It also considers current market realities such as a shortage of high-emitting companies with robust transition plans, the lack of high-quality and consistent metrics available to assess such plans, and no clear definition of what transition finance activity entails.
“There is no universal approach to transition finance,” said Yingzhi Tang, one of the lead authors of the playbook and a senior research associate with the ISF.
“That is where our playbook comes into play, to lay out a range of approaches, allowing financial institutions to select the path that best suits their mandate and context.”
The playbook offers 14 tips and provides some practical examples from the Caisse de dépôt et placement du Québec, Ontario Municipal Employees Retirement System (OMERS) and the Co-operators Group. The three institutions helped develop the recommendations.
The list of tips starts with a recommendation to get “the top level” of a financial institution involved, Tang said, referring to senior executives. The playbook says securing support at the senior level can be done by presenting a business case about how transition finance can allow an institution to create value and manage risks.
Another tip is to leverage third-party taxonomies and frameworks to come up with an in-house definition for transition finance and clearly communicate which frameworks that definition is based on. For example, it notes that OMERS developed its in-house climate taxonomy by drawing on external frameworks such as the International Capital Markets Association’s Green Bond Principles and Climate Bonds Initiative Taxonomy.
Acknowledging that high-emitting companies are still in the early stages of decarbonizing, the playbook further recommends using a range of metrics to track their progress. This includes emissions intensity metrics, which measure the emissions produced for each unit of activity or output, and temperature scores, which estimate the global temperature rise associated with a company’s emissions or those of a portfolio.
Other recommendations include segmenting portfolios based on “transition maturity” to gauge which investments are further along in supporting a transition to a low-carbon economy and which require more progress, embedding decarbonization targets in underwriting strategies and collaborating with policymakers to drive further action.
“It is very much going step by step through the investment cycle,” Tang said.
The new playbook comes on the heels of the launch of Business Future Pathways, an initiative that seeks to encourage Canadian financial institutions and companies to develop credible climate transition plans. That initiative is also supported by the ISF.
Tang said the playbook and Business Future Pathways are intended to work hand in hand to propel Canada toward its target of achieving net zero by 2050. As it stands, it’s estimated that the country is short $115 billion a year in transition-aligned investments to achieve that target.
“Those activities make up the whole puzzle of deploying capital credibly to those assets with robust transition plans,” she said.
“It’s extremely important for Canadian financial institutions to manage climate-related financial risks and capture long-term value in the transition to net zero.”
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