Governments and regulators should work with industry stakeholders to develop clear transition taxonomies to help harness the pivotal role that finance focussed on high-emitters can play in achieving net-zero goals, according to CFA Institute Research and Policy Centre.
In a report out today, it said this role was “not universally recognised” and that sustainability “requires a significant paradigm shift to incorporate transition finance”.
“The premise is that transition finance is poorly understood and inadequately incorporated into existing sustainability policy frameworks, and so how do we enable transition finance to play a bigger part in net zero,” said Rhodri Preece, senior head of research at CFA Institute.
“On the issue of taxonomies, the challenge here is that there is not yet a well-defined taxonomy as to what a transitional activity involves,” he told IPE.
Asked specifically about the EU’s taxonomy, he said the activities transition finance aims to support are not “a neat fit or really captured”.
“And so the outcome is that a lot of investors steer away from participating in allocating capital to transitional activities because it’s not consistent with a sustainability taxonomy.”
The Commission has so far resisted arguments that it needs to do more to promote what has effectively become known as transition finance.
CFA Institute also recommended that regulators use labelling “to provide a proper identity to and acknowledge the pivotal role played by transition finance products”.
However, it also reported that not all of its interviewees emphasised the importance of taxonomies and labelling, as some “leaned toward national or sectoral transition pathways/roadmaps, expressing the belief that the transition label may struggle to adapt to evolving regulations and technologies, particularly in the case of multinational corporations”.
Economic feasibility disclosures
CFA Institute also recommended that governments and policymakers should collaborate with industry to harmonise transition plan disclosures and that these should address the economic feasibility of corporates’ net zero targets.
The idea is that this would discourage greenwashing and boost investors’ and financiers’ confidence in the targets.
According to CFA Institute, an example of economic feasibility reporting is a “projected abatement capacity (PAC) assessment” that CPP Investments, the body that invests Canada Pension Plan funds, set out in 2021 recommendations to the US Securities and Exchange Commission about climate-related disclosures.
CFA Institute included recommendations for institutional investors and corporations in its report, saying “collaboration synergy” was crucial to achieving change.
Most investors use an emissions intensity metric to determine the carbon levels associated with a portfolio. According to CFA Institute, corporations should provide inflation- and currency-adjusted carbon intensity per revenue so investment managers can better measure their portfolios’ real economy impact. Portfolio managers should in turn report the adjusted portfolio weighted average carbon intensity (WACI) as well as the change in WACI.
Managers should also use attribution analysis to report to clients on how their investment strategies promote low emissions or emissions reduction. Attribution analysis aims to distinguish between the emissions effect of asset allocation changes and portfolio companies’ decarbonisation efforts. The Net Zero Asset Owner Alliance has developed an approach for emissions attribution analysis.
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