1st FGD OECD Guidance on Transition Finance - Elia Trippel & Valentina Bellesi, OECD.pptx

OECD Environment
OECD EnvironmentOECD Environment
OECD Guidance on Transition Finance
Ensuring Credibility of Corporate Climate Transition Plans
1st Focus Group Discussion on Transition Finance in Indonesia
21 March 2023
Background
1
To limit the average global temperature increase to 1.5°C, global GHG emissions need to reach
net zero by 2050 and peak before 2025, with rapid emissions reductions across all sectors of
the economy, especially in energy-intensive and hard-to-abate sectors.
In 2019, more than 50% of net GHG emissions
came from energy production and industry.
If emissions from electricity and heat production are
attributed to the sectors that use the final energy,
90% of these indirect emissions are allocated to the
industry and buildings sectors (increasing relative
GHG emission shares from 24% to 34%, and from
6% to 16%, respectively).
Source: Adapted from IPCC (2022), Climate Change 2022: Mitigation
of Climate Change (Figure 2.12)
Industry, 24%
Electricity +
heat, 23%
AFOLU, 22%
Transport, 15%
Other
energy,
10%
Buildings, 6%
Total net anthropogenic GHG emissions by sector (2019)
Note: AFOLU = Agriculture, Forestry and Other Land Use
OECD Guidance on Transition Finance
Main elements and target audience
• Landscape analysis
• Key challenges in transition finance (industry survey)
• 10 elements of credible corporate transition plans
• Financial market participants
• Corporates
• Policymakers and regulators
3
Source: OECD (2022) Guidance on Transition Finance:
Ensuring Credibility of Corporate Climate Transition
Plans
FOR WHOM
WHAT
• Finance raised or deployed by corporates to implement their net-zero
transition, in line with temperature goal of Paris Agreement, based on
credible corporate climate transition plans
3
OECD Guidance on Transition Finance
Definitions
Working definition
of Transition
Finance
Key distinction
• Green/sustainable finance = already green, point-in-time assessment
• transition finance = becoming green, moving towards net zero
• Despite no universally-agreed definition of transition finance or common criteria for transition
activities, there is increasing convergence among different actors on core concepts.
• Transition finance is generally understood as being intended to decarbonise entities or economic
activities that are emissions-intensive, and currently have no viable green substitute but that are
on their way to becoming sustainable or reaching net zero.
Transition-related financial instruments
2
• In 2021, the utilities and industry sectors issued
the second largest share of SLBs by volume.
• Most SLBs target GHG or carbon emission
reduction objectives (of which, 77% were verified
by the Science Based Targets initiative).
• Concerns have been raised on the use of
composite ESG ratings as Key Performance
Indicators to link the financing with.
• Transition finance is currently extended mainly through fixed-income instruments, namely
sustainability-linked bonds (SLBs) and loans (SLLs) and transition bonds.
• Fast growth of sustainability-linked debt, led by utilities and industry sectors in Europe and North
America. Transition bond market still new but growing, led by hard-to abate sectors in Asia.
Source: OECD (2022), based on Bloomberg data
Green bonds,
620 bn (38%)
Sustainability-
linked loans, 428
bn (26%)
Social
bonds,
205 bn
(13%)
Sustainability
bonds,
190 bn (12%)
Sustainability-
linked bonds,
109 bn (7%)
Green
loans, 86
bn (5%)
Note: bn = USD billion
OECD Guidance on Transition Finance
Focus on corporate transition plans
4
Why focus on corporate transition plans?
• Credible corporate transition plans can reduce or avoid risks
related to greenwashing, lock-in and delayed action
YET
• Increasing evidence that despite investor expectations, only a
minority of companies are developing transition plans
• Existing transition plan disclosure is limited and inadequate
31%
69%
Yes No
Do you have
a low-carbon
transition
plan?
Source: CDP (2022)
A transition plan is a time-bound, cross-cutting action plan that clearly sets out how a company
intends to achieve its transition strategy and reach its goals/targets to transform its business model,
operations, assets and relationships towards low-emission, climate resilient pathways aligned with the
goals of the Paris Agreement (CBI, 2021; CDP, 2021; CPI, 2022).
OECD Guidance on Transition Finance
Mushrooming of initiatives on transition plans
Disclosure
frameworks
• Standards and
regulatory
frameworks with
components that
companies
should
disclosure
Validation and
assessment
services
• Validation of
science-based
targets
• Transition plan
assessments
Pathways and
methodologies
• Methodologies
for companies to
set GHG
emission targets
• Guidance and
tools for
companies to
develop TPs
Data collection
and analysis
• Data collection
and analysis on
entities’
transition plans
and targets
5
OECD Guidance on Transition Finance
Key challenges in transition finance
6
Submit full
draft to SFWG
co-chairs and
Secretariat
Financial market participants’ obstacles to identifying companies or projects committed to a transition along low-
emission pathways and the Paris Agreement goals (% of responses)
Note: Responses by financial market participants. The number of responses for this survey question was 156.
Source: 2022 OECD Industry Survey on Transition Finance
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Lack of commercially viable projects and companies
Lack of consensus/guidance on how to address the risk of emission lock-in
from near-term investments
Difficulty to assess ambition/relevance of corporates’ net-zero targets
Lack of definition of transition activities and methodological inconsistencies
Lack of consensus/ guidance on what constitutes a Paris-aligned country-
level sectoral transition pathway
Lack of detailed information from corporates on content/format of their
transition plans
Lack of comparability in corporate disclosures regarding climate-related data
and transition plans
Very relevant Relevant Moderately relevant Slightly relevant Not at all relevant
9
OECD Guidance on Transition Finance
Transition plans as part of the SF toolbox
OECD Guidance on Transition Finance
Elements of credible corporate transition plans (I)
8
Setting temperature goals, net-zero, and interim targets
Net-zero and interim targets are science-based, consistent with an IPCC 1.5°C reference
scenario, and cover all relevant GHG emissions. Interim targets reflect the need for global
GHG emissions to peak by 2025. In limited and well-justified circumstances, companies may
choose reference scenarios consistent with limiting warming to below 2°C.
Using sectoral pathways, technology roadmaps, and taxonomies
Net-zero and interim targets as based on available sectoral pathways, technology roadmaps,
and, where possible, taxonomies. The plan clarifies how and for which technologies future
operating and capital expenditures will be used to achieve targets.
Measuring performance and progress through metrics and KPIs
Climate change mitigation-related metrics and KPIs cover lifecycle GHG emissions, are
measurable and externally verifiable. Targets and reporting include scope 3 emissions, and
omissions are limited and clearly justified and explained.
1
2
3
OECD Guidance on Transition Finance
Elements of credible corporate transition plans (II)
9
Setting out a strategy, actions, and implementation, incl. on preventing emission-
intensive lock-in
The plan includes concrete actions to achieve the company’s targets and an assessment of
the likelihood that targets will be achieved.
The risk of emission-intensive lock-in is assessed, a plan for responsible retirement of high-
emitting assets provided where relevant, and mechanisms put in place to prevent lock-in for
any existing or future assets and infrastructures at risk.
Providing clarity on use of carbon credits and offsets
Given the risk that carbon credits and offsets can pose to the credibility of transition plans,
their use is limited and carefully explained.
4
5
OECD Guidance on Transition Finance
Elements of credible corporate transition plans (III)
10
Integrating with financial plans and internal coherence
The transition plan is integrated into the corporate business plan, makes direct reference to
the company’s financial plan and is done concurrently with financial reporting.
Supporting a just transition
Measures are taken to mitigate negative impacts on workers, suppliers, local communities,
and consumers. Credible transition plans are developed through a process that ensures
regular, continuous, and inclusive stakeholder engagement and social dialogue.
Addressing adverse impacts through the Do-No-Significant-Harm (DNSH) Principle
and due diligence for Responsible Business Conduct (RBC)
The plan should consider not only mitigation goals but also other environmental and social
objectives, including by ensuring no harm is done to them. Risk-based due diligence should
be conducted based on OECD Due Diligence Guidance for RBC.
6
7
8
OECD Guidance on Transition Finance
Elements of credible corporate transition plans (IV)
10
Ensuring sound governance and accountability
A whole-of-entity approach ensures that the design and implementation of the transition plan
is subject to regular monitoring and reporting, subject to senior management approval and
oversight, and involves all relevant stakeholders.
Transparency and verification, labelling and certification
Progress on targets is regularly disclosed and third-party verification of the plan and its
targets ensured.
9
10
`z
Thank you!
For more information, please contact:
Elia Trippel: elia.trippel@oecd.org
Valentina Bellesi: valentina.bellesi@oecd.org
14
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1st FGD OECD Guidance on Transition Finance - Elia Trippel & Valentina Bellesi, OECD.pptx

  • 1. OECD Guidance on Transition Finance Ensuring Credibility of Corporate Climate Transition Plans 1st Focus Group Discussion on Transition Finance in Indonesia 21 March 2023
  • 2. Background 1 To limit the average global temperature increase to 1.5°C, global GHG emissions need to reach net zero by 2050 and peak before 2025, with rapid emissions reductions across all sectors of the economy, especially in energy-intensive and hard-to-abate sectors. In 2019, more than 50% of net GHG emissions came from energy production and industry. If emissions from electricity and heat production are attributed to the sectors that use the final energy, 90% of these indirect emissions are allocated to the industry and buildings sectors (increasing relative GHG emission shares from 24% to 34%, and from 6% to 16%, respectively). Source: Adapted from IPCC (2022), Climate Change 2022: Mitigation of Climate Change (Figure 2.12) Industry, 24% Electricity + heat, 23% AFOLU, 22% Transport, 15% Other energy, 10% Buildings, 6% Total net anthropogenic GHG emissions by sector (2019) Note: AFOLU = Agriculture, Forestry and Other Land Use
  • 3. OECD Guidance on Transition Finance Main elements and target audience • Landscape analysis • Key challenges in transition finance (industry survey) • 10 elements of credible corporate transition plans • Financial market participants • Corporates • Policymakers and regulators 3 Source: OECD (2022) Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans FOR WHOM WHAT
  • 4. • Finance raised or deployed by corporates to implement their net-zero transition, in line with temperature goal of Paris Agreement, based on credible corporate climate transition plans 3 OECD Guidance on Transition Finance Definitions Working definition of Transition Finance Key distinction • Green/sustainable finance = already green, point-in-time assessment • transition finance = becoming green, moving towards net zero • Despite no universally-agreed definition of transition finance or common criteria for transition activities, there is increasing convergence among different actors on core concepts. • Transition finance is generally understood as being intended to decarbonise entities or economic activities that are emissions-intensive, and currently have no viable green substitute but that are on their way to becoming sustainable or reaching net zero.
  • 5. Transition-related financial instruments 2 • In 2021, the utilities and industry sectors issued the second largest share of SLBs by volume. • Most SLBs target GHG or carbon emission reduction objectives (of which, 77% were verified by the Science Based Targets initiative). • Concerns have been raised on the use of composite ESG ratings as Key Performance Indicators to link the financing with. • Transition finance is currently extended mainly through fixed-income instruments, namely sustainability-linked bonds (SLBs) and loans (SLLs) and transition bonds. • Fast growth of sustainability-linked debt, led by utilities and industry sectors in Europe and North America. Transition bond market still new but growing, led by hard-to abate sectors in Asia. Source: OECD (2022), based on Bloomberg data Green bonds, 620 bn (38%) Sustainability- linked loans, 428 bn (26%) Social bonds, 205 bn (13%) Sustainability bonds, 190 bn (12%) Sustainability- linked bonds, 109 bn (7%) Green loans, 86 bn (5%) Note: bn = USD billion
  • 6. OECD Guidance on Transition Finance Focus on corporate transition plans 4 Why focus on corporate transition plans? • Credible corporate transition plans can reduce or avoid risks related to greenwashing, lock-in and delayed action YET • Increasing evidence that despite investor expectations, only a minority of companies are developing transition plans • Existing transition plan disclosure is limited and inadequate 31% 69% Yes No Do you have a low-carbon transition plan? Source: CDP (2022) A transition plan is a time-bound, cross-cutting action plan that clearly sets out how a company intends to achieve its transition strategy and reach its goals/targets to transform its business model, operations, assets and relationships towards low-emission, climate resilient pathways aligned with the goals of the Paris Agreement (CBI, 2021; CDP, 2021; CPI, 2022).
  • 7. OECD Guidance on Transition Finance Mushrooming of initiatives on transition plans Disclosure frameworks • Standards and regulatory frameworks with components that companies should disclosure Validation and assessment services • Validation of science-based targets • Transition plan assessments Pathways and methodologies • Methodologies for companies to set GHG emission targets • Guidance and tools for companies to develop TPs Data collection and analysis • Data collection and analysis on entities’ transition plans and targets 5
  • 8. OECD Guidance on Transition Finance Key challenges in transition finance 6 Submit full draft to SFWG co-chairs and Secretariat Financial market participants’ obstacles to identifying companies or projects committed to a transition along low- emission pathways and the Paris Agreement goals (% of responses) Note: Responses by financial market participants. The number of responses for this survey question was 156. Source: 2022 OECD Industry Survey on Transition Finance 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Lack of commercially viable projects and companies Lack of consensus/guidance on how to address the risk of emission lock-in from near-term investments Difficulty to assess ambition/relevance of corporates’ net-zero targets Lack of definition of transition activities and methodological inconsistencies Lack of consensus/ guidance on what constitutes a Paris-aligned country- level sectoral transition pathway Lack of detailed information from corporates on content/format of their transition plans Lack of comparability in corporate disclosures regarding climate-related data and transition plans Very relevant Relevant Moderately relevant Slightly relevant Not at all relevant
  • 9. 9 OECD Guidance on Transition Finance Transition plans as part of the SF toolbox
  • 10. OECD Guidance on Transition Finance Elements of credible corporate transition plans (I) 8 Setting temperature goals, net-zero, and interim targets Net-zero and interim targets are science-based, consistent with an IPCC 1.5°C reference scenario, and cover all relevant GHG emissions. Interim targets reflect the need for global GHG emissions to peak by 2025. In limited and well-justified circumstances, companies may choose reference scenarios consistent with limiting warming to below 2°C. Using sectoral pathways, technology roadmaps, and taxonomies Net-zero and interim targets as based on available sectoral pathways, technology roadmaps, and, where possible, taxonomies. The plan clarifies how and for which technologies future operating and capital expenditures will be used to achieve targets. Measuring performance and progress through metrics and KPIs Climate change mitigation-related metrics and KPIs cover lifecycle GHG emissions, are measurable and externally verifiable. Targets and reporting include scope 3 emissions, and omissions are limited and clearly justified and explained. 1 2 3
  • 11. OECD Guidance on Transition Finance Elements of credible corporate transition plans (II) 9 Setting out a strategy, actions, and implementation, incl. on preventing emission- intensive lock-in The plan includes concrete actions to achieve the company’s targets and an assessment of the likelihood that targets will be achieved. The risk of emission-intensive lock-in is assessed, a plan for responsible retirement of high- emitting assets provided where relevant, and mechanisms put in place to prevent lock-in for any existing or future assets and infrastructures at risk. Providing clarity on use of carbon credits and offsets Given the risk that carbon credits and offsets can pose to the credibility of transition plans, their use is limited and carefully explained. 4 5
  • 12. OECD Guidance on Transition Finance Elements of credible corporate transition plans (III) 10 Integrating with financial plans and internal coherence The transition plan is integrated into the corporate business plan, makes direct reference to the company’s financial plan and is done concurrently with financial reporting. Supporting a just transition Measures are taken to mitigate negative impacts on workers, suppliers, local communities, and consumers. Credible transition plans are developed through a process that ensures regular, continuous, and inclusive stakeholder engagement and social dialogue. Addressing adverse impacts through the Do-No-Significant-Harm (DNSH) Principle and due diligence for Responsible Business Conduct (RBC) The plan should consider not only mitigation goals but also other environmental and social objectives, including by ensuring no harm is done to them. Risk-based due diligence should be conducted based on OECD Due Diligence Guidance for RBC. 6 7 8
  • 13. OECD Guidance on Transition Finance Elements of credible corporate transition plans (IV) 10 Ensuring sound governance and accountability A whole-of-entity approach ensures that the design and implementation of the transition plan is subject to regular monitoring and reporting, subject to senior management approval and oversight, and involves all relevant stakeholders. Transparency and verification, labelling and certification Progress on targets is regularly disclosed and third-party verification of the plan and its targets ensured. 9 10
  • 14. `z Thank you! For more information, please contact: Elia Trippel: elia.trippel@oecd.org Valentina Bellesi: valentina.bellesi@oecd.org 14

Notes de l'éditeur

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  8. Elia Sectoral pathways: sector-specific trajectories for reduction emissions and consider specific technological advances and hurdles of different sectors; often based on underlying scenarios, e.g. the IEA model scenario. Esp important for hard-to-abate sectors where net-zero options are not always feasible or available. However, broad sectoral scope and emissions coverage for economy-wide sectoral pathways is still lacking and several countries have unclear sectoral scopes for emissions. Technology roadmaps Sectoral pathways can inform technology roadmaps for specific sectors Can provide indication of which technologies could be used to achieve emissions reduction targets along a sectoral decarbonisation pathway Taxonomies Can be used by fmps to assess credibility of planned capex and rdi expenditures Can be used by companies to set targets and provide confidence to investors Issue of lack of comparability Reporting Standards can provide global baseline (e.g. ISSB) to provide company information on sustainability risks and opportunities National standards too Provide for metrics and targets to assess and compare information and manage company performance (e.g. absolute GHG emissions or GHG intensity); reporting against emission scopes with consensus moving towards 3 (net zero tracker analysis shows only 36% of largest MNEs have scope 3 targets)
  9. Elia 2 degrees means 2070 (e.g. India 2070, China 2060) Global 1.5, i.e. for some sectors or countries this may mean before 2050 (e.g. Sweden 2045, Finland 2035) 2 - Explanation of how it compares with national target + analysis of any discrepancies and how risks are addressed mechanisms to prevent lock-in will explicitly identify infrastructures at risk and specify safeguards to minimise this risk (e.g., a combination of futureproofing of assets, use of sunset clauses and gradually more stringent emissions criteria, as well as investment in RDI and plans for early retirement) IEA/IPCC: to reach net zero by 2050, no additional fossil fuel exploration Existing and planned FF infra, without additional abatement, exceeds 1.5 (consistent with 2 degrees) Continuing to install unabated ff infra will lead to emissions lock-in (abatement means interventions that substantially reduce GHG, e.g., capturing 90% or more from power plants) Transition plans that rely on investments in ff exploration, sale, distribution likely not compatible with PA temp goal and lead to lock-in 3 Lifecycle emissions, absolute and intensity-based, incl for subsidiaries GHG Protocol Corporate Accounting Reporting Standard provides methodologies for different sectors Scope 3, growing consensus to include; on average 5.5 times the amount of combined scope 1 and 2 Measurement challenging Avoid using terms like significant, relevant, material (EFRAG uses “significant”) – leads to lack of clarity But clear that for some companies scope 3 not very relevant or very difficult to obtain data (e.g. some SMEs) Targets should include scope 3 emissions Corporate to provide explanation of which scope 3 emissions were included and detailed explanation of any exclusions Basis for measurement of value chain info should be explained (can employ supply chain mapping from OECD dd guidance for RBC) Omission only in limited cases where careful justification is included, incl assumption to determine omission
  10. Elia Offsets can deliver finance for emission reductions where it is needed the most and can achieve equivalent environmental outcomes in cost-effective ways But should not disincentivise companies from decarbonising Carbon markets, which from the basis of transactions, are heterogenous and follow different quality standards Credible Consider that use decreases credibility of plan Not as alternative to cutting emissions or a reason for delayed action Explicitly describe any intended use and basis for their carbon removal (e.g. nature or technology-based), applicable verification scheme, quality criteria to assess credibility Ideally not included in GHG inventory and as a contribution to targets (as in EFRAG draft) Explain their additionality and permanence, extent to which they are used as last resort, and clearly state share of emissions mitigated using offsets (which should decline over time) and their explicit role in the company’s mitigation strategy 5 Articulate transition risks and opportunities, limitations, constraints and uncertainties Assess likelihood of achieving the plan’s targets using multiple climate-related scenarios Identify levers and corrective actions to address or correct underperformance against a target Concrete actions to meet targets, capital investments needed, using tools like roadmaps and taxonomies Lock-in prevention and describe strategy and process for responsible retirement of high-emitting assets, e.g. phase-out plan, just transition considerations, key milestones and phaseout timing, governance mechanisms, financing plans, key assumptions and uncertainties (GFANZ)
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