Global
Lisa Quest

Lisa Quest

As COP27 came and went, one message rang abundantly clear: Global investment in decarbonization is falling far short of what is needed to get the world on track to limit warming to 1.5 degrees C. Transition planning could play a big part in meeting climate objectives. By: Lisa Quest and Elizabeth Hoyler at Oliver Wyman 

Where we need by 2030 to be spending four times the level of our fossil fuel investment on expanding the low-carbon energy supply, today we are barely matching it. Another study puts the investment gap between now and 2050 at more than $270tn across energy, transport, buildings, and other industrial sectors. We have a long way to go.

So it was a welcome jolt when the United Nations’ High-Level Expert Group on Net-Zero Emissions Commitments for Non-State Entities (HLEG) admonished global financial institutions about the dire need to “dramatically” scale-up their financial commitment to climate — a message echoed by the UN Secretary General. They called on regulators to help make it so through new rules and standards around net-zero pledges.

Many standard-setters and regulators anticipated this call and have in the past couple of weeks been issuing a range of new guidelines on net-zero claims and key considerations around carbon markets. The problem: We can’t keep waiting for the next COP to get mobilised around the planet’s existential threat.  

For the financial sector to scale up, financial supervisors and regulators across jurisdictions must step up and coalesce around the immediate actions that are needed now. Probably the most helpful focus for the regulatory community would be to become champions of transition planning.

Why transition planning? Because when it comes to emissions, many countries and businesses are making promises that they haven’t figured out how to deliver on. Pledges do not equate to action, and while COP27 has been billed as the implementation COP, there remains a significant implementation gap. The missing element is transition planning — a set of goals, actions, and accountability mechanisms that get corporates’ strategy and mission aligned with a pathway to net zero. These plans provide the roadmap to lower emissions, and ultimately, net zero.

Be ambitious 

How financial regulators and supervisors embrace transition planning may vary by jurisdiction, at least initially. Regardless of the approach taken, the regulatory community must insist that standards around transition planning are ambitious, coherent, and interoperable across jurisdictions. Ideally, regulators will embrace existing voluntary initiatives that have picked up steam in the private sector, such as those promoted by Glasgow Financial Alliance for Net Zero, the Task Force on Climate-Related Financial Disclosures, the Task Force on Nature-Related Financial Disclosures — and the climate-related disclosure standards being drafted by the International Sustainability Standards Board (ISSB).

Regardless of how transition planning is formally embraced within the financial system, many will benefit. Take investors as an example. Transition planning endorsed by regulators will help investors to more effectively allocate capital to enterprises with viable plans toward low-carbon operations. They will have more confidence their investment is not being greenwashed.

Financial regulators and supervisors will also rest easier as transition plans can clearly show if and how climate risk is being managed. Early engagement on the data provided by transition plans should help supervisors to shape more effectively and proactively best-in-class climate risk management.

At a micro-prudential level, disclosures of financial institution transition plans enable a clear view as to which firms are left vulnerable. At a macroprudential level, widespread disclosures can provide a window into potential systemic risk. The good news is that jurisdictions are beginning to embrace transition planning. Last week the United Kingdom’s Transition Plan Taskforce launched their definition of a “gold standard” transition plan, to name but one example, and the UK’s Bank of England and the Financial Conduct Authority have embraced transition plans as a way of enabling an orderly transition to net zero and managing climate risk.

There is also momentum building around tools and utilities that can help track progress against net-zero commitments and transition plans. For instance, the Climate Data Steering Committee outlined the foundational data upon which the planned Net Zero Data Public Utility (NZDPU) should be based and a beta version of the NZDPU is expected to be launched in the third quarter of 2023. The CDP also agreed to apply the ISSB’s climate disclosure standard in its work, ensuring that the largest environmental disclosure platform is aligned with global guidelines.

An urgent gap

Yet in most jurisdictions, the need for transition planning is too often overlooked. This is a missed opportunity, and an urgent gap. Without clear expectations on what these plans should include, as well as careful considerations around coordination and interoperability of requirements, the data from transition plans risk being disparate across firms and sectors — preventing it from painting a full picture of progress. It will also prevent supervisors and regulators from effectively managing climate risks in line with their mandates.

If we are to limit temperature increases in accordance with the Paris Agreement and mobilise the financial system to reach net zero, then supervisors and regulators need to step up and explore how they can enable an orderly transition that supports financial stability and avoids climate catastrophe. Transition plans–ideally made mandatory and disclosed at scale—may end up being the light that enables them to proceed with confidence.

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