Connect with us

Impact Investing

Transition Finance Will Capture ESG Attention

Financial institutions are deliberating limits for transition finance, debating standards to distinguish between green and non-green activities, focusing on helping polluting firms phase out emissions gradually. The Glasgow Financial Alliance for Net Zero proposes financing companies in the process of closing polluting operations.



transition finance

“Transition finance” is shaping up to be one of the biggest issues of the new year for anyone who claims to care about the climate crisis. “A whole world of transition finance” is being created right now, said Mark Carney, UN special envoy for climate action and finance, during a panel discussion at COP28 in Dubai last month.

The conversation has “matured from talking about investing in the climate to investing in the transition,” said Annika Brouwer, sustainability specialist at Ninety One, a South African company dedicated to transition financing.

At least half of the South African asset manager’s commitments in Dubai focused on transition finance for emerging markets.

The term was part of the final agreement between 200 nations in which they agreed to abandon fossil fuels. However, there is a lot of room for maneuver. In the non-binding document, countries are only asked to contribute to a global transition.

In other words, fossil fuel companies have few limits on how and when they will participate, said Ehsan Khoman, head of commodities, environment, social affairs and governance and emerging markets research at MUFG Bank (EMEA) based in Dubai.

It also gives room for maneuver to investors, including those with so-called sustainable mandates. The term “transition finance” is loosely defined as investments primarily in industries and infrastructure that help drive efforts to achieve a net-zero economy. It is different from green financing, which usually targets so-called climate solutions, such as wind farms or battery plants.

Even so, Chuka Umunna, head of ESG and green economy investment banking at JPMorgan Chase for EMEA, affirms that the change in tone is opening the doors to strategies that were faltering a few years ago. Concern over accusations of greenwashing previously thwarted efforts to develop a transitional bond label for debt capital markets, but there is now “a lot more appetite to discuss it,” he said.

Read more about transition finance and find other interesting business news from around the world with the Born2Invest mobile app.

Coalitions of banks, insurers and asset managers are debating whether to put limits on what constitutes transition finance

However, for now, there is no coherent standard.

The Glasgow Financial Alliance for Net Zero proposes that the investment strategy include financing traditional green activities, such as renewable energy or electric vehicles, as well as polluting companies that plan to decarbonize and even large emitters, such as coal plants, whenever they are in the process of closing.

What unites most proposals around transition financing is the belief that, rather than simply cutting ties with high-emitting companies, financial institutions should help polluting companies gradually phase out their emissions. activities or to put them on a path to reduce emissions.

“You have to go where the emissions are and try to reduce them,” says Curtis Ravenel, senior advisor at GFANZ. The group is co-chaired by Carney, former governor of the Bank of England and chairman of Bloomberg, and Michael R. Bloomberg, founder and majority owner of Bloomberg LP, parent company of Bloomberg News.

However, for investors concerned about sustainability, all this raises a question: Are there assets that don’t qualify? And for those pollutants that do meet the requirements, how can investors be confident that they will decarbonize at the expected speed and scale?

These details are all the more critical as some climate finance funds announced at COP28 aim to invest in transition assets. For example, part of Alterra, a $30 billion company launched by the United Arab Emirates with Blackrock, TPG and Brookfield Asset Management, will go into transition funds. But there are few immediate details about how they are structured.

The way to “stay honest” and avoid “the slippery slope” of investing in assets that are not actually decarbonizing is to have standards in place, said Nazmeera Moola, director of sustainability at Ninety One. Ideally, you would penalize companies that do not meet their environmental commitments.

“If you’re investing in a company that’s looking to make the transition, you have to have a really solid plan,” agreed Kate Levick, who leads E3G’s sustainable financing activities. “Regulatory expectations are taking hold, but it is a race to get there and also to converge so that we don’t have fragmented regulatory gaps.”

Sustainable finance in brief

Norway’s largest pension manager divested $15 million from Gulf companies over fears they could facilitate human rights violations, while delisting Saudi Aramco over climate risks.

KLP, which oversees $70 billion, has excluded a dozen companies listed in Saudi Arabia, Qatar, the United Arab Emirates and Kuwait from its investment universe. The divestments mostly reflect an “unacceptable” risk of contributing to human rights abuses, KLP said. Among the excluded companies are companies in the real estate sector, where, according to KLP, migrant workers from Africa and Asia have suffered discrimination and human rights violations.

“The Gulf States continue to be characterized by authoritarian governance systems that restrict freedom of expression and political rights, including those of critics and human rights activists,” Kiran Aziz, head of responsible investments at KLP, said in a statement. .

The U.S. Securities and Exchange Commission’s failure to complete an ambitious climate agenda by 2023 is making environmental activists nervous.

The global sustainable debt market could struggle to surpass its high mark again for the third year in a row, as borrowers face additional labeling costs, higher interest rates and greater ESG scrutiny.

Swiss climate activists say they have collected enough signatures for a national vote on a new tax on the rich to cover the costs of climate change.


(Featured image by JuergenPM via Pixabay)

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.

First published in Social Investor. A third-party contributor translated and adapted the articles from the originals. In case of discrepancy, the originals will prevail.

Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us

Jeremy Whannell loves writing about the great outdoors, business ventures and tech giants, cryptocurrencies, marijuana stocks, and other investment topics. His proficiency in internet culture rivals his obsession with artificial intelligence and gaming developments. A biker and nature enthusiast, he prefers working and writing out in the wild over an afternoon in a coffee shop.