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Will Glasgow financial alliance fracture as disclosure requirements tighten?

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The Global Financial Alliance for Net Zero (GFANZ) has launched stringent guidelines for investor transition plans, leading to pushback from investors afraid of the implications. According to FT reports, two members have already pulled out.

  • GFANZ has issued a practical guide for transition plans for financial institutions, and the real economy companies that they invest in, lend to, insure and support.
  • The focus is moving from climate pledges to implementation. This guide works with existing frameworks to make the steps of implementation and engagement tangible.
  • The stringency of GFANZ has provoked a backlash amongst some participants.

As what is required to align to net zero becomes clearer, there are fractures appearing within the GFANZ group. While the group’s AUM may be $130 trillion it is becoming increasingly clear that some investors joined into order to tout their credentials and show alignment with market shifts.

There are increasing signs that such investors are simply unprepared for the actions necessary for meeting the agreed upon targets. One of the most obvious is the need to close down the financing of fossil fuels – oil and gas but especially coal – and clearly many of the signatories refuse to do so.

New GFANZ Transition Plan guidance

The guidance provides companies in the real economy with criteria and approaches they can use when building their transition plans to identify the disclosures that financial institutions expect.  It also helps financial institutions develop a framework against which their transition plans can be referenced.

Today there is no more critical issue, in terms of credibility, of exactly how a firm or investor plans to transition to net zero. By clarifying plans, some investors are concerned they will be opened up to potential liability issues.

This is a particular concern amongst investors that have made net zero pledges, but still continue to finance fossil fuels, especially coal, as part of their portfolio of investments.

GFANZ pledge to net zero

GFANZ was born out of the pledges made at the Glasgow Conference of the Parties in November 2021. Nearly 200 countries signed the 2021 Glasgow Climate Pact, through which they resolved to pursue efforts to limit the temperature increase to 1.5 degree C.

Over 10,000 firms, organizations, or subnational governments have joined the UN Race to Zero, committing to achieve net-zero carbon emissions by 2050 at the latest.

GFANZ defines a net-zero transition plan as “set of goals, actions, and accountability mechanisms to align an organization’s business activities with a pathway to net-zero GHG emissions that delivers real-economy emissions reductions in line with achieving global net zero.”

It’s latest guide is applicable to all types of financial institutions through the seven financial sector-specific net-zero alliances under the UN Race to Zero; asset managers, asset owners, auditors, banks, data providers, exchanges, insurers, and rating agencies.

Components of transition plans that financial institutions will look for

The report outlines the components of transition plans that financial institutions will be looking for from companies in the real economy.  Financial institutions are increasingly reassessing their strategies and operations to bring about emissions reductions in the real economy and achieve their own net-zero commitments.

Companies’ access to financial products and services may be increasingly dependent on their climate targets and strategies, and on their progress against these targets. Companies of all sizes, across all industries globally, will be affected by the alignment of capital to net-zero commitments.

The pillars of the guide in which the components are set are: Foundation, Implementation Strategy, Engagement Strategy, Metrics and Targets, and Governance.

 Details in transition plans will need to be disclosed

The guide is designed to serve as a reference for firms building and disclosing transition plans. 

Disclosure of transition plans, including the detailed assumptions and data that underpins them, is deemed essential in providing the information that will steer capital allocation, and engagement with the companies.

The report says that according to a number of sources, few companies are reporting credible, decision-useful climate data and transition plans. 

The tools for data disclosure used in the guide are using existing frameworks; TCFD, International Sustainability Standards Board (ISSB), CDP, Assessing Low Carbon Transition (ACT), Climate Action 100+ (CA100+), Transition Pathway Initiative (TPI), and the Science Based Targets initiative (SBTi). The CDP is one that many corporates have adopted. In 2021, more than 13,000 companies disclosed data through CDP’s environmental platform.

Transparency is urged on the decision logic behind specific choices for disclosures (e.g.,

Why were specific metrics selected? How has the transition plan been reviewed? Which stakeholders/business areas were consulted for specific decisions?). This transparency would provide context for financial institutions when assessing transition plans and tracking progress of actions against past disclosures. 

Company case studies

Eighteen companies and financial institutions have fed into the report with case studies of their experience and engagement with the transition process. NatWest gives its assessment of transition plan credibility, with Montanaro Asset Management provides its scoring of transition plans.

Kellogg’s focuses on driving action through engagement with suppliers. AXA IM writes of ‘Three strikes and you’re out escalation approach for portfolio companies,’ whilst Wellington Management talks of disclosure of Scope 3 emissions for decision-making.  

Previous guidance documents published by GFANZ

Guidance has previously been published by GFANZ on sectoral pathways for transition for financial institutions.

On August 2022, GFANZ issued a guidance document for consultation with the aim to enhance, converge, and adopt international best practices for portfolio alignment metrics (PAMs).

 Tough demands on members

The stringency of GFANZ has caused some major Wall Street banks to retaliate saying it gives rise to legal risks according to the Financial Times, with some members reported to “feel blindsided by tougher UN climate criteria.”

What makes the current situation remarkable is that the pushback is on the idea that for investors to consider environmental, social and governance criteria is not aligned with fiduciary duty.

It’s been said more than once that externalities such as climate change should be the subject of legislation, not investment action. Even leaving aside the fact that many legislators may feel they need the support of financiers to deploy new legislation, there is a clear fiduciary duty to consider risk in investment decision making. Perhaps a more interesting question should be about the time horizons over which investors choose to consider risks.

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