GFANZ publishes guidance for companies on credible climate transition plans

The Glasgow Financial Alliance for Net Zero (GFANZ) has published a report on what financial institutions expect to see in companies’ climate transition plans (see GFANZ press release). It is estimated that just 30% of companies disclosing climate-related data to the CDP are developing a low carbon transition plan and only 1% of those companies reported all key indicators associated with a credible transition plan.

The report sets out what GFANZ considers to be the key components of a credible and actionable transition plan. This is what financial institutions (that are GFANZ members) will be looking for from companies across the globe, to inform the financial sector’s allocation of capital and services and to help them decide how to engage with investee companies on the net zero transition. GFANZ urges companies (and financial institutions alike) to be ambitious when developing transition plans, as the next few years will be crucial for climate change.

The GFANZ report highlights that companies’ access to financial products and services may be increasingly dependent on their climate targets and strategies and on the progress made against those targets. GFANZ see transition plans as the most effective way for companies to provide financial institutions with information about their net-zero strategy and their level of ambition. This will enable the financial sector to assess the credibility of a company’s climate objectives and compare the company relative to sectoral/regional expectations and against their peers.

The key implication is that companies with credible transition plans may increasingly be able to access financial products and services tailored to low-carbon business models. While companies that do not have credible transition plans may face higher costs and/or restricted access to financial products and services (e.g. higher costs of capital), depending on the decision-making process of their financial institution(s).

The report divides the key components of a credible transition plan into five themes:

• Foundations: what the company’s end goal is with respect to climate change and its high-level strategy for getting there, including (science-based) targets (for the short, medium and long-term), timelines and priorities, as well as a company’s alignment/deviation with a 1.5C pathway.
• Implementation Strategy: how the company will align its business activities and operations with its climate objectives and priorities.
• Engagement Strategy: how the company will influence others to support its transition strategy.
• Metrics and Targets: quantitative goals against which to measure progress (including disclosure of any third party verification of targets, and which sectoral pathway the company has chosen and the rationale for choosing that pathway).
• Governance: how the company is structured to provide oversight, incentivize and support implementation of the transition plan. GFANZ see governance structures are a key mechanism for enabling implementation of a transition plan and for holding companies accountable for progress against their targets.

These components are drawn from existing transition plan guidance, rather than creating a new framework. GFANZ have also considered international standards and regulatory frameworks to ensure that financial institutions’ expectations are in line with the latest developments on mandatory transition plans. The report includes examples and details of expected disclosures.

On carbon credits, GFANZ members expect disclosure of carbon credits, offsets, and avoided emissions (aka Scope 4 emissions) separately from GHG reduction targets and metrics – that is, carbon credits should not be incorporated into reaching a transition plan’s target GHG emissions. In particular, GFANZ will be looking for use of “high quality" carbon credits – in respect of which separate guidelines are being developed by several different global initiatives.

However, the GFANZ report says that companies can determine the specific content, manner of disclosure and frequency of disclosure of their transition plans. For example, companies may wish to integrate their transition plans with TCFD climate reporting.

GFANZ has also identified four key financing strategies which they believe define “transition finance”:

• Climate solutions: Financing or enabling entities and activities that develop and scale climate solutions. This strategy encourages the expansion of low-emitting technologies and services, including nature-based solutions, to replace high-emitting technologies or services, remove greenhouse gases from the atmosphere, or otherwise accelerate the net-zero transition in a just manner.
• Aligned: Financing or enabling entities that are already aligned to a 1.5C pathway. This strategy supports climate leaders and signals that the financial sector is seeking transition alignment behavior from the real-economy companies with which it does business.
• Aligning: Financing or enabling entities committed to transitioning in line with 1.5C-aligned pathways. This strategy supports both high-emitting and low emitting firms as they develop robust net-zero transition plans, set targets aligned to sectoral pathways, and implement changes in their business to deliver on their net-zero targets
• Managed phaseout: Financing or enabling the accelerated managed phaseout (e.g. via early retirement) of high-emitting physical assets. This strategy facilitates significant emissions reduction by the identification and planned early retirement of assets while managing critical issues of service continuity and community interests. GFANZ believe this activity is essential to reducing global emissions and supporting a smooth and just economic transition. In particular, GFANZ envisage that some high-emitting assets can continue to be operated - and indeed many will need to continue operating while no/low-carbon alternatives are developed - within a 1.5C-aligned retirement date as an alternative but equivalent approach to a GHG emissions reduction pathway. (See Appendix D for suggested disclosures for the managed phaseout of high-emitting assets.)

GFANZ are also developing a separate series of sector briefs for high-emitting and hard-to-abate sectors (aviation, oil & gas and steel), which will provide more detail for those industries in their path to decarbonisation. The sector briefs are expected to be published “soon”.

Separately, the UK’s Transition Plan Taskforce (TPT) is also developing guidance for UK companies on what constitutes a credible transition plan and is expected to publish this before the end of 2022. For more information on the UK TPT, see our previous blog post.