2023 was the planet’s hottest year in recorded history, and ice coverage over the Antarctic Ocean also dropped to a record low. With climate change as the world’s most pressing risk, its social and financial impact is already visible in the increasing costs of climate disasters for countries where events occur and for their supply chains.
As more governments and business entities have announced net-zero carbon ambitions and launched climate disclosures, it is critical to ensure their transition roadmaps are robust and credible enough to lead us to a net-zero future, says Fidelity International in a Feb 22 note.
According to the International Renewable Energy Agency, US$5 trillion ($6.70 trillion) of global investments are needed per year from 2030 to 2050 to keep global warming on the 1.5°C pathway. This means that investments must more than triple 2022 levels to meet this growing financing gap.
However, transition financing remains a significant hurdle for corporates and financial institutions alike, says Fidelity. Challenges include a lack of climate mitigation and adaptation planning, and fragmented climate data and disclosures.
This is especially urgent in Asia as the region accounts for half of global carbon emissions and produces about 85% of its energy from fossil fuels. However, Asia is not on track to deliver its 2030 climate targets.
Unlike green finance where funds are allocated to projects that are already meeting ESG criteria, transition finance is about helping carbon-intensive sectors become more sustainable over time, says Jenn-Hui Tan, chief sustainability officer at Fidelity International.
“However, clearer definitions of credible improvements are needed to reduce greenwashing risks and improve investor confidence in the ‘transition’,” adds Tan. “Asia will play a significant role in supporting global energy transition efforts and doing so will also unlock investment opportunities.”
Regulatory and governmental support
See also: MAS launches coalition, two pilots to test 'transition credits' for early retirement of coal plants
To address systemic climate issues and catalyse transition finance, Fidelity says three requirements must be met. They are: funding, clear disclosure guidance and a favourable regulatory environment.
Gradually, frameworks are emerging to help companies put in place robust strategies to meet their net-zero targets, says Fidelity. Governments are also seeking to close policy gaps to make green technologies cheaper while regulators are working to channel transition financing to the right places, adds the firm.
System-wide initiatives, such as the US’ Inflation Reduction Act, provides support to develop technologies like green hydrogen and sustainable aviation fuels.
Meanwhile, the Transition Plan Taskforce in the UK aims to standardise private sector climate transition planning by providing general and sector specific best practices.
Global regulations on fund products, such as the UK Sustainability Disclosure Requirements (SDR) also recognises “transition” as an investment category. These developments are expected to drive improvements in corporate transition planning and disclosures as well as speed up relevant capital allocation.
Singapore announced a slew of initiatives at the COP28 climate conference in Dubai last December. The government will launch a new Asia-focused blended finance initiative, which aims to mobilise up to US$5 billion for green and transition projects.
Known as the Financing Asia’s Transition Partnership, or Fast-P, Singapore’s contribution will form part of the “concessional capital” required in the blended finance structure. These cheaper forms of funding, often from the public sector, help attract private capital into projects deemed risky or less profitable.
See also: In conversation with StanChart, Citi and HSBC sustainable finance heads
The following day, the Monetary Authority of Singapore (MAS) launched the Transition Credits Coalition (Traction) and two pilot projects to test the use of “high-integrity transition credits” in transactions for the early retirement of coal-fired power plants (CFPPs).
Traction is supported by close to 30 members and knowledge partners, including Temasek, GenZero, Citi, Standard Chartered, DBS and Oversea-Chinese Banking Corporation (OCBC). It will study the challenges and propose solutions to scale the early retirement of CFPPs in Asia through “high-integrity carbon credits”.
These so-called transition credits are generated by retiring a CFPP early and replacing it with clean energy sources. With the funds raised from selling these offsets, this “complementary financing instrument” could incentivise plant owners to retire their assets early and replace them with renewable energy.
Stewardship is key
Investors can help investees understand systemic climate risks and opportunities and share their expectations of robust transition roadmaps, says Fidelity.
Stewardship activities, such as engagement and voting, also play a significant role in highlighting the uniqueness of individual corporate transition plans and allowing investors to make decisions accordingly.
If a company’s actions and efforts are inadequate, investors can escalate and express their position through voting. For voting to yield results, however, the board must cultivate an enabling corporate culture and behaviour, implement the right incentive structures and uphold transparency to investors.
Transition often does not happen in a linear fashion and requires a strategy that is unique to the market, the industry and the company, says Tina Chang, associate director, sustainable investing at Fidelity International.
“Our engagement with companies focuses on the local challenges and opportunities presented and highlights the importance of effective communication for investors to evaluate whether a transition strategy is credible,” says Chang. “Such communication is especially important in Asia because climate and ESG disclosure is relatively nascent, so companies are often tackling the dual challenge of building out disclosure capacity while setting targets.”
Fidelity itself aims to achieve net zero across its investment portfolios by 2050, including halving its portfolio’s carbon footprint by 2030, and to phase out investment in thermal coal in OECD countries by 2030 and globally by 2040.
“At Fidelity, we continue to evolve our approach as the sustainable landscape changes,” says Tan. “As more businesses publish credible transition plans, it is important for asset managers to champion further developments in transition finance and engage with regulators and governments to close policy gaps to make green technologies cheaper and channel transition financing to the right places.”
Photos: Fidelity International
Read more about transition finance:
- Transition finance to gain prominence in 2024 as SLBs face greater scrutiny: Moody's
- In conversation with StanChart, Citi and HSBC sustainable finance heads
- 'Some' of BlackRock's 'most sophisticated' clients prefer 'transition' assets over those that are already green
- Engagement over divestment: MAS proposes transition planning guidelines for financial institutions
- Ninety One makes a case for actively investing in high-emitters to achieve net zero
