Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
Making climate goals a reality
Having credible, science-based transition plans will be crucial for organisations to help direct and unlock capital flows on the road to net zero.
Mandatory reporting around net zero is set to comprehensively shift how organisations respond to the climate challenge, meaning credible transition plans will be critical to navigating the financial environment.
This is the message from transition specialists working across the financial sector, industry and government, as they acknowledge both the urgency and difficulty of the task in such a rapidly evolving arena.
“The advent of global and national mandatory reporting is going to fundamentally change the entire discussion around organisational responses on climate change and other sustainability issues,” says EY Partner, Climate Change and Sustainability Services, Emma Herd.
“The whole point of transition plans is about how we get to net zero and who is going to financially prosper in that economic context. When developing a plan, think about your requirements in the context of where we are going, not where we are right now, and don’t underestimate the amount of change that’s needed.”
Transition plans detail how an organisation is setting, managing and financing its climate goals in the rapid shift to a low greenhouse gas (GHG) emissions economy. They are increasingly being used by banks, investors, policymakers, regulators and other stakeholders to help inform decisions around climate and transition risk across the value chain.
With heightened accountability for emissions in both operations (scope 1 and 2) as well as customers and suppliers (scope 3), transition plans are something businesses across the whole economy need to consider.
At the same time, there is a high level need to develop and integrate any transition planning within evolving reporting systems, data, disclosure frameworks and taxonomies at a global, local and industry level.
It’s a situation Herd describes as “everything, everywhere, all at once” as this whole ecosystem develops but that “standing still is not an option”.
“The expectation around what heightened sustainability performance means is a moving target and all this work needs to happen together,” she says. “All the elements need to building-block into each other to actually get credible, meaningful and decision-useful information.”
In Australia, the federal government is currently working with industry to develop standards for climate-related financial disclosures to help the nation manage the physical and transition risks associated with a changing climate.
The work aims to fit in at a regional and sector level with the other international standards being developed to facilitate the flow of transition capital through the international financial system.
In this context, transition plans are seen as the next step for the private sector to set out a strategy to contribute to, and prepare for, a net zero economy and to maintain and attract the capital necessary to do so.
Raising the bar
According to the UK’s Transition Plan Taskforce (TPT)1, best practice means demonstrating the three principles of ambition, action and accountability. This covers elements like setting high-level targets to mitigate, manage and respond to climate change and to leverage any transition opportunity; having short, medium and long-term plans of how to finance and achieve these goals; and having governance and accountability mechanisms in place to support robust measurement and reporting.
An organisation’s plan should also form a core part of business strategy and involve engagement with the entity’s board and executive to encourage activity that contributes to transition in the wider economy where possible.
The TPT is working to design a “gold standard” disclosure framework for transition plans and to inform future regulation requirements in the UK. The TPT both informs and builds on work by international bodies such as the International Sustainability Standards Board (ISSB) and the Glasgow Financial Alliance for Net Zero (GFANZ).
Herd says as transition plans are being developed, there is an increased focus on ensuring and classifying them as “credible”.
She says a credible plan aligns to the science-based goals and objectives of the Paris Agreement 1.5C trajectory for net zero 2050 and provides evidence for its actions towards these – such as aligning capex with the stated climate ambition.
“The transition plan is the disclosure framework, the core components, the building blocks that need to be reported on,” she says. “The credible transition plan is the iteration of this which needs to sit within the ecosystem of these parallel initiatives being developed.
“It’s important to ensure that the structural elements are sound, consistent and aligned with global and national targets, as well as industry sector pathways.”
Herd also says key disclosure principles should apply when considering internal systems, processes and controls in order to be confident about the quality, completeness and coverage of the data involved.
Once an informed assessment is in place, it is important to be transparent in the assumptions and component parts of the data and analysis being used, to help ameliorate risk. The use of standards available now is also important, Herd says, along with ideally having independent verification and assurance, noting infrastructure is still being developed in this evolving area.
“The level of difficulty is high but the financial sector across all parts – banking, investment, insurance – are all actively engaged in this discussion,” she says. “They are also really supportive of the work being done to resolve some of these challenges.”
NAB Executive, Corporate Finance, Connie Sokaris says the use of transition plans is crucial when engaging with customers as part of the bank’s Net Zero Banking Alliance (NZBA) commitments.
The NZBA is an industry-led and United Nations-convened project to which NAB became a signatory in late 2021 and is committed to the alignment of lending and investment portfolios with net-zero emissions by 2050.
“The ability to assess an organisation’s climate activity and behaviours when talking to senior management in this context is critical,” Sokaris says. “Transition plans allow us to have a real and standardised way of understanding what their ambitions are and how they are going to meet them.
“The customers we’re seeing that are really driving outcomes are the ones which put transition plans at the core of their strategy.”
Sokaris says NAB is taking an industry approach, in line with the NZBA, and is prioritising larger GHG emitting customers in emissions-intensive sectors, where there is better data availability and quality.
Expectations on transition readiness differ for customers depending on sectors and size, with the knowledge built up over time set to feed into the smaller customer base, she says.
As set out in NAB’s 2023 half year investor presentation2, after conducting transition maturity assessments of 100 of its largest GHG emitting customers, NAB found 67 per cent had set a goal to be net zero by 2050 or sooner but transition maturity varies across industries.
Sokaris also sits on the board of the Australian Sustainable Finance Institute (ASFI) which is currently working with industry and government to develop a taxonomy for reporting. She stresses the need for this collaborative approach.
ASFI members are 37 of Australia’s largest financial institutions across banking, superannuation, asset management, insurance and financial services who are all working to enable greater flows of finance towards sustainable outcomes.
Sokaris says with the nature of global business, any standards and frameworks in place need to work consistently together, while also remaining fit-for-purpose at a regional and sector level.
“When you have a global challenge like climate then you really can’t do that individually,” she says. “The world needs to come together and provide that consistency.
“We know the amount of capital that’s required to decarbonise in Australia is not going to be just Australian capital. We also know there’s a lot of capital going offshore and investing in the decarbonisation story.”
Sokaris says a strong transition theme of recent years has been the rapid pace of change – a trend she expects to continue over the next 12 to 18 months.
“Collaboration between industry, customers, the finance sector and government will continue to increase,” she says. “We’re all learning and so what’s credible will evolve over time. We know where we need to be and transition plans will help us get there.”
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Climate change is a significant risk to the planet and a major challenge for society to address. At the same time, opportunities are emerging as the transition to net zero occurs.
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