15 June 2022 was a big day for the climate finance community with announcements made by the UN-backed Race to Zero (“RTZ”) campaign and the Glasgow Financial Alliance for Net Zero (“GFANZ”).
Race to Zero campaign
The RTZ announced an update to its membership criteria. The RTZ is a coalition of over 10,000 businesses, financial institutions, and government bodies worldwide that was launched in 2020 under the auspices of the UNFCCC to further the campaign to halve global emissions by 2030 and achieve net zero by 2050.
Under the revised membership criteria, RTZ members are now explicitly required to pledge to “phase down and out all unabated fossil fuels as part of a just transition”, a requirement that was previously implicit. This means corporations and investors must restrict the development, financing, and facilitation of new fossil fuel assets, which includes no new coal projects. However, the exact pathways and timelines will differ across regions and sectors. Furthermore, members will also have to publicly disclose a transition plan within twelve months of joining the RTZ.
The updated criteria will come into effect for all new members joining RTZ from 15 June 2022, with all existing members needing to meet the criteria by 15 June 2023.
These changes will have major consequences for the financial institutions in GFANZ who fall under RTZ through their GFANZ membership. The requirement to phase down/out unabated fossil fuels means that financial institutions will have to take a hard look at their portfolios if they want to stay a part of the global climate alliance.
NOTE ADDED on 04/10/22: The membership criteria to the UN Race to Zero no longer refers to “no new coal projects”. It says: “[Members] Pledge at the head-of-organisation level to reach (net) zero GHGs as soon as possible, and by 2050 at the latest, in line with the scientific consensus on the global effort needed to limit warming to 1.5C with no or limited overshoot, recognising that this requires phasing down and out all unabated fossil fuels as part of a global, just transition.” This should be interpreted in accordance with section 5 of the Interpretation Guide to the membership criteria, which says: “Race to Zero notes that ‘unabated fossil fuel phase down and out’ does not refer to a single universal date for all entities and sectors, but is instead aligned to a global, science-based, just transition. For example, the IEA 2021 Net Zero scenario envisions an immediate halt on building new coal plants and a phaseout of coal-fired electricity generation by 2030 in OECD countries and 2040 in non-OECD countries, as well as no new oil and gas fields. Other credible scenarios, such as those from the IPCC, differ in some details but all envision phasing fossil fuels down and out. Each Race to Zero member shall independently undertake an approach based in the best available science to implementing the “unabated fossil fuel phase down and out” criterion, in compliance with all legal and professional obligations. Each Race to Zero member shall phase out its development, financing, and facilitation of new unabated fossil fuel assets, including coal, in line with appropriate global, science-based scenarios...”
After a period of relative silence following the conclusion of COP26, GFANZ has published, for consultation, its much awaited Draft Recommendations and Guidance on Financial Institution Net-zero Transition Plans (the “GFANZ Recommendations”). GFANZ is a global coalition of financiers and funds launched as part of a campaign to mobilise private capital for the net zero transition in the lead up to COP26 in Glasgow last year (see our previous blog post here).
The GFANZ Recommendations is one of a set of five publications released by the coalition to support transition planning across the financial sector. The other four publications consist of: "Guidance on Use of Sectoral Pathways for Financial Institutions"; "Introductory Note on Expectations for Real-economy Transition Plans"; "2022 Concept Note on Portfolio Alignment Measurement"; and "Managed Phaseout of High-emitting Assets".
The GFANZ Recommendations couldn’t come at a better time, with a recent report by Net Zero Tracker finding that only one third of the world’s largest companies have set transition targets, and GFANZ more generally facing criticism that it was simply enabling the greenwashing of its members.
The GFANZ Recommendations comprise ten core components that are grouped into five themes: Foundations, Implementation Strategy, Engagement Strategy, Metrics and Targets, and Governance (see figure below). Taken together, these components are designed to support financial institutions to develop a credible transition plan that is “actionable, measurable, focused on the near term, based on climate science, and against which there is accountability and appropriate transparency”.
Alignment with the TCFD
Thankfully for everyone working in the increasingly crowded field of climate regulations and guidance, the GFANZ Recommendations build upon existing TCFD guidelines. In particular, the GFANZ recommendations were designed to complement the TCFD Guidance on Climate-related Metrics, Targets and Transition Plans (see our blog post here).
If disclosing a transition plan within the framework of the TCFD guidance, the GFANZ Foundations, Implementation Strategy, and Engagement Strategy themes may accompany a financial institution’s TCFD Strategy disclosure. Similarly, other areas of alignment include the Metrics and Targets and Governance themes with their TCFD counterparts.
The GFANZ Recommendations are open to public consultation until 27 July. The aim is to finalise the Recommendations ahead of COP27 in November 2022. Click here if you would like to participate in the consultation.
NOTE ADDED on 04/10/22: The GFANZ guidance has since been published - see our blog post: GFANZ publishes guidance for companies on credible climate transition plans.