The Final Report recommends five themes that financial institutions should incorporate into their net zero transition strategies.
On 1 November 2022, the Glasgow Financial Alliance for Net Zero (GFANZ) issued its Final Report on the Fundamentals, Recommendations, and Guidance for Financial Institution Net Zero Transition Plans (the Report). The Report sets out a framework for transition planning, identifying financing strategies for financial institutions to effectively transition to net zero, and makes recommendations for implementing these strategies.
Background on GFANZ and the Report
GFANZ is a global coalition of seven[1] sector-specific (within the broader financial sector) alliances, with each alliance setting commitment criteria for its members. This coalition now includes over 550 financial institutions committed to the goal of net zero greenhouse gas (GHG) emissions by 2050, in support of the global transition to a net zero economy and seeking to limit warming to 1.5 degrees Celsius.
The Report includes voluntary guidance for financial institutions on a sector-agnostic basis (i.e., all financial institutions fall within scope of the Report), and therefore aims to act as a reference point for institutions across the global financial sector, including regulators and policymakers. However, GFANZ acknowledges that, given the considerable sector-specific transition planning that institutions are currently undertaking, the guidance provided in the Report should be read alongside relevant sector-specific regimes and institutions’ internal policies and processes.
Notable Aspects of the Report
Transition Plan Framework
The Report issues recommendations to financial institutions in relation to transition plans, which are organised into five themes and 10 components.[2] These themes (which constitute the “transition plan framework”) are:
- Foundations (defining the institution’s objectives to reach net zero by 2050).
- Implementation strategy (how institutions will go about implementing their transition plan, including the development of products and services, internal policies, and decision-making processes).
- Engagement strategy (engaging with clients, portfolio companies, industry, and the government and public sector in order to ensure an efficient and orderly transition to net zero across the economy).
- Metrics and targets (developing relevant and actionable metrics and targets across these institutions).
- Governance (roles, responsibilities, and remuneration of the institutions, as well as ensuring these institutions have the right skills and culture to implement their transition plan).
The Report also presents optional disclosures in relation to each component, which financial institutions are encouraged to adopt if those disclosures are relevant to their business model.
Transition Financing Strategies
The Report identifies four types of transition finance that the transition plan framework would seek to enable. These are:
- Climate solutions (financing or enabling entities and activities that develop and scale climate solutions).
- Aligned (financing or enabling entities that are already aligned to a 1.5 degrees C pathway).
- Aligning (financing or enabling entities committed to transitioning in line with 1.5 degrees Celsius-aligned pathways).
- Managed phase-out (financing or enabling the accelerated managed phase-out – e.g., via early retirement) – of high-emitting physical assets).
The Report provides examples of each of these types of finance, and notes that GFANZ expects opportunities for each type to grow as the world accelerates towards net zero.
Scope 3 Treatment
The Report covers financial institutions’ Scope 3 financed emissions (i.e., one category of emissions noted in the Greenhouse Gas Protocol’s Scope 3 Standard) consistent with the sector-specific alliance commitments. The Report acknowledges that Scope 3 methodologies are still evolving, including in financial sectors, where the same real-economy emissions can be counted multiple times in the investment chain. The concept of financed emissions, especially relevant for banks and asset owners, exists alongside other evolving approaches appropriate to asset managers, insurers, service providers, and other financial services actors. Conversely, the Report does not cover emissions from a financial institution’s own operations, such as supply chains or employee travel, although GFANZ recommends in the Report that all scopes of GHG emissions should be “actively managed and disclosed”.
Additional Considerations
The Report identifies and discusses areas in which GFANZ recognises the need to enhance its aim of a global approach to net zero transition planning. Some core elements that require refinement are the use of carbon credits and the expansion of metrics and targets. The Report also identifies overarching issues that intersect with net zero transition planning and require consideration, including adaptation and resilience, just transition, and nature.
Latham & Watkins will continue to monitor global developments in relation to transition planning, both related to the work of GFANZ and other similar initiatives.
Endnotes
[1] Net Zero Asset Owner Alliance, Net Zero Banking Alliance, Net Zero Investment Consultants Initiative, Net Zero Asset Managers Initiative, Net Zero Insurance Alliance, Paris-Aligned Asset Owners and Net Zero Financial Service Providers Alliance.
[2] The 10 components are: objectives and priorities; products and services; activities and decision-making; policies and conditions; engagement with clients and portfolio companies; engagement with industry; engagement with government and public sector; and metrics and targets.
