Making a net-zero commitment allows financial institutions to seize opportunities that arise from the global transition to net-zero economies. These opportunities can be maximised by prioritising certain strategies to achieve the transition targets. Instead of solely investing in proven transition technologies like solar and wind, financial institutions’ transition strategies can focus on supporting the sustainable transformation of business models and on targeting the most urgently needed technology and research and development (R&D) investments.

This article presents UNEP FI’s tenth recommendation on credible net-zero commitments as outlined in a UNEP FI input paper to the G20. The eleven recommendations, alongside this series of articles, aim to support policymakers in understanding the progress in net-zero finance to date and how to scale up the global transition to a net-zero economy.

Strategic capital allocation

It is essential for financial institutions to carefully manage their portfolio decisions in light of their transition targets. For example, withdrawing capital too rapidly from certain high-emitting counterparties that do have transition potential or allocating capital to counterparties without credible transition plan, might impede the transition objectives. Therefore, outlining transition strategies in line with the financial institution’s business model will facilitate portfolio decisions.

The emphasis on “transition finance” is particularly critical in the early years of the transition when real-economy actors require funding to deploy their business model transformations. To direct financing to the most urgently needed technology and research and development (R&D) investments, two elements are crucial:

  • Understanding the decarbonization potential of the sector and the individual counterparty via sectoral transition pathways and company-specific transition plans.
  • Proactively engaging with hard-to-abate sectors like shipping, transport and steel as well as with the individual counterparties.

The transition strategies of real economy actors and the transition strategies of financial institutions are thus closely interlinked. As a result, the success of financial institutions’ transition strategies also relies upon clear signals from policymakers on the direction of travel to reach industry-specific emission reduction targets.

Seizing net-zero opportunities through innovative financial solutions

As the entire economy is transitioning, clients across various sectors are increasingly seeking financial support and expertise from their financial institutions. This presents an excellent opportunity to create a range of solutions that support clients’ business model transformation while progressing towards the financial institution’s transition targets.

These solutions may cover both:

  • Targeted financial solutions such as green loans, bonds and specialized lending solutions
  • Non-financial advice and technical assistance

By providing targeted solutions at every stage of the transition, financial institutions can play an important guiding role in their clients’ transition journey.

In conclusion, to support financial institutions in deploying their transition strategy, policymakers must develop clear transition pathways at the sectoral level and require the establishment and disclosure of corporate transition plans. By doing so, financial institutions will be supported in creating innovative financial and non-financing solutions enabling sustainable business model transformations and in financing the most urgently needed technology and R&D developments.

Download UNEP FI’s G20 input paper to access the full set of recommendations for credible net-zero commitments from financial institutions.

Download the UN Secretary General’s High Level Expert Group Integrity Matters Report to access the full set of recommendations for all economic actors.