Lenders should assess whether financed projects meet ICMA criteria and align with sectoral pathways.
A group of banks have published new guidelines to help Asian financial institutions assess the suitability of projects for transition finance.
The group, known as the Asia Transition Finance Study Group (ATFSG), was established last year and tasked with creating the guidelines, on the recognition that transition finance will play an important role in Asia’s transition carbon neutrality.
The ATFSG includes participation from MUFG, Mizuho, SMBC, HSBC, Standard Chartered, Citibank, Barclays, UOB, Macquarie, Maybank, and others – with various regulators and government agencies serving as observers.
The new guidelines are designed to complement recommendations from ICMA’s Climate Transition Finance Handbook, outlining the common challenges and technical issues banks experience in transition finance and offering recommendations for conducting transition finance assessments.
A key step in the recommended process is to communicate with clients to understand their emissions, with a view to deciding the type of finance required and assessing whether it meets ICMA’s transition finance criteria.
Guidance is offered on climate transition-related funding instruments categorised into: general corporate purposes financing, which supports a company’s overall decarbonisation strategy; and use-of-proceeds (UoP) financing, which supports specific projects contributing to decarbonisation.
To assess whether the requested financing might reasonably be treated as transition finance, lenders should review whether projects align with sectoral pathways identified by government or other globally recognised bodies. They should also compare the fundraiser’s technology roadmap, threshold-defined taxonomies, and activity lists to those in the Paris Agreement.
Where there is no government-published pathway, the guidelines suggest using a wide set of sources – such as pathways issued by the IEA, NGFS, and ERIA – as an “interim approach” to evaluate requests for transition finance.
Where there are no government-published technology roadmaps or taxonomies with thresholds and activity lists, lenders can refer to a list of transition technologies published by the Economic Research Institute for ASEAN and East Asia (ERIA).
The guidelines include several examples in the form of case studies, helping to explain the practical questions and issues transition finance practitioners may encounter and suggested approaches to tackle them.
The ATFSG has also published an activity report, providing a summary of its setup, activities, and recommendations to gain support to promote transition finance.