As well as the finalised transition framework for financial institutions, GFANZ issues updates on portfolio alignment metrics and policy levers.
The Glasgow Financial Alliance for Net Zero (GFANZ) has finalised its transition finance framework for financial institutions as part of a suite of 2022 workstream updates, published following mounting concern about softening decarbonisation requirements for the umbrella body’s members.
Originally open to consultation in June, the finalised ‘Financial Institution Net Zero Transition Plan’ has identified and provided guidance across four aspects of transition finance. These are investing in climate solutions, business models already aligned with a net zero pathway, companies in the process of aligning with net zero, and the managed phase-out of high-emitting assets that will be stranded by 2050.
“The structure of the framework has remained the same [as the draft], and that is in large part due to the strong support we received during the consultation,” Joy Williams, Executive Director of Financial Institution Transition Plans at GFANZ, said during the media briefing.
The financial institution framework includes ten core transition plan components, such as ‘engagement with clients and portfolio companies’, which involves providing feedback and supporting clients and portfolio companies with their net zero-aligned transition strategies. It also includes an escalation framework with consequences when engagement is ineffective.
Each component comprises a recommendation, guidance, case studies, and practical examples for financial institutions to refer to. They have also been grouped into five themes: foundations, implementation strategy, engagement strategy, metrics and targets, and governance.
GFANZ issued guidance for corporate transition plans in September which mirrors the framework for financial institutions. It has further been incorporated into just transition guidance recently published by the London School of Economics’ Grantham Research Institute on Climate Change and the Environment (LSE GRI).
Williams acknowledged that developing and implementing a GFANZ-aligned transition plan will require resources. “This is not a small project; it will involve many departments within an institution,” she said.
The report encouraged policymakers and regulators to reference the framework and “support global consistency when considering policy around net zero transition planning and disclosures”.
GFANZ has labelled the framework as “living guidance”, acknowledging that supporting pathways, tools and methodologies are not yet available for all situations. Further, policy, regulation, technology and science are all evolving at a rapid pace, which means that the framework must remain flexible.
However, as more financial institutions develop their transition strategies, GFANZ said that the quality and usability of the necessary tools, methodologies and datasets will likely improve.
Mark Carney, GFANZ Co-Chair and UN Special Envoy on Climate Action and Finance, said that the new transition framework will improve accountability and “accelerate the speed and scope with which these enormous financial resources are put to work to achieve the world’s goals”.
“That accountability extends to governments and international financial institutions who – based on the real-world experience of GFANZ members – must now deepen their efforts to address climate change,” he said.
GFANZ was launched in April 2021 and has more than 500 members across its member alliances, including the Net Zero Asset Owner Alliance (NZAOA).
The umbrella body has been under increasing scrutiny in the run up to COP27.
Last week, GFANZ published its 2022 progress report, which appeared to confirm that the body would be allowing member groups to set their own path to net zero, rather than aligning with the UN-backed Race to Zero (RtZ) campaign’s criteria. Members are now permitted to “take note of the advice and guidance” of RtZ, whereas the 2021 progress report said that, to ensure credibility and consistency across the alliance, “all GFANZ members must align with the RtZ criteria”.
This also follows mounting legal, reputational and political risks for US-based Net Zero Banking Alliance members, who are expected to make good on net zero commitments by phasing down fossil fuel investments, but are simultaneously under pressure to continue bankrolling the US fossil fuel industry by Republican politicians.
GFANZ has been clear that today’s updated transition framework is “voluntary and complementary to related efforts by the seven sector-specific net-zero alliances”, noting that it should not supersede jurisdictional requirements on transition planning or climate-related financial disclosure, or contractual requirements, such as mandates with clients. Financial institutions are nonetheless encouraged by GFANZ to consider all five themes when constructing their plans, and to be as ambitious and robust as possible when setting out their targets.
“The GFANZ net zero transition plans recommendations contain positive language on the need for immediate deep cuts in emissions, and the reality that these cuts have to come from halting fossil fuel expansion and ensuring a rapid transition away from fossil fuels to clean energy,” said Paddy McCully, Senior Analyst on Energy Transition at NGO Reclaim Finance.
“But GFANZ needs to insist that its member alliances incorporate many of the recommendations in this report into their guidelines and it must name and shame those that refuse to do so.”
Vice Chair Mary Schapiro emphasised that the GFANZ mission remains the same, and that the body will continue to “expand the number of net zero commitments from financial institutions and, equally importantly, establish a forum for tackling sector-wide challenges that are associated with the transition, so that we can help to ensure these high levels of ambition are met with transparent action”.
2022 workstream progress
Alongside the transition framework, GFANZ published resources on measuring and reporting on transition progress and increasing mobilisation of capital to emerging markets and developing economies (EMDEs). It also updated its policy recommendations for Group of 20 governments to deliver on their climate commitments.
In ‘Measuring Portfolio Alignment: Driving Enhancement, Convergence, and Adoption, GFANZ outlined the four categories of alignment metrics being used by financial institutions and the six most common use cases for these metrics being utilised. Based on this, GFANZ has introduced nine ‘Key Design Judgements’ for measuring portfolio alignment, including consideration of which benchmarks to use, scopes to cover, and how to aggregate counterparty-level metrics into a portfolio-level score.
“Practitioners should select those metrics that are most decision-useful for their relevant use case based on a number of selection criteria, for example, ease-of-use, transparency with regard to underlying assumptions, and how suitable the metric is to incentivise transition finance,” the report said.
In its recommendations on mobilising capital for EMDEs, GFANZ said achieving net zero by the mid-century will require an additional US$1 trillion a year of investment in EMDEs alone by 2030.
The report identified three areas of focus for GFANZ going forward: improving the transparency and measuring of financial flows supporting EMDE climate transition efforts, providing support for the development of EMDE-based climate-related practices and standards, and increasing the mobilisation of finance to accelerate the transition of key sectors and deployment of climate solutions across EMDEs.
Although the finance sector has an “essential role” to play in the world’s transition to net zero, GFANZ noted that “it cannot substitute for government policy”.
‘Call to Action – One Year On’ revisits the five climate policy recommendations for G20 governments, published by GFANZ last year, emphasising the importance of taking steps to accelerate the transition to net zero in the face of geopolitical volatility, as well as health and energy crises. G20 governments must commit to introducing economy-wide transition plans which are underpinned by sectoral pathways and policies, GFANZ said. The body also reiterated its call for all G20 governments to introduce carbon pricing and carbon market mechanisms.
“It is frustrating that instead of focusing on the need for governments to remove their subsidies and other forms of support for fossil fuels, GFANZ focuses on promoting carbon markets and carbon pricing, measures which decades of experience have shown to be at best ineffective and a distraction from meaningful actions, and often harmful both for climate mitigation and the rights of local communities and ecosystems,” said Reclaim Finance’s McCully.