Preparing for Change: The Importance of Transition Strategies
In the ever-evolving landscape of green and sustainable finance, CIB, a leading financial institution, has taken a significant step forward by launching the development of an internal Transition Plan Assessment (TPA) methodology. This new approach aims to deepen CIB's understanding of how to support clients in their transition towards a more sustainable future.
The TPA methodology revolves around four key pillars: ambition, past and current performance, actions, and management of the transition. This structured, framework-driven approach has evolved from mere pledges to concrete actions, transitioning from voluntary disclosure guidelines to regulatory disclosure frameworks.
Leisa Cardoso de Souza, a Green & Sustainable Finance Expert at CIB, has been instrumental in driving this initiative. The TPA is designed to elevate CIB's strategic dialogue on transition-related issues and provide a forward-looking and analytical view of clients' transition potential.
Transition plans are increasingly recognized by investors as valuable tools for Environmental, Social, and Governance (ESG) integration, supporting decision-making processes. They help investors distinguish industry leaders from laggards, decide on the weight of investments, and potentially observe a pricing differential linked to these plans.
However, transition planning is not without its challenges. Companies often struggle with crafting a complete transition strategy, including verifying their emission inventory, accounting for Scope 3 emissions, and linking Key Performance Indicators (KPIs) to remuneration. Setting long-term science-based targets can be particularly challenging, especially when engaging with policy matters.
Despite these challenges, credible transition plans should clearly articulate greenhouse gas (GHG) emission reduction targets, decarbonization levers, and the direction of capital, with responsibility assigned for these actions. Just 2% of the 6,000 companies disclose to all 21 indicators for assessing transition plan credibility.
Examples of regulatory disclosure frameworks include the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) in the EU, and the International Sustainability Standards Board's Climate-Related Disclosure (IFRS S2). Various frameworks and guidance are also available for creating credible transition plans, such as those from the Transition Plan Taskforce, Climate Bonds Initiative, and the World Benchmarking Alliance.
Transition planning is not just a reporting exercise; it's a change management tool. It helps companies navigate the real-world challenges they face in implementing transition plans, as demonstrated by the auto sector's struggles with infrastructure, resource availability, regulation, and consumer behavior.
Financial planning is another hurdle, as organizations must identify spending that aligns with their transition plans. The auto sector offers a prime example of this challenge, as companies must balance investments in electric vehicle infrastructure with ongoing production costs.
As CIB continues to develop its TPA methodology, it is expected to play a crucial role in supporting clients in their transition towards a more sustainable future. The TPA will not only provide a comprehensive assessment of a client's transition plan but also offer guidance on how to implement these plans effectively.
In conclusion, the launch of CIB's TPA methodology marks a significant step forward in the financial industry's transition towards sustainability. By providing a forward-looking and analytical view of clients' transition potential, CIB aims to deepen its understanding of how to support clients in their transition approach and contribute to a more sustainable future.
