GFANZ launches consultation on transition finance strategies and measuring the impact on emissions

GFANZ has launched a consultation to refine the definitions of its transition finance strategies and support financial institutions to forecast the impact of these strategies on reducing emissions. 

The Glasgow Financial Alliance for Net Zero (GFANZ) Secretariat launched a consultation on its work to further refine the definitions of its transition finance strategies and support financial institutions to forecast the impact of these strategies on reducing emissions. 

In 2022, GFANZ identified four strategies necessary for financing a whole economy transition to net zero, which collectively comprise “Transition Finance.” These are defined as financing or enabling: the development and scaling of climate solutions; assets or companies already aligned to a 1.5 degrees Celsius pathway; assets or companies committed to transitioning in line with 1.5 degrees C-aligned pathways; and the accelerated managed phaseout of high-emitting physical assets. 

Achieving a whole economy transition will require common definitions of transition finance across the four strategies and common methodologies for measuring their impact on emissions. Creating consistent definitions that are applicable across markets and sectors will help to scale transition finance to ensure real-economy decarbonization, help financial institutions independently identify their risk exposure and the investment opportunity ahead. They can also serve as safeguards to verify that the reduction of emissions in their portfolios corresponds to actual emissions reductions in the real world, rather than being achieved solely through divestment from high-emitting assets. 

The consultation paper seeks market feedback on a principles-based approach to segment portfolios by the four key strategies and highlights potential approaches to estimate associated decarbonization contribution impact, drawing on existing methodologies and concepts. The principles outlined in the consultation document are designed to be voluntary, pan-sector and globally applicable. They build on previous GFANZ publications, existing practices, transition finance frameworks, and potential decarbonization contribution methodologies. 

The work also highlights the importance of real-economy transition plans, part of a suite of attributes, for entities, assets, and activities to be considered transition finance by the financial sector. For example, proposed attributes for aligning entities may encompass a net zero by 2050 commitment, the presence of a transparent net-zero transition plan and the inclusion of low-carbon capex plans. 

To provide further clarity around transition finance activities, this consultation proposes emerging technical approaches for measuring the decarbonization contribution of transition finance activities. It also introduces the concept of Expected Emissions Reductions (EER). This concept is applicable across the four key financing strategies but employs distinct approaches for each, allowing financial institutions to quantify the “emissions return” of their transition finance activities more effectively. 

Find out more here.