Financial institutions have a critical role to play in accelerating the transition to a net-zero economy. Many banks have outlined their climate ambition, including through joining the Net-Zero Banking Alliance (NZBA), and have made commitments to financing ambitious climate action to transition the real economy to net-zero greenhouse gas emissions by 2050.
Banks have developed a set of metrics to report externally on their efforts towards meeting their ambition. Over time, this has led firstly to reporting of the volume of sustainable finance provided, supported by a range of international taxonomies (e.g. the EU Taxonomy), and, more recently, to measures of total financed emissions and sectoral decarbonisation targets that represent the climate impact of a bank’s overall portfolio and how the bank plans to reduce it.
Banks’ strategies for managing climate impact have also matured, with banks moving from exclusionary policies and targeted sustainable finance to more wide-ranging engagement with clients, especially large corporates. This engagement is helping to encourage companies to set transition plans and to accelerate those plans which, in turn, will support banks’ net zero strategies (if banks have existing exposures to these clients).
Financing provided to clients under such engagements is frequently described as “Transition Finance”. This paper discusses how banks may consider reporting their Transition Finance efforts. We see a need for additional specific metrics, as existing metrics may fail to provide a full picture of banks’ approaches to decarbonising their portfolios.