products/services at predetermined terms,thus providing certainty about future revenue streams.Eligible projects may also receive financing

67、 under the InvestEU Programme(Breakthrough Energy 2022).Finance in Motion is a leader in structuring multilayered blended finance funds where public monies serve as a risk cushion for private impact investors.One of the Finance in Motion impact funds is the Green for Growth Fund,which channels resou

68、rce efficiency and renewable energy dedicated financing to small and medium-sized enterprises and households through local financial institutions.The fund was initiated by EIB and KfW Development Bank in 2009 and uses a tranche capital structure to address the wide range of risk profiles of public a

69、nd private sectors(Exhibit 2).The fund has helped the agricultural industry upgrade equipment in Ukraine and the tourism industry upgrade a bus fleet in Georgia to reduce fuel consumption and thus reduce emissions.Blended finance helps bridge the financing gap,and more importantly,it plays a role in

70、 demonstrating“investability”of developing markets to mobilize private sector finance(Network for Greening the Financial System 2023).However,according to the Monetary Authority of Singapore,the average annual flows of blended finance have been less than USD10 billion since 2015(Menon 2022a).This am

71、ount constitutes a tiny fraction of the estimated USD2 trillion annual investment needed in developing countries/regions to achieve net-zero emissions by 2050,as projected by the International Energy Agency(Ananthakrishnan,Ehlers,Gardes-Landolfini,and Natalucci 2023).Navigating Transition Finance:An

72、 Action ListCFA Institute|102.2.High-Emitting Corporations Are at Different Stages of Transition Finance ReadinessBased on a survey of 500 senior executives working in the high-emitting sectors by Masdar(2023),only 40%of respondents have drawn plans to achieve net zero by 2050(see Exhibit 3 for a br

73、eakdown by sector),out of which only 30%said their budgets will be adequate to support their decarbonization targets,andout of those who have yet to set net-zero targets,53%said the main obstacle is the lack of reliable financing.Moreover,the decarbonization of high-emitting industries will require

74、an additional annual CAPEX of USD370 billion between 2024 and 2050(World Economic Forum 2023),with the scale and pace greatly influenced by the availability of transition finance vehicles.Nevertheless,based on the survey results from Masdar(2023),not all high-emitting corporations are adequately pre

75、pared to secure the necessary capital.More importantly,a high-emitting corporation without a net-zero target will not be able to secure transition finance.Transition finance must be substantiated by borrowers and investees credible transition plans that align with the Paris Agreement.According to EY

76、(2023),although over 80%of FTSE 100 constituent firms have made a net-zero commitment,78%of firms disclosed only partial transition plans(with key elements,such as strategy and execution plan,missing),and 17%have yet to publish any plan.Of the 5%that have disclosed sufficiently detailed transition E

77、xhibit 2.Green for Growth Fund Structure Share Class%of Total Funding(March 2021)Income DistributionbRisk TakingbPrivate sectoraNotes27%Development finance institutionsSenior A shares36%Mezzanine B shares2%Public sectorL shares6%Junior C shares29%aIn the most detrimental scenario,at least 62.5%,25%,

78、or 12.5%of the losses will be absorbed by subordinated classes.bAssymetric distribution of income and risks.Source:Finance in Motion(2023).Navigating Transition Finance:An Action ListCFA Institute|11plans,they are not fully TPT aligned.Whether the 23 index constituents in high-emitting sectors(energ

79、y,industrials,materials,and utilities)have disclosed TPT-aligned transition plans is not reported,but EYs(2023)findings imply that a majority of them are not sufficiently prepared for transition finance.2.3.Limited Private Sector Investment in Transition FinancePublic finance plays a crucial role be

80、cause there are many actions that private finance either cannot or is unwilling to undertake.Nevertheless,recognizing the scale of transition finance needed,the mobilization of private capital flows becomes imperative.The EC expects that most of the investment required to achieve the EUs climate obj

81、ectives will need to come from the private sector(Elderson 2023).In developing markets,the International Monetary Fund(2023)projects that around 80%of the necessary investment in climate mitigation by 2030 will have to be supplied by the private sector.Contrary to this finding,the Climate Policy Ini

82、tiative found that the private sector accounted for only 50%of global climate finance(including transition finance)from 2011 to 2020(Naran,Connolly,Rosane,Wignarajah,Wakaba,and Buchner 2022).According to the Energy Transitions Commission(2023),capital commitments from the private sector remain“vague

83、 and insufficient.”Exhibit 3.Which of the Following Statements Best Describes Your Companys Plans for Decarbonization?(survey responses)78%74%62%62%61%57%49%45%22%26%35%32%35%43%47%45%3%6%4%4%10%0%10%20%30%40%50%60%70%80%90%Aluminum ProductionPetrochemicalsShipping(transportation of goods)AviationSt

84、eel ProductionCement ProductionHeavy Industrial ManufacturingOil and GasWe are taking steps to reduce emissions but have not set a target date for completionMy company is planning to achieve net zero by 2050My company is planning to achieve net zero by 2030Source:Masdar(2023).Navigating Transition F

85、inance:An Action ListCFA Institute|12Sustainable,impact,green,climate,and transition finance are interconnected,as depicted in Exhibit 4,and can be in the form of equity,debt,loans,or grants.Sustainable finance adopts a holistic approach,integrating environmental,social,and governance considerations

86、.Within this framework,green finance focuses on diverse environmental aspects,such as biodiversity protection and pollution reduction.Climate finance,a subset of green finance,specifically targets activities mitigating/adapting to climate change impacts and reducing emissions.Impact finance,in contr

87、ast,aims to generate measurable positive social and/or environmental impact alongside financial returns.Transition finance funds the decarbonization of high-emitting activities.It places a strong emphasis on the credibility of the issuers or borrowers transition strategy,commitments,and practices an

88、d manages phaseout transactions that are socially inclusive.Thus,transition finance aims to address both social and governance factors and intersects with sustainable,impact,green,and climate finance,bridging social and governance factors.Sustainable funds,impact funds,and climate funds can potentia

89、lly support transition finance,depending on the funds investment objectives and methodology.Nonetheless,transition strategies accounted for less than 0.2%of AUM by sustainable funds sold in the EU as of July 2023(Tylenda et al.2023),despite the substantial financing needed for the decarbonization of

90、 high-emitting sectors,such as cement,chemicals,fertilizers,steel,and transportationwhich collectively contribute to about one-third of global emissions.Exhibit 4.Overlapping Scope of Sustainable,Impact,Green,Climate,and Transition FinanceSustainable finance covers environmental,social,andgovernance

91、 factors(Spinaci 2021)Climate finance provides funds for addressing climate changeadaptation and mitigation(Spinaci 2021)Transition finance provides funds for decarbonization ofhigh-emitting activities,including managed phaseoutGreen finance covers all environmental goals(e.g.,biodiversityprotection

92、/restoration)(Spinaci 2021)Impact finance aims to accelerate transition of the realeconomy,based on intentionality,additionality,and impactmeasurement(Institut de la Finance Durable 2023)SGESources:Based on information in Spinaci(2021)and Institut de la Finance Durable(2023).Navigating Transition Fi

93、nance:An Action ListCFA Institute|132.3.1.Debt FinancingCurrently,transition finance is extended primarily through sustainability-linked bonds(SLBs)and sustainability-linked loans(SLLs;OECD 2022).In Q4 2022,outstanding SLBs represented only 11%of the value of green bonds(see Exhibit5;Mahmood and Tif

94、tik 2023).The disparity in outstanding values suggests a certain inclination or prioritization in the investment community toward green bonds.SLBs are instruments designed for general corporate purposes(proceeds not restricted to specific transitional or enabling activities)with coupons linked to pr

95、edefined sustainability performance targets(SPTs).If an SLB issuer fails to meet its SPTs,the issuer will be subject to a punitive coupon step-up,often set at 25 bps.Issuers will enlist independent verifiers to confirm their compliance with the International Capital Market Associations(ICMAs)Sustain

96、ability-Linked Bond Principles(ICMA 2020)and/or other pertinent guidelines.As of 1 February 2023,approximately USD130 billion has been raised by high-emitting sectors(energy,industrial,materials,and utilities)through SLBs(ICMA 2023).Based on the top 10 SLB issuers of the selected sectors,the most co

97、mmon SPTs are the reduction of GHG emissions or emission intensity(GHG emissions per output;see Exhibit 6).A transition bond is typically a plain vanilla use-of-proceeds instrument(proceeds dedicated to specific transitional or enabling activities).Since 2017,over USD13 billion of transition bonds h

98、ave been issued,with total issuance reaching USD3.5 billion in 2022,primarily driven by Japanese and Chinese issuers(Climate Bonds Initiative 2023).In Japan,the government plans to issue JPY20 trillion(approximately USD130 billion)in transition bonds(to be labeled Green Transformation or GX bonds)ov

99、er the next 10 years.These funds are earmarked for the deployment of such technologies as hydrogen supply networks,CCUS,synthetic fuels,and small nuclear reactors(Obe 2023).Nonetheless,the market for Japanese and Chinese transition bonds is largely domestic,since investors outside Japan and China ar

100、e hesitant to invest in these bonds because of the absence of an international standard for transition bonds(Environmental Finance 2023).ICMA has published principles for green bonds,sustainability bonds,social bonds,and SLBs but not for transition bonds.Instead,it published the Climate Transition F

101、inance Handbook to provide guidance on transition strategies and disclosures for issuers that seek transition finance through all types of sustainable bonds(Exhibit 7).Navigating Transition Finance:An Action ListCFA Institute|14Exhibit 5.Outstanding Sustainable Debt Securities,Q4 2022(USD billions)D

102、ebt Securities(a)Green BondsGreen Asset-Backed SecuritiesSustainability BondsSocial BondsGreen Municipal BondsSLBsLoans(b)Green LoansSLLsTotal(a+b)Global markets3,2231,75578580530891911,5625301,0314,785Mature markets 2,2111,28375269352891431,2123378753,423Emerging and frontier markets 44930247424045

103、23214488682Offshore centers 3830032031174968155Supranationals 525139023515200000525Top seven mature markets1,52285073165243891029022296732,424Top seven emerging markets353249443200381317160484Two offshore centers 3730032031104961147Notes:The top seven mature markets by size are the United States,Fra

104、nce,Germany,the United Kingdom,Spain,Italy,and the Netherlands.The top seven emerging markets by size are Mainland China,Chile,India,Mexico,Brazil,Turkey,and the United Arab Emirates.The two offshore centers are Singapore and Hong Kong SAR.Sources:Mahmood and Tiftik(2023)using data from Bloomberg,Bl

105、oombergNEF,and Institute of International Finance.Exhibit numbers may not sum to 100 because of rounding.Navigating Transition Finance:An Action ListCFA Institute|15Exhibit 6.Top 10 SLB Issuers by Amount Issued in Energy,Industrial,Materials,and Utilities SectorsIssuer NameLocationIssuer SectorAmoun

106、t Issued(USD billions)Examples of SPTsENEL FIN INTLNetherlandsUtilities28.92Scope 1 carbon intensity(2025:130 g CO2e/kWh)Scope 3 emissions(2025:gas retail,20.9 million t CO2e)Renewable installed capacity(2025:76%of total)EU taxonomyaligned CAPEX(2025:80%)ENEL FIN AMERICAUSUtilities2.75ENI S.P.A.Ital

107、yEnergy5.30Renewable installed capacity(2025:5 GW)Scope 1 and 2 emissions(2024:7.4 million t CO2e)ENBRIDGE INCCanadaEnergy5.12Scope 1 and 2 carbon intensity reduction(35%from 2018 to 2030)Racial and ethnic group workforce representation(2025:28%)Female board representation(2025:40%)ASTM SPAItalyIndu

108、strial3.39Scope 1 and 2 emissions reduction from 2020(2024:10%;2027:17%;2030:25%)Scope 3 emissions reduction from 2020(2027:9%;2030:13%)SUZANO AUSTRIAAustriaMaterials2.75Industrial water withdrawal intensity reduction from 2018(2026:12.4%;2030:14.8%)Women in leadership positions(2025:30%)VESTAS WIND

109、 SYSTEMSDenmarkEnergy2.17Scope 1 and 2 emissions reduction from 2019(2025:55%;2030:100%)Supply chain emissions reduction from 2019(2030:45%)Material efficiency ratio reduction from 2021(2030:90%)NRG ENERGY INCUSUtilities2.00Scope 1,2,and 3 emissions reduction from 2014(2030:50%;2050:90%)WEIR GROUP P

110、LCUKIndustrials1.97Scope 1 and 2 emissions reduction from 2019(2026:19.1%;2028:24.6%;2030:30%)PCF GMBHGermanyMaterials1.79Recycled wood use(2025:50%)Scope 1 and 2 emissions reduction(21%from 2020 to 2025)Sources:ICMA sustainable bonds market data(ICMA 2023);SPTs from respective companies SLB framewo

111、rks;processed by authors.Navigating Transition Finance:An Action ListCFA Institute|162.3.2.Equity FinancingSustainable/ESG equity funds can accelerate the net-zero transition through stewardship and engagement strategies as contemplated by the Net Zero Asset Managers Commitment.4 However,many ESG in

112、vestment strategies tend to underweight high-emitting sectors and create low-carbon portfolios,according to Goldman Sachs Asset Management(see van Nieuwenhuijzen 2023).High-emitting sectors count on hydrogen,CCUS,and other innovative technologies mostly at nascent or early stages of technological/fi

113、nancial maturity.Up to USD13 trillion in cumulative private sector investment will be required in hydrogen projects and CCUS by 2050,based on an estimate from a BCG report(Beetz,Hegnsholt,Rakhou,Clayton,Jamal,and Jumani 2023),or over USD480 billion annually.According to another BCG report,venture ca

114、pital firms and private equity firms have played a critical role in supporting innovation and emerging technologies(Backler,Goydan,Herhold,Pieper,Shandal,Sethurathinam,and Sharma 2021).Leading private equity and venture capital firms have made important commitments to transition finance.For instance

115、,the USD15 billion Brookfield Global Transition Fund I plans to allocate half of the fund on transitioning of carbon-intensive companies(Flood 2022),and reportedly,the USD15 billion Fund II(launched in 2Q 2023)intends to invest in green hydrogen and CCUS for green steelmaking(Slav 2023).Climeworks(a

116、 direct air capture company)raised USD634 million,and Carbon Clean 4For information on the Net Zero Asset Managers initiative,go to zeroassetmanagers.org/commitment/.Exhibit 7.Definition of Transition Finance Instruments from ICMAs Climate Transition Finance HandbookGreen BondPrinciplesUse of Procee

117、dsInstrumentsGeneral CorporatePurpose InstrumentsSocial BondPrinciplesSustainabilityBond GuidelinesSustainability-Linked BondPrinciplesTransitionFinanceHandbookSource:Financial Services Agency;Ministry of Economy,Trade and Industry;and Ministry of the Environment,Japan(2021).Navigating Transition Fi

118、nance:An Action ListCFA Institute|17(a carbon capture company)raised USD150 million from venture capital firms in 2022(MacDonagh 2022).Nonetheless,investment in carbon capture and storage(CCS)and hydrogen totaled only USD7.5 billion in 2022,according to BloombergNEF(2023a),and the funding gap betwee

119、n need and actual investment remains wide.2.3.3.Impact InvestingImpact investments are“made with the intention to generate positive,measurable social and environmental impact including decarbonization alongside a financial return”5 and are characterized byintentionality,referring to the investors in

120、tention to contribute to the generation of a measurable environmental and/or social benefit;additionality,referring to the financial and nonfinancial contribution of the investor that enables the investee company or the project financed to increase the net positive impact;andimpact measurement,refer

121、ring to the process of measuring the environmental and/or social outcome of investments against the investors intended impact goals(France Invest 2021).According to the Global Impact Investing Networks(GIINs)annual survey in 2010,out of approximately 50 respondents,75%believed the market was in its

122、infancy;in aggregate,they expected to invest USD4 billion in the following year.The number of respondents to the same survey jumped to around 300 in 2020,of whom 69%regarded the market as growing steadily,and the respondents expected to invest USD48 billion in 2021.6 GIIN estimated that in 2022,the

123、AUM of the global impact investing market was USD1.2 trillion,managed by 3,349 organizations(Hand,Ringel,and Danel 2022).According to a Fidelity Charitable(2022)survey,34%of the 1,200 respondents participated in impact investing.Of this number,61%of millennial respondents were actively involved,comp

124、ared to only 23%of baby boomers.The report highlights that millennials will continue driving adoption of impact investing as they come to control more wealth.Another key driver of impact investing is corporations increasing allocation to impact investment in response to rising shareholder expectatio

125、ns of using cash reserves to make meaningful contributions in addressing such issues as climate change and social inequity,according to GIIN(Hand et al.2022).The growing capital allocation to impact investing could help fill the funding gap in decarbonization of high-emitting sectors.5This definitio

126、n is from the Global Impact Investing Network:https:/thegiin.org/impact-investing/need-to-know/.6This information is from the Impact Investing Institute:www.impactinvest.org.uk/learning-hub/the-impact-investing-market/?level=introductory.Navigating Transition Finance:An Action ListCFA Institute|183.

127、CHALLENGES IN TRANSITION FINANCEGiven the current context of transition finance,this section consolidates the challenges for scaling transition finance based on both a literature review and input from market participants.We conducted intensive individual interviews with over 20 market participants a

128、mong the numerous stakeholders in the transition finance system(see Exhibit 8;Appendix A provides a full mapping of actors in the transition finance system).Here,we explore perspectives on the challenges and solutions for transition finance development in practice.Each interview included a mix of st

129、ructured questions and unstructured free-flowing discussion in the context of our research objectives.We also invited volunteers through an ESG virtual roundtable organized by CFA Institute in May 2023.In the following sections,we outline the three key reasons why transition finance has been limited

130、 in scope,despite the enormity of the problem.In sum,these challenges are as follows:Knowledge gaps in transition finance hinder mainstream adoption and create challenges in effectively communicating and implementing transition strategies,despite substantial net-zero commitments.Lack of credible tra

131、nsition plans and fit-for-purpose disclosure and greenwashing concerns discourage financial institutions from transition finance,while the absence of clear taxonomies and labeling standards complicates risk evaluation and limits international capital flows.The risk/return profile is unfavorable beca

132、use of inadequate government support for improvement of commercial viability of transition projects.3.1.From Lack of Awareness to Limited ActionAt the outset,we note that the Net-Zero Banking Alliance(2022)identifies the inadequate recognition of the pivotal role played by transition finance in achi

133、eving net-zero goals as a key constraint to the mainstream adoption of transition finance.Our work supports this conclusion.Exhibit 8.Role of Interviewees by Actor GroupActor GroupsRole of IntervieweesPrivate financeAsset managers,asset owners,stewardship lead,investment bankers,sustainability resea

134、rch,internal sustainable finance framework development,corporate sustainabilityBlended financeImpact investment fund managerSystemic enablersMarket exchanges,advisers to regulatory bodies,standard settersService providersSustainability consultants,sustainable investment research,disclosure platforms

135、,data analytics,and intellectual property developmentNavigating Transition Finance:An Action ListCFA Institute|19Our interviewees observed that the market has yet to fully understand why and how a low-emission investing strategy does not necessarily equate to decarbonizing the real economy.In Asia,o

136、ur interviewees found it difficult to communicate transition strategy to individual investors,partly because messages are lost in translation as a result of a long chain of gatekeepers(e.g.,fund distributors,investment advisers,and relationship managers),and in some cases,they found that transition

137、finance(as well as sustainable finance)is not sufficiently understood among institutional clients.As of December 2023,87 asset owners(AUM of USD9.5 trillion)had joined the Net-Zero Asset Owner Alliance and 315 asset managers(AUM of USD57 trillion)had joined the Net Zero Asset Managers initiative.Sig

138、natories to both initiatives are dedicated to achieving net-zero emissions in their investment portfolios by 2050.However,these well-intentioned pledges raise operational challenges,particularly the trade-offs related to investments in hard-to-abate sectors where complete decarbonization remains una

139、ttainable based on current technologies.Consequently,net-zero portfolios often prioritize clean projects over transition initiatives(Bobro 2022).Even for long-term and patient investors,such as development finance institutions,a net-zero portfolio target may incentivize early divestment to achieve s

140、hort-and medium-term portfolio decarbonization targets(Fankhauser,Srivastav,Sundvor,Hirmer,and Shrimali 2023).Most of our interviewees pointed out that portfolio decarbonization is frequently achieved by emphasizing low-emission sectors,a practice criticized as mere window dressing.Moreover,they not

141、ed that the short-term objectives of linear portfolio decarbonization often fall short of supporting the long-term and dynamic goal of achieving net zero.Despite numerous net-zero commitments from asset owners and managers,there is a notable absence of commitments to allocate a proportionate amount

142、of capital based on real-economy impact.Our interviewees also observed that commonly used reporting metrics,such as portfolio carbon footprint and portfolio weighted average carbon intensity(WACI),7 focus on portfolio emissions but do not effectively convey a transition strategy and do not effective

143、ly track the impact performance.These metrics fail to highlight the changes in emissions of portfolio companies and their contributions to decarbonizing the real economy.Ultimately,the emphasis on portfolio emissions may undermine actual progress toward real-world transition goals.Beyond investors,r

144、egulators continue to predominantly concentrate on financed emissions.As for impact investing,our interviewees highlighted that(1)asset managers find it challenging to substantiate additionality(effecting change through engagement)when reporting to asset owners,(2)the impetus for the development of

145、more pertinent impact metrics/indicators comes from asset 7=Issuers Scope 1&2 emissionsWACIIssuersrevenue in millions,niiw where w=portfolio weight.Navigating Transition Finance:An Action ListCFA Institute|20owners,and(3)although the reality of climate change is indisputable,insisting on waiting for

146、 perfect metrics/indicators can impede progress.3.2.Lack of Clarity and Insufficient DisclosureIn a survey conducted by Ninety One(formerly Investec Asset Management)of asset owners and advisers,60%of respondents cited the lack of corporations with credible and feasible transition plans as a barrier

147、 to transition finance(Ninety One 2022).Currently,transition plan disclosure is not mandatory,which leads to a lack of fit-for-purpose disclosure.Inadequate disclosure requirements may encourage false transition activities(Bobro 2022;Ma and Terada-Hagiwara 2022),and a lack of comparability of report

148、ed data and transition plans makes the evaluation of investment risks/opportunities difficult(OECD 2022).One interviewee considers feasibility to be a crucial component of a transition plan,yet it is frequently overlooked.Without due consideration for feasibility,the validity of the transition plan

149、becomes uncertain.Further,relying on uncertain decarbonization targets for forecasting could impede progress toward achieving net zero.Although large and well-resourced listed companies have the ability to address this issue,there seems to be a reluctance to do so.According to S&P Global Ratings(202

150、1),the evolution of the transition finance market has heightened greenwashing concerns,primarily stemming from the absence of clarity and standardized terminology regarding what qualifies as a transition activity or project.With the lack of universally accepted definitions and clear standards,financ

151、ial institutions that deploy transition capital to high-emitting sectors on their own terms may face accusations of greenwashing(Harnett,Holland,and Kessler 2023).In addition,there are no clear standards and benchmarks for transition finance products(e.g.,transition bonds),which could raise suspicio

152、ns of greenwashing because net-zero investors in these products technically support high-emitting sectors(Bobro 2022).The absence of transition taxonomies and the lack of interoperability of existing sustainability-related taxonomies could also be a barrier to international capital flows(see Section

153、 2.1).The Net-Zero Banking Alliance(2022)identifies the lack of transition taxonomies and the absence of clearly defined labeling standards as core issues leading to the restricted availability of transition finance.Our interviewees showcased two distinct perspectives on taxonomies and labeling.One

154、group emphasized the importance of taxonomies,viewing them as a common language for all stakeholders to build consensus on disclosure requirements.Part of this group also asserted the necessity of establishing a separate transition finance asset class,acknowledging that there may be some challenges,

155、particularly in the early stages.The other group leaned toward national or sectoral transition pathways/roadmaps,expressing the belief that the transition label may struggle to adapt to evolving regulations and technologies,particularly in the case of multinational corporations(MNCs).Navigating Tran

156、sition Finance:An Action ListCFA Institute|21Two interviewees concurred that corporations low-carbon investments(those directed toward transitional and enabling activities)can serve as a leading indicator for their future decarbonization performance.However,these indicators are constrained to market

157、s with established transition taxonomies.3.3.Inadequate Government Support to Derisk Transition FinanceThere is a widespread belief that climate-related investing carries a higher financial risk,primarily stemming from the perceived challenges in scalability and commercial viability of specific tran

158、sition solutions.This dynamic contributes to an unfavorable risk/return profile(Bobro 2022;Menon 2022b;Ehmann,Reisser,Iten,Kellenberger,and Reinhart 2022;Baraldi,Chitre,and Khaykin 2022).Moreover,transition finance could heighten reputational risk,as it will increase portfolio emissions of financial

159、 institutions,which are facing stakeholder scrutiny to cut exposure to high-emitting sectors(Furness 2022).It undermines the confidence of financial institutions in extending transition finance.For instance,while financing the mining of critical raw materials is crucial for the energy transition,the

160、 simultaneous increase in portfolio emissions and exposure to the high-emitting mining sector could generate unwarranted false negative greenwashing concerns(British International Investment 2022).The Taskforce on Climate-related Financial Disclosures(TCFD)has identified the stigmatization of high-e

161、mitting sectors as a source of reputational risks in the analysis of climate-related risks(TCFD 2017).OECD(2022)conducted an industry survey on transition finance.The findings revealed numerous shortcomings in the facilitating environment.These include insufficiently detailed disclosures and data fr

162、om corporations,a lack of fiscal incentives(such as ineffective carbon pricing and limited public investments),as well as deficient policy frameworks.These frameworks notably lack prohibitions or restrictions on the use of polluting technologies,and there is a notable absence of green public procure

163、ment initiatives.One interviewee highlighted the need for increased government support to make the returns of low-carbon solutions more evident.Measures such as carbon pricing,carbon border taxes,and the promotion of a green premium are essential for mobilizing private sector investment.Another inte

164、rviewee called for a collective shift in mindset,from a focus solely on risk and return to a consideration of real-economy impact.This shift,the interviewee argued,should extend beyond investors to encompass policymakers,regulators,and all other actors in the transition finance system(see Appendix A

165、 for a mapping of actors in the transition finance system).Two interviewees noted that governments rely on market forces,including the stewardship efforts of financial institutions,to drive advancements toward Navigating Transition Finance:An Action ListCFA Institute|22decarbonization targets.Howeve

166、r,this process takes time,and consequently,the investable universe for transition finance has remained limited.To help accelerate transition finance development,we will explore solutions in the following sections toempower the transition finance storytelling in order to foster increased awareness an

167、d facilitate the conversion of awareness into action,by using relevant metrics/indicators to differentiate investment strategies that promote low emissions or emission reduction and by labeling to provide a proper identity to transition finance products(Section 4);enhance the robustness of transitio

168、n plans and make disclosures fit for purpose by requiring economic feasibility to demonstrate the achievability of decarbonization targets,thus discouraging the practice of greenwashing(Section 5);andderisk transition finance and improve the enabling environments by additional government support,suc

169、h as creating taxonomies and establishing transition finance standards to improve legal clarity,using blended finance facilities to mobilize private sector investment,and using reverse auctions and climate bad banks for managed phaseouts to alleviate stranded asset risks(Section 6).Navigating Transi

170、tion Finance:An Action ListCFA Institute|234.EMPOWER THE TRANSITION FINANCE STORYTELLING8=Issuers Scope 1&2 emissionsWACIIssuersrevenue in millions,niiw where w=portfolio weight.A report by Churches,Charities and Local Authorities(CCLA 2023)found that asset managers commit to portfolio net zero in o

171、ne of two ways.The first is a“transactions”approach,under which asset managers reduce portfolio emissions by selling high-emitting assets and buying/holding low-carbon ones,but it is unlikely to bring an impact to the real economy because the assets will continue to emit regardless of who holds them

172、.The second is an“action”approach,whereby asset managers engage with their portfolio companies to incentivize decarbonization in the real economy,and as a result,the portfolio is decarbonized.In this context,supporting transition finance is an“action”approach for achieving portfolio net zero.We will

173、 discuss the use of relevant metrics/indicators to explain this action approach,to increase investors awareness of their options between emission reduction and maintaining low emissions and ultimately to translate awareness into informed investment decisions(Section 4.1).We will also discuss the use

174、 of labeling as a recognition of the significance of transition finance(Section 4.2).4.1.Interplay between the Real Economy and Portfolio DecarbonizationIn this section,we discuss several aspects pertaining to the relationship between the real economy and portfolio decarbonization.4.1.1.Eyeing Both

175、Decarbonization and EmissionsWeighted average carbon intensity,8 a commonly used metric recommended by the TCFD to measure a portfolios emissions exposure,is widely used for reporting on portfolio climate performance(TCFD 2021).Insights from our interviewees emphasize the importance of focusing on t

176、he change in WACI.In practical terms,the UBS Climate Action Fund,dedicated to decarbonizing emission-intensive industries,establishes an average decarbonization target of 5%per year at the portfolio level.AllianzGI introduced an approach based on key performance indicators(KPIs)for its sustainabilit

177、y-focused products in late 2022.The objective is to connect sustainability performance with the investment process through measurable indicators.The initial KPI that was introduced was the reduction of portfolio carbon intensity,with targets set either at a minimum of 5%WACI reduction per year or lo

178、wer than the benchmark.These targets are integrated into investment objectives and restrictions where applicable(Allianz Global Investors 2022;see Exhibit 9).Navigating Transition Finance:An Action ListCFA Institute|24Presenting both WACI(reflecting emissions)and the change in WACI(indicating decarb

179、onization)while establishing explicit decarbonization targets can serve as a useful reminder to investors.This approach underscores the significance of not only maintaining low emissions but also actively working toward reducing emissions.WACI measures portfolio carbon intensity per the issuers reve

180、nue and is applicable to all commercial entities.However,its sensitivity to inflation and exchange rate fluctuations is noteworthy.For example,in the fiscal year ending March 2022,Nippon Steel(the worlds fourth-largest steelmaker)reported a 20%year-on-year decline in carbon intensity per Japanese ye

181、n million revenue,while emissions per unit of output decreased by only 5%year on year.This disparity is largely attributed to a 14%increase in average selling prices during the period.Furthermore,if we recalculate carbon intensity per revenue using millions of US dollars for portfolio WACI computati

182、on,the companys carbon intensity,adjusted for the sharp Japanese yen depreciation,decreased by only 11%.Exhibit 9.Change of Investment Objective and Investment Restrictions of Allianz European Equity DividendPrevious ApproachNew ApproachInvestment ObjectiveLong-term capital growth by investing in co

183、mpanies of European equity markets that are expected to achieve sustainable dividend returns.Long-term capital growth by investing in companies of European equity markets that are expected to achieve sustainable dividend returns,as well as to achieve the Sustainability KPI(as defined in the“Investme

184、nt Restrictions”below)with the adoption of the Sustainability Key Performance Indicator Strategy(Absolute)(“KPI Strategy(Absolute)”).Investment Restrictions Climate Engagement with Outcome Strategy(including exclusion criteria)applies KPI Strategy(Absolute)(including exclusion criteria)applies.Min.8

185、0%of Sub-Funds portfolio shall be evaluated by the“Weighted Average GHG Intensity(in terms of sales).”Portfolio in this respect does not comprise derivatives and instruments that are non-evaluated by nature(e.g.,cash and deposits).The Sustainability KPI is at least a 5%year-on-year reduction in the

186、Weighted Average GHG Intensity(in terms of sales)on an improvement pathway starting at the Reference Date(i.e.first date of adoption of the KPI Strategy(Absolute).For the period between Reference Date and the first fiscal year end of strategy adoption,a pro rata temporis rate of the Sustainability K

187、PI will be applied.Source:Allianz Global Investors(2022).Navigating Transition Finance:An Action ListCFA Institute|25To interpret and compare WACI meaningfully,adjustments for inflation and exchange rate fluctuations are necessary,as illustrated by an analysis by Janssen,Dijk,and Duijm(2021).The aut

188、hors compared the change of reported WACI with that of WACI adjusted for inflation and exchange rate fluctuations of Dutch pension funds and insurance companies between 2012 and 2019,and they labeled the difference of 7.310.3 percentage points(pps)the“non-real”greening effect(see Exhibit 10).However

189、,determining the appropriate deflator and exchange rate for such adjustments remains challenging for global funds unless portfolio companies,particularly MNCs,report their adjusted carbon intensity per revenue.While such disclosure is unavailable,an alternative approach to interpret and compare port

190、folios environmental outcomes is presented in a report by Horan,Dimson,Emery,Blay,Yelton,and Agarwal(2022).The authors develop tools and a framework to evaluate ESG outcomes,evaluating investment products according to the outcomes relative to their objectives(e.g.,decreased emissions,increased human

191、 rights).The report suggests measuring year-on-year change of ESG performance at the security level rather than the portfolio level:,1ESGESG=1,ESGni tiiii tw dwhere ESG=chosen ESG metric w=portfolio weight d=duration of holdingWeighting the portfolio by duration of holding mitigates the effect of di

192、vestment in the middle of the reporting period and window dressing on the outcome.We can aggregate at the security level the change of carbon intensity per revenue based on the reporting currency to mitigate the effect of the exchange rate(Carbon intensity per reporting currency revenue)or the chang

193、e of carbon intensity per output(Carbon intensity per output)to reflect the Exhibit 10.Reported vs.Adjusted WACI,20122019 Pension FundsInsurance CompaniesReportedAdjustedReportedAdjustedChange in WACI34.4%24.1%31.0%23.7%Non-real greening effect10.3 pps7.3 ppsSource:Janssen et al.(2021).Navigating Tr

194、ansition Finance:An Action ListCFA Institute|26portfolios environmental performance while eliminating the effect of changes in price,exchange rate,and volume and align with target setting of companies with commoditized output.There is no one-size-fits-all metric for reporting/assessing portfolio car

195、bon exposure and decarbonization(refer to Illustration 1 to see the results of measuring decarbonization by different metrics based on a hypothetical portfolio),and a dashboard approach using multiple metrics is needed,as recommended by Simmons,Jain,Bourne,and Kooroshy(2022).Illustration 1.Evaluatio

196、n of Decarbonization by Multiple MetricsThe following illustration is based on a hypothetical portfolio,which is composed of two steel companies and two cement companies by assuming equal portfolio weight throughout FY2021FY2022 and constant portfolio value at the end of the reporting period for sim

197、plicity(see Exhibit 11).Using the previous formula,the hypothetical portfolios change in WACI per revenue in millions of US dollars and in local reporting currency,per output,and change in total emissions are shown in Exhibit 12.Exhibit 11.Reported Data for the Hypothetical Portfolio(for illustratio

198、n only)Portfolio Weight Duration of HoldingsTotal EmissionsRevenueCarbon Intensity per OutputFY2021FY2022YoYFY2021FY2022YoYFY2021FY2022YoYMillion t CO2eUSD Millions*t CO2e/outputSteel A25%13911815.4%76,57179,8444.3%2.112.052.8%Steel B25%748413.2%43,62655,58427.4%1.971.884.6%Cement A25%86833.5%29,432

199、31,6447.5%0.610.602.0%Cement B25%74705.3%21,29222,6296.3%0.610.592.5%*Based on end of reporting period exchange rate.Note:YoY represents year over year,and t CO2e represents tonnes of carbon dioxide equivalent.In Exhibit 12,we can see the WACI change is largely attributable to price hikes and a stro

200、ng US dollar during the period.This finding highlights the limitation of relying on each metric independently to convey the complete narrative.Navigating Transition Finance:An Action ListCFA Institute|27Ideally,examining both carbon intensity per output and total emissions provides insights into how

201、 portfolio companies contribute to global emission reductions.However,it is essential to note that carbon intensity per output may not be applicable to companies without commoditized outputs(e.g.,those in the service industry).Additionally,relying solely on total emissions may not unveil the carbon

202、efficiency of outputs,such as in the case of a decarbonization leader gaining market share.Exhibit 12.Comparison of Portfolio Decarbonization by Different MetricsPortfolio WeightedChange YoYRemarksCarbon intensity per USD million revenue12.8%Proxy to change of WACICarbon intensity per reporting curr

203、ency revenue16.5%Forex rate changeCarbon intensity per output2.9%+Price change(including inflation,post-pandemic recovery,product mix change)Total emissions2.8%+Output changeNote:Based on end-of-reporting-period exchange rate.In addition,portfolio decarbonization can be a result of“transactions”(suc

204、h as acquiring low-emission assets and divesting high-emitting assets)and“action”(engagement efforts contributing to the decarbonization of portfolio companies).Horan et al.(2022)suggested using attribution analysis to assess the impact of asset allocation and security selection on portfolio ESG per

205、formance.Simmons et al.(2022)further dissected changes in the WACI of the FTSE All-World Index from 2017 to 2020,revealing that the reduction in the weighting of carbon-intensive industries is the most significant contributor(see Exhibit 13).Investors preferences may differ,yet it remains crucial to

206、 ensure that financial products align with their intended investment objectives,whether focused on achieving low emissions or contributing to the broader goal of reducing global emissions.To summarize,we believe reporting/comparing portfolio companies decarbonization progress is equally important as

207、 reporting portfolio emissions,because it helps investors understand the environmental impact of different investment approaches and make informed decisions.Therefore,we recommend the following:Navigating Transition Finance:An Action ListCFA Institute|28Decarbonization progress should be reported to

208、gether with emissions as headline numbers(i.e.,year-on-year change of WACI together with WACI).Corporations should report carbon intensity adjusted for inflation and exchange rates,and accordingly,portfolio managers should report the adjusted portfolio WACI.Multiple metrics should be used for carbon

209、 exposure reporting to reveal the environmental impact(e.g.,Carbon intensity per output,Total emissions;see Exhibit 12),particularly for sustainable funds and impact investments with the reduction of global emissions as an objective.Attribution analysis is necessary to break down the impact by weigh

210、ting change and portfolio companies aggregated decarbonization efforts to ensure investors that the decarbonization outcomes are achieved according to investment objectives.The Joint Committee of the European Supervisory Authorities(2023)proposed amendments to the Sustainable Finance Disclosure Regu

211、lation(SFDR),including the introduction of a new disclosure requirement regarding decarbonization targets.The paper proposes to require a narrative description in precontractual documents about how the target will be achieved,indicating whether the target isa commitment to reduce the financed emissi

212、ons of the product,through divestment/capital reallocation,and/ora commitment that the investee companies will deliver emission reductions over the duration of the investment,either based on the investee companies transition plan or by engaging with investee companies to contribute to their decarbon

213、ization.Exhibit 13.Disaggregating Portfolio WACI Changes,20172020Emissions(7%)Revenues(5%)Weight(14%)InflationadjustmentConstituentchanges(1%)Carbon intensity changesWeight changes2017 FTSEAll-WorldWACI=175tonnes permillion USD2020 FTSEAll-WorldWACI=149tonnes permillion USDSource:Simmons et al.(2022

214、).Navigating Transition Finance:An Action ListCFA Institute|29The changes proposed here are complementary to the European Supervisory Authorities proposed amendments and will provide important information for decision making.With that said,both emissions and decarbonization tell us the financial pro

215、ducts performance at a point in time or over a period of time,but they are not forward looking and cannot tell us the benefits of enabling activities.4.1.2.Avoided EmissionsAvoided emissions refer to“emissions being avoided as they displace the emissions that would have otherwise occurred without th

216、e projects implementation”(Partnership for Carbon Accounting Financials 2022).Avoided emissions are recognized by the TCFD as a climate-related goal for all sectors and occur outside of the products life cycle(therefore,they are also known as Scope 4 emissions).The calculation of avoided emissions c

217、an be either precise or scalable,depending on the purpose.For instance,Schroders and GIC codeveloped a framework that is scalable,and it is used to screen thousands of companies(Howard,Tang,Low,Teo,and Wong 2021).Schroders identifies 19 material,economical and/or potentially scalable carbon avoiding

218、 activities,matches them with FactSet revenue segments,shortlists companies from a broad investment universe,and derives avoided emissions at a company level.Avoided emissions assessment is applicable to both transitional and enabling activities/climate solutions,but no universal framework or calcul

219、ation method exists.A study by Cleantech Scandinavia on 15 different frameworks found a high potential for variation in results(Carrin 2021).Calculations often rely on life-cycle assessment or related concepts and are sensitive to such choices as baseline,geography(global or national),and market eff

220、ects(changes in consumer behavior,market penetration,and market share estimates).Thus,to interpret avoided emissions properly,it is vital to know the assumptions behind the outputs,and caution is required when making comparisons.One interviewee in our study acknowledged the lack of comparability as

221、a drawback when individual asset managers develop and/or use proprietary assessment frameworks.However,the interviewee noted that as long as they are approached with caution,proprietary assessment frameworks can still be beneficial because they enable the interpretation of data in a consistent manne

222、r,which is valuable for making informed investment decisions within the organization.With the goal of creating a global standard for assessing avoided emissions,a consortium of financial institutions,spearheaded by Mirova and Robeco,is working on developing a standardized database of avoided emissio

223、ns factors.This initiative aims to enhance the transparency and comparability of calculating emissions avoided by activities financed by financial institutions.The consortium plans to release the database in Q4 2024,making it accessible to all stakeholders involved in calculating avoided emissions(R

224、obeco 2024).The projects second phase aims to construct a database enabling the estimation of Navigating Transition Finance:An Action ListCFA Institute|30avoided emissions for the top 1,500 listed companies by market capitalization.Subsequent stages will expand the coverage to include smaller compan

225、ies,private enterprises,and green bonds(Mirova and Robeco 2023).Avoided emissions help transition storytelling,particularly for the contribution of enabling activities,and can be forward looking.However,users need to be cautious because comparing portfolio avoided emissions managed by different asse

226、t managers can be considered apples-to-oranges comparisons until financial institutions adopt a global standard to resolve the comparability issue.TCFD could consider accelerating the adoption of a global standard by recommending the use of standardized avoided emissions factors in its guidance on e

227、xposure metrics.4.1.3.Low-Carbon InvestmentIn the EU,revenues,CAPEX,and operating expenses are all relevant KPIs to measure taxonomy-aligned sustainable investments for SFDR disclosure,and while revenues and operating expenses provide a historical snapshot,CAPEX is a precursor to improvements in sus

228、tainability trajectory.In addition to CAPEX,CDP(formerly the Carbon Disclosure Project,a global environmental disclosure system for over 740 investors and over 23,000 corporations and governmental bodies)also asks corporations in high-emitting sectors in the EU that use the CDP Climate Change disclo

229、sure platform to provide their research and development(R&D)investment in low-carbon solutions.R&D is an indication of future earning capacity and resiliency to climate-related issues of a corporations core businesses.For the purposes of our report,low-carbon investment includes a corporations CAPEX

230、 and R&D investment in transitional and enabling activities.We believe that disclosing low-carbon investment is crucial for empowering investors to make well-informed decisions in transition finance and to monitor corporations progress in executing their transition plans.The current challenge lies i

231、n the absence of a widely agreed-on transition taxonomy to define such activities outside the EU,compounded by the lack of mandatory reporting requirements.Because many countries/regions are in the process of developing their transition taxonomies,we suggest that regulators encourage disclosure of l

232、ow-carbon investment to enhance transparency and cultivate a conducive environment for transition finance.4.2.Labeling to Improve Awareness and ClarityIn the United Kingdom in November 2023,the FCA released the Sustainability Disclosure Requirements(SDR)and labeling regime(FCA 2023b).These labels ai

233、m to provide investors with a clear understanding of the sustainability characteristics associated with various financial products,fostering transparency and trust in the market for sustainable investments.In the FCAs labeling system,four categories are delineated:Navigating Transition Finance:An Ac

234、tion ListCFA Institute|31Sustainability Improvers:financial products that are improving their sustainability credentials and,therefore,align well with transition financeSustainability Impact:products that demonstrate additionality in contributing to the sustainability of the real economy and align w

235、ith impact investing strategiesSustainability Focus:products labeled with a sustainable focus that can use,for instance,the EU Taxonomy as a benchmark to demonstrate how assets meet a credible standard of sustainability(see Guy 2023;an investment fund with low-emission assets is likely classified un

236、der this class)Sustainability Mixed Goals:products with a combination of the sustainability objectives for the other labels(with disclosure of the proportion of assets invested in accordance)The investment labeling and disclosure regime applies to UK funds,and FCA will consult on the extension of th

237、e regime to portfolio management undertaken for UK retail clients,overseas funds marketed in the United Kingdom,and pension products in Q1 2024.The Sustainability Improvers label recognizes that stewardship initiatives to improve the environmental or social sustainability profiles of portfolio compa

238、nies contribute to the sustainability of the real economy.When applied to transition finance products,this label not only establishes a proper identity but also acknowledges the pivotal role played by transition finance in achieving net-zero goals.Additionally,it serves to alleviate potential miscom

239、munication along the long chain of gatekeepers(see Section 3.1).The UK Sustainable Investment and Finance Association agreed that the labeling system will enhance transparency for investors,but it urged for more clarity on appropriate metrics for the Sustainable Improvers label.Without such clarity,

240、there is a risk of it becoming a generic label,potentially leading some funds to exaggerate the impact of their engagement activities(Dodds 2023).Our interviewees acknowledged that it may not be flawless initially but believe in the necessity of establishing a separate transition finance asset class

241、.In general,the FCAs labeling system is based on a products purpose.It is different from the EU SFDR classification system,which is a disclosure system under which an ESG/sustainable fund is classified as follows:Article 6:funds without a sustainability scopeArticle 8:funds that promote environmenta

242、l or social characteristicsArticle 9:funds that have sustainable investment as their objectiveNavigating Transition Finance:An Action ListCFA Institute|32Each type of fund under the EU system requires a different level of disclosure.In the United States,the approach proposed by the Securities and Ex

243、change Commission(2022),as outlined in the Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental,Social,and Governance Investment Practices,is also based on disclosures,with ESG/sustainable funds classified as follows:Integration Funds:funds that integrate

244、ESG factors alongside non-ESG factors in investment decisionsESG-Focused Funds:funds for which ESG factors are a significant or main considerationImpact Funds:a subset of ESG-Focused Funds that seek to achieve a particular ESG impactNeither the EU nor the US regulatory bodies currently have plans to

245、 label funds.The FCA conducted a high-level mapping of the three approaches to illustrate their interoperability(see Exhibit 14).However,because the starting point of the three jurisdictions is different(labeling versus disclosure),more work must be done to ensure interoperability and avoid market f

246、ragmentation(Guy 2023).Note that in the EU,irrespective of the ECs intention,the SFDR is often used by the market as a product labeling system.In September 2023,the EC published a consultation on SFDR,revealing the ECs consideration to establish a new product categorization system,and the change cou

247、ld bring the EU SFDR and UK SDR closer(Sidley 2023).Navigating Transition Finance:An Action ListCFA Institute|33Exhibit 14.How to Map SFDR and SEC Fund Classification with the UK FCAs Investment LabelsArticle 6Article 9NoNoYesSustainableFocusSustainableImproversSustainableImpactNo sustainable labelD

248、oes it meet ourcross-cuttingcriteria?*Does it meet ourcross-cuttingcriteria?NoYesYesYesNoNoDoes it meetcategory-specificcriteria?Does it meetcategory-specificcriteria?YesArticle 8NoYesYesIs your product?IntegrationImpactNoNoYesSustainableFocusSustainableImproversSustainableImpactNo sustainable label

249、Does it meet ourcross-cuttingcriteria?Does it meet ourcross-cuttingcriteria?NoYesYesYesNoNoDoes it meetcategory-specificcriteria?Does it meetcategory-specificcriteria?YesESG FocusedNoYesYesIs your product?*Article 8 funds will need to“level up”to meet the FCAs criteria by specifying a sustainability

250、 objective.It is unlikely that an Article 8 fund would meet the criteria for sustainable impact.Source:FCA(2022).Navigating Transition Finance:An Action ListCFA Institute|345.CREDIBLE AND FEASIBLE TRANSITION PLANS FOR FORWARD-LOOKING INVESTINGIn this section,we discuss the necessary elements of tran

251、sition plans that will allow investors to make informed,forward-looking investment decisions.5.1.Feasible and Credible Transition PlanBoth corporations and investment managers provide disclosures of historical emissions and decarbonization trends.These disclosures,however,are insufficient for making

252、 informed forward-looking investment decisions.Investors and financiers in the transition finance sector rely on the forward-looking transition plans of borrowers and investees.Unfortunately,a significant portion of high-emitting corporations have not disclosed their transition plans,as highlighted

253、in Section 2.2.The ESMA(2023)progress report on greenwashing identifies issuers commitments to future ESG performance,especially net-zero pledges and“so-called transition plans,”as high-risk areas for greenwashing(refer to Section 2.1.2).In short,there is skepticism surrounding both the quantity and

254、 quality of transition plans.Despite this skepticism,some progress is taking placenotably,with the International Sustainability Standards Boards climate-related standard IFRS S2 Climate-related Disclosures and the UK TPT framework,both of which were finalized in 2023.IFRS S2 requires disclosure ofan

255、y climate-related transition plan the entity has,including information about key assumptions used in developing its transition plan,and dependencies on which the entitys transition plan relies;and how the entity plans to achieve any climate-related targets.(International Sustainability Standards Boa

256、rd 2023)The TPT framework incorporates IFRS S2 and lays out specific requirements for disclosure of financial planning:An entity shall,to the extent the financial effects of its transition plan are separately identifiable,disclose information about the effects of its transition plan on its financial

257、 position,financial performance and cash flows over the short-,medium-,and long-term,including information about how it is resourcing or plans to resource its activities in order to achieve the strategic ambition of its transition plan.(Transition Plan Taskforce 2023)Navigating Transition Finance:An

258、 Action ListCFA Institute|35Together,they provide clarity on what constitutes a credible transition plan.Nonetheless,the wider challenge of addressing the deficiency identified by Ninety One(2022)in credible and“feasible”transition plans remains unresolved(see Section 3.2).What constitutes a feasibl

259、e transition plan?According to IFRS S2 and the TPT framework,entities need to disclose decarbonization targets together with the projection of financial effects,and there should be economic feasibility to support projection of the reported financial effects.We believe incorporating analysis of econo

260、mic feasibility into transition plan disclosure will directly address investors concerns and boost confidence in the decarbonization targets being well thought out and realistic instead of empty promises.5.2.Transition Capacity and Economic Feasibility AnalysisIn 2021,CPP Investments,the organizatio

261、n that invests Canada Pension Plan(CPP)funds,proposed a Projected Abatement Capacity(PAC)assessment for the projection of a corporations transition capacity and economic feasibility(CPP Investments Insights Institute 2022),which forms part of the recommendations CPP Investments provided to the US Se

262、curities and Exchange Commission to enhance and standardize climate-related disclosures(CPP Investments 2022).The idea is similar to the regulators oil and gas reserve reporting requirements,under which undeveloped reserves are categorized as proven,probable,or possible according to the likelihood o

263、f commercial recovery using reliable technologies.The PAC assessment would provide investors witha standardized probability instead of wide ranges of outcomes;the nonoptimized scenario under the“proven”category,where decarbonization is technologically and economically feasible and might actually hap

264、pen;andthe technology trajectories,depending on policy levers under the“probable”category,whereby decarbonization will become feasible at different carbon prices(as a proxy for all policy levers).Exhibit 15 shows an illustrative example of a PAC assessment.The PAC assessment requires a corporation t

265、o do the following:Assess current emissions to build a baseline.Identify actions that can cost-effectively cut emissions with currently available and proven technologies and derive the amount of emissions reduction from the baseline,which would be“proven PAC.”It includes Navigating Transition Financ

266、e:An Action ListCFA Institute|36Exhibit 15.Illustrative Example of PACScope 1Scope 2Scope 3TotalIllustrationScope 1Scope 2Scope 3TotalGHGs(t CO2e)GG1G2G3Gt1,5008002,5004,800EfficiencyEE1E2E3Et4001001,1001,60033%Investment(demand)IDID1ID2ID3IDt200501003507%Investment(supply)ISIS2IS3ISt501001503%Renew

267、ablesRR1R2R3Rt1002001,0001,30028%Current(proven)PACCC1C2C3Ct7004002,3003,40071%Percentage of totalC1/G1C2/G2C3/G3Ct/Gt47%50%92%71%Economic USD100/t CO2eEc100Ec100-1Ec100-2Ec100-3Ec100-t502002505%Economic USD150/t CO2eEc150Ec150-1Ec150-2Ec150-3Ec150-t20020010050010%Economic internal shadow priceEcInt

268、EcInt-1EcInt-2EcInt-3EcInt-t2002004%Long-term(probable)PACLL1L2L3Lt45040010095020%Percentage of totalL1/G1L2/G2L3/G3Lt/Gt30%50%4%20%Closure/abandonmentAA1A2A3At1501002505%Transformative technologyTT1T2T3Tt1501503%Offsets via removal creditsOO1O2O3Ot50501%Uneconomic PACUU1U2U3Ut3501004509%Percentage

269、of totalU1/G1U2/G2U3/G3Ut/Gt23%13%4%9%Source:CPP Investments Insights Institute(2022).Navigating Transition Finance:An Action ListCFA Institute|37emissions reduction requiring(1)no additional investment,under“efficiency”;(2)investment for reduction of energy consumption,under“investment(demand)”;(3)

270、investment for increasing supply of green energy,under“investment(supply)”;and(4)switching to renewable energy,under“renewables.”Identify activities and strategies that can reduce emissions in the future with solutions that would become economic at predetermined future carbon prices(e.g.,USD100 and

271、150/t CO2e),and derive the amount of emissions reduction therefrom,which would be“probable PAC.”An optional company-specific internal carbon price can also be considered.For the residual emissions that are uneconomic to abate(under“uneconomic PAC”),consider potential options,such as closures and car

272、bon offsets.The PAC assessment is based on net present value,and emissions are deemed economic to abate if total revenues over the lifetime of the investment exceed total costs(CAPEX and cash operating expenses).Exhibit 15 provides an illustrative example of the assessment in a standard template.It

273、tells us that the company is 91%“savable,”out of which 58%requires additional capital outlay,and investors can drive positive outcomes.The assessment also helps readers visualize the probability to achieve net zero through novel technologies under different carbon price scenarios.Illustration 2 exam

274、ines an effort to organize published target data and action plans from listed companies into the PAC assessment template.However,incomplete disclosures hinder the completion of a full assessment.Illustration 2.Evaluation of Transition CapacityAn attempt was made to organize published target data and

275、 an action plan from a listed steel company(Exhibit 16)and a listed cement company(Exhibit17)in a format similar to the PAC assessment,assuming all planned actions are value accretive.As shown in Exhibit 16,the steel company disclosed that green hydrogen will become commercially viable at USD0.7/kg

276、in the United States,and based on EY estimates,the US IRA will bring the production cost of green hydrogen to USD0.5USD1.5/kg(Bansal 2023).As such,part of the steel companys“probable PAC”could be upgraded to“proven PAC”by 2030.Navigating Transition Finance:An Action ListCFA Institute|38Exhibit 16.PA

277、C Profile of a Listed Steel Company(for illustration only)Decarbonization StrategyActions/Enabling ConditionsIntensity Reduction(from 2018 baseline)t CO2e/t steel2019203020312050Total2019203020312050EfficiencyIncreased scrap useInnovative DRI-EAF projects;smart carbon+gas injection projects;new proj

278、ects in NAFTA;roll out in operating countries0.480.80 Investment(demand)Steelmaking transformationInvestment(supply)Energy transformationRenewableSourcing clean electricity 0.040.12Proven PAC 0.520.9225%45%70%Green hydrogen USD1/kg(Europe)and USD0.7/kg(US)0.52 Bioenergy and CCUSCountry by countryPro

279、bable PAC 0.52 25%25%Offsetting residual emissions 0.10 Uneconomic PAC 0.10 5%Source:CFA Institute analysis based on company reports.Note:Scope 1 and 2 only.In practical terms,because there are no standardized disclosure requirements for corporations decarbonization plans,the plans often are depicte

280、d through visual illustrations,using graphics or images.However,specific numerical data and a detailed timeline typically are not explicitly provided.For instance,the steel company for this illustration provided its decarbonization targets by action in the medium term(e.g.,sourcing clean electricity

281、 to reduce carbon intensity by 0.04t CO2e/t steel by 2030),but the cement company provided only a long-term target(e.g.,efficiency gains in concrete to contribute to a 10%emissions reduction by 2050).Unfortunately,existing disclosures did not allow a full assessment.Navigating Transition Finance:An

282、Action ListCFA Institute|39Exhibit 17.PAC Profile of a Listed Cement Company(for illustration only)PathwayIntensity Reduction(from 2018 baseline)kg CO2/g cementitious2019203020312050Total2019203020312050EfficiencyEfficiency gains in design+construction21773%13%Efficiency gains in concrete25374%6%Inv

283、estment(demand)Less clinker in cement31315%5%Less CO2 in clinker(alternative raw materials)31315%5%Waste recovery19354%6%Investment(supply)Decarbonization of electricityRenewableCCUS,other technologiesProven PAC 126 21%33%55%CCUS,other technologies 246 40%Probable PAC 246 40%40%Uneconomic PAC 5%Sour

284、ce:CFA Institute analysis based on company reports.Note:Scope 1 and 2 only.Despite the challenges in completing a full PAC assessment,the previous exercise does the following:It illustrates that substantial value-accretive abatements through efficiency improvements can be proven and engagement can d

285、rive change for more rapid decarbonization.Coupled with industry research,it allows research analysts to develop the enabling scenarios for feasibility analysis of probable PAC.For instance,based on a Mission Possible Partnership report(Material Economics and Navigating Transition Finance:An Action

286、ListCFA Institute|40Energy Transitions Commission 2021),a carbon price of up to USD120/t CO2e9 is needed to make low-carbon technologies economic.It provides a basis for asset managers to engage with corporations and policymakersfor example,to accelerate efficiency improvements by available and prov

287、en technologies and lobbying for green premiums(e.g.,public procurement,life-cycle emission regulations on steel users)to turn“probable PAC”to“proven PAC.”It informs investment decisions and allows in-depth engagement at the operational/technological levels if like-for-like comparisons in the same s

288、ector are available.In addition,the assessment is readily applicable to due diligence of private equity investments and helps corporations develop and review their transition plans.An interviewee noted that corporations and investors frequently give more attention to the uncertainties associated wit

289、h novel technological developments than to the potential for technologically and financially feasible efficiency improvements.As a result,both corporations and investors hesitate to progress because of this overstatement of perceived risks.A PAC assessment serves as a valuable tool to alleviate this

290、 apprehension and provide clarity.CPP Investments has applied the PAC assessment on 12 of its private market portfolio companies(Fronda 2023),illustrating that it is a practicable exercise for issuers irrespective of size and resources.On this point,one interviewee highlighted that willingness to re

291、port goes hand in hand with capability.For high-emitting companies that need transition finance support,it may be in their best interest to make their transition plan credible and convincing(therefore,create willingness),and adopting the concept of transition capacity and economic feasibility might

292、be practicable and helpful to develop capacity in this high-demand area.Even though it was designed for corporations reporting,investors and analysts can apply the concept to evaluation of“savable”companies to inform investment decisions and engagement.5.3.Decarbonization Targets in Executive Remune

293、rationThe recent trend of tying executives remuneration and incentives to sustainability performance helps assure asset managers of corporations commitment to achieve their sustainability targets.A study conducted by PwC and London Business School(2023)revealed that 78%of the STOXX Europe 50 constit

294、uents have incorporated executive pay ties with decarbonization targets.According to Spierings(2022),among S&P 500 Index companies,executive compensation is most commonly linked to human capital 9Assuming 2.3t CO2e/t steel.Navigating Transition Finance:An Action ListCFA Institute|41management goals(

295、64%),with environmental goals being the least frequently connected ESG metrics.However,there is an upward trend,with 19%of S&P 500 companies tying executive pay to decarbonization targets in 2021,a substantial increase from the 10%reported in 2020.Linking executive pay with sustainability targets pr

296、ovides a new definition of job performance under a triple bottom line framework(social,environmental,financial),but whether it helps meet investor expectations and ultimately helps achieve net zero remains unknown(Spierings,2022).We recognize this as progress nevertheless because the mechanism bolst

297、ers credentials of decarbonization targets in transition plans and helps raise the confidence level of the“savable-ness”of a portfolio company.Asset managers can also make use of shareholder say-on-pay votes to advocate for more assurance.Navigating Transition Finance:An Action ListCFA Institute|426

298、.ADDITIONAL GOVERNMENT SUPPORT TO DERISK TRANSITION FINANCEOne major hurdle of transition finance development is the prevailing perception that transition solutions lack commercial viability(particularly technological risks).Furthermore,the decarbonization of high-emitting sectors could involve earl

299、y retirement of assets,introducing financial risks associated with potential stranding(stranded asset risk).Beyond financial risks,transition finance investing is susceptible to performance risk,as asset managers must substantiate that the environmental outcomes justify the incremental opportunity c

300、ost of capital,if any.In addition to these challenges,the lack of awareness and clarity surrounding transition finance exposes it to the risk of greenwashing.Several interviewees noted that although stewardship efforts of financial institutions and other market forces(e.g.,demand for green steel and

301、 cement)will drive corporations to advance toward decarbonization targets,the movement toward corporations meeting decarbonization targets is gradual.Consequently,the investable universe for transition finance remains constrained.To address this issue,several countries/regions are developing taxonom

302、ies,aiming to enhance clarity by establishing common terminology for economic activities eligible for transition finance.In previous sections,we delved into the advancements in establishing labeling systems and disclosure requirements for transition plans,contributing to increased awareness and clar

303、ity in transition finance and enhancing the quality of information for investment decision making.These changes collectively work toward mitigating the risk of greenwashing.Next,we will explore additional government support measures that could further reduce the risks associated with transition fina

304、nce(see Exhibit 18).Exhibit 18.Exploring Government Support to Alleviate Risks Associated with Transition Finance Financial(capital loss)Nonfinancial(damaged reputation,regulatory action)Technological RiskStranded Asset RiskGreenwashing RiskPerformance RiskGovernment support Grants and loans,tax cre

305、dits Green public procurement Blended finance facilities(Sections 6.16.3)Reverse auctions Climate bad banks(Sections 6.4 and 6.5)Taxonomies(Section 2.1.1)Transition finance product labeling(Section 4.2)Transition plan disclosure(Section 5)Navigating Transition Finance:An Action ListCFA Institute|436

306、.1.Grants,Loans,and Tax CreditsThe US IRA earmarks USD369 billion for climate and energy investments.For high-emitting industries,it lowers the costs of hydrogen and carbon capture through(1)the introduction of a new 10-year clean hydrogen production tax credit up to USD3/kg and(2)increasing tax cre

307、dits for eligible CCUS to USD85/t CO2e from USD50/t CO2e and carbon capture and utilization(CCU)to USD60/t CO2e from USD35/t CO2e.This initiative gives new impetus to turn probable PAC to proven PAC(Section 5.2).BCG(2022)estimates that as a result,green steelmaking in the United States could be over

308、 40%less expensive than in Germany in 2030.One year after the passage of the IRA,studies indicate that it is insufficient to derisk investments in hydrogen and carbon capture technologies and mobilize private finance:A study from the Oxford Institute for Energy Studies(Goddard 2023)evaluates the imp

309、act of the new tax credit provisions in the framework of the IRA to the CCUS investment landscape in the United States and finds that the new policy incentives fail to derisk CCUS projects for private finance.The study suggests(1)an extension of the crediting period to 30 years from 12 years or alte

310、rnative measures to lengthen the predictable revenue-generation period,(2)an investment tax credit made available to industrial CCS and removal to reduce capital costs,(3)using loans and loan guarantees to support specific policy objectives for industrial CCS deployment and technology R&D,and(4)amen

311、dments to strategic documents to provide a clear market signal that CCU is a long-term priority for transition of high-emitting sectors.In a BloombergNEF(2023b)report,a policy scenario is built to quantify the IRA impacts,which are found to be insufficient to meet the United States NDC commitment,pa

312、rtly because industrial decarbonization remains limited;hydrogen and CCUS will not become economical until the 2040s,after the phaseout of tax credits(by 2033).For decarbonization of the high-emitting sectors,the report also suggests Congress should consider allowing eligible projects(hydrogen,CCUS,

313、and biofuels)to claim tax credits beyond the 12 years currently allowed.Additionally,demand-side incentives,such as initial off-take,should be considered.The reports other suggestions include(1)adding“sticks”to complement the IRA“carrots,”such as pricing emissions and mandating emission-control tech

314、nologies;(2)maximizing the impact of the USD57 billion in loans,grants,loan guarantees,and other pools of flexible funding(out of the total USD357 billion bill)by targeting the investment gap not filled by federal programs(e.g.,commercialization of new technologies,such as electrolytic steel and bio

315、plastics);and(3)accelerating the infrastructure buildout to support CCS development(e.g.,speed up carbon pipeline and storage facility approvals).Navigating Transition Finance:An Action ListCFA Institute|446.2.Green Public ProcurementOne interviewee emphasized that making returns noticeable is cruci

316、al to attracting more investment into transition finance.Therefore,leveraging green public procurement(GPP)can serve as an incentive to stimulate the development of green products and services.Public procurement of goods and services accounts for approximately 15%of GDP in the EU,with the constructi

317、on and transport sectors each accounting for about 12%of public procurements GHG emissions.In the United States,the IRA funding will support the Federal Buy Clean Initiative,which prioritizes purchases of US-made,low-carbon construction materials in federal procurement and federally funded projects.

318、However,in the EU,recognized as a green pioneer,GPP is labeled as a“neglected tool”because of a lack of focus and motivation;the EU institutions themselves exhibit the lowest adoption of GPP compared to member states(see Lewis,Kaaret,Morales,Piirsalu,and Axelsson 2023;Sapir,Schraepen,and Tagliapietr

319、a 2022;Badell and Rosell 2021).China and India,two of the worlds top four emitting countries/regions,exhibit significant potential to bolster decarbonization initiatives through GPP,particularly considering that public procurement constitutes 30%35%of their respective GDPs(refer to Exhibit 19).Exhib

320、it 19.Characteristics of GPP in the Top Four Emitting Countries/Regions ChinaUSIndiaEUGPP-specific legislationPartiallyYesNoYesApplicabilityPartially mandatoryMandatoryVoluntaryVoluntaryDefined goalsNoYesNoYesMonitoringMonitoring framework under developmentYesInformation not availableNoPublic disclo

321、sureInformation not availableYes,in developmentInformation not availableNo,general procurement info via TED*Construction-specific GPP policyPartiallyYesNoYesPublic procurement/GDP35%10%30%15%*Tenders Electronic Daily.Source:Morales,Skinner,Hemingway,Axelsson,and Piirsalu(2023).Navigating Transition

322、Finance:An Action ListCFA Institute|456.3.Blended Finance FacilitiesAs mentioned in Section 2.1.3,enabling the scaling of blended finance is crucial for transition of developing markets.For private sector investment in blended finance,challenges include the following(Kozloski,Chau,Han,Desai,Yau,Dhan

323、ani,Hill,Newman-Martin,Bashian,Woods,and Shandal 2022):Lack of scaled investment vehicles:Meaningful aggregators are rare,and many blended finance initiatives are too small to attract engagement from institutional investors.This situation results in multiple investors competing for positions in a li

324、mited number of sizable deals.Costly and slow deal structuring:Impact measurement,verification,and technical assistance can be expensive,and the bespoke structuring involved in blended finance arrangements is often time consuming.Achieving a diversified investor base necessitates a system that makes

325、 deal structuring more replicable.To address these challenges,the Network for Greening the Financial System(NGFS),a coalition of 125 central banks and 90 financial regulators,published a technical document that served as a handbook for blended finance at COP28.This handbook explores key mechanisms f

326、or scaling blended finance,which includepooling of investors at the fund or facility level and taking a portfolio rather than individual project approach andstandardization of documentation to streamline due diligence and project preparation processes and to lower origination costs(Network for Green

327、ing the Financial System 2023;Menon 2023).Indeed,the latest generation of blended finance facilities,exemplified by Finance in Motion(see Section 2.1.3),function as aggregators equipped with comprehensive technical assistance.This assistance spans various aspects,such as structuring,investor relatio

328、ns,impact monitoring,verification,and reporting.Additionally,there are specialized blended finance incubators and accelerators designed to foster innovation.The Global Innovation Lab for Climate Finance,founded in 2014 by the UK,German,and US governments,identifies,develops,and launches innovative f

329、inance instruments to mobilize private climate-related investment in developing markets.As of the end of 2021,the labs portfolio of 55 climate finance solutions had attracted over USD3 billion in sustainable investments.10 One of the projects endorsed by the Global Innovation Lab for Climate Finance

330、 is the Financing Steel Decarbonization initiative.This initiative combines technical assistance,diverse sources of blended finance,and implementation-stage funding support to prepare,invest in,and derisk decarbonization technology projects for low-carbon steelmaking while concurrently cultivating t

331、he broader industrial ecosystem.The initiative is poised to conduct a pilot program in India and,in October 2022,10Go to www.climatefinancelab.org/how-it-works/.Navigating Transition Finance:An Action ListCFA Institute|46formalized a memorandum of understanding with JSW Steel(one of the largest stee

332、lmakers in India).This partnership aims to promote innovative financing and technological solutions for the decarbonization of the Indian steel industry.The NGFS handbook can serve as a catalyst,fostering the emergence of additional blended finance facilities akin to Finance in Motion and the Financ

333、ing Steel Decarbonization initiative.On the demand side,insights from our interviewees in the blended finance sector highlight that a significant portion of private sector investments originate from impact investors,which include international financial institutions with specific mandates for impact investing.As discussed in Section 2.3.3,the increasing capital allocation to impact investing holds