According to the UK-based Transition Pathway Initiative, only one-quarter of about 400 large and listed global companies have made a strategic assessment of issues related to the climate transition. Only in a handful of EU countries do more than 10 percent of reporting companies define plans that meet most of the required indicators. In February 2023, the Climate Disclosure Project showed that only a small fraction of the 18,000 companies monitored globally met all key indicators of high-quality climate transition plans (CDP, 2023). However, overall, the quality of corporate climate disclosures remains disappointing. Some companies have already adopted this relatively comprehensive concept, in part based on templates that the Financial Stability Board ’ s Taskforce on Climate-Related Financial Disclosures (TCFD) first designed in 2016. They should also explain the incentives management has to deliver on the plan, for instance, by setting internal carbon prices or linking executive pay to climate outcomes. They should, for instance, explain how emissions in the upstream and downstream value chain are captured. In fact, transition plans are a much more complex aspect of corporate disclosure and strategy. The sheer number of net-zero targets companies have announced would suggest that this concept is well-established. This central role of corporate climate plans has been recognised in templates for transition plans developed by, for example, the Organisation for Economic Co-operation and Development (OECD, 2022) and the G20 Sustainable Finance Working Group (2022 ). Only on the basis of well-defined transition plans will investors be in a position to understand the residual climate risks to which companies are exposed, while bond and loan markets will increasingly feature contracts that link financial terms to the achievement of climate outcomes. Transition finance relies inherently on forward-looking climate commitments by companies. A static classification of activities is neither sufficient nor necessary for transition finance to take off. In the European Union, a technical expert group has proposed such a separate transition classification (Platform on Sustainable Finance 2022), but EU legislation on this right now does not seem likely. Gas, rather than oil-powered, vessels may reduce emissions initially while not offering the ultimate net-zero technology, such as green hydrogen. Shipping, for instance, is a typically ‘hard-to-abate’ sector. Some observers have argued that transition finance requires a new classification that would set out intermediate technologies and ‘shades of green’ deployed on the path to a net-zero world – in other words, technologies that are not, in a strict sense, sustainable, but which are needed to get to sustainability. From ‘cheap talk’ to credible climate plans Transition financing is also needed for energy companies in the process of switching to renewables and phasing out their fossil-fuel assets. Transition finance refers, for example, to financing for emission reductions and low-carbon technologies in industries such as cement or steel, where no purely green technologies are readily available. But financial markets now increasingly focus on transition finance as a component of the broader sustainable finance asset class. – seeks to encourage financing for activities and technologies that are clearly carbon neutral. This type of regulation – for example setting out classifications of what economic activities count as ‘green’ 1Īs in the European Union taxonomy for sustainable activities see. One aim of sustainable finance regulation is to push companies towards activities that will be compatible with the target to limit global warming to 1.5 degrees Celsius above pre-industrial levels.
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