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1、iADBInstitute.ADBIWorkingPaperSeriesANOVERVIEWOFAPPROACHESTOTRANSITIONFINANCEFORHARD-TO-ABATESECTORSSayuriShiraiNo.1423December2023AsianDevelopmentBankInstituteTheWorkingPaperseriesisacontinuationoftheformerlynamedDiscussionPaperseries;thenumberingofthepaperscontinuedwithoutinterruptionorchange.ADBs
2、workingpapersreflectinitialideasonatopicandarepostedonlinefordiscussion.Someworkingpapersmaydevelopintootherformsofpublication.Suggestedcitation:Shirai,S.2023.AnOverviewofApproachestoTransitionFinanceforHard-to-AbateSectors.ADBIWorkingPaper1423.Tokyo:AsianDevelopmentBankInstitute.Available:Pleasecon
3、tacttheauthorsforinformationaboutthispaper.Email:sshiraiadbi.orgAsianDevelopmentBankInstituteKasumigasekiBuilding,8thFloor3-2-5Kasumigaseki,Chiyoda-kuTokyo100-6008,JapanTel:+81-3-3593-5500Fax:+81-3-3593-5571URL:www.adbi.orgE-mail:infoadbi.org2023AsianDevelopmentBankInstituteAbstractClimatefinancehas
4、witnessedsignificantgrowthasaburgeoningfieldoflong-termfinancegloballyinrecentyears.However,ithasyettoreachthenecessaryscaleformobilizingsufficientfundstosupportthedecarbonizationeffortsofbusinesses.Thisshortfallispartlyattributedtoongoinginvestorsconcernsaboutgreenwashingrisk.Manyglobalcompanieshav
5、emadecommitmentstoachievethenet-zerotargetby20501butwithoutconsistentshort-andmedium-termtargets,comprehensivedataandprogressreport,anddetailedactionplans.WhiletheTaskForceonClimate-RelatedFinancialDisclosure(TCFD)recommendationshavecontributedtoadvancingdisclosureframeworks,thestandardizationofcorp
6、oratedisclosureshasnotmadesubstantialprogress.Furthermore,aseriesofinitiativessuchastheenvironmental,social,andgovernance(ESG)ratingsofferedbydataproviders,thecertificationofgreenorsustainability-linkedbondlabelsthroughsecond-partyopinions,aswellasvarioustaxonomiesforgreenactivitieshaveenhancedtrans
7、parencytosomeextentbuttheirdivergentapproacheshavehamperedclimatefinancefromexpandingfurther.Therecentefforttostandardizeclimate-relateddisclosuresbytheInternationalSustainabilityStandardsBoard(ISSB),whichwasestablishedbytheTrusteesoftheInternationalFinancialReportingStandards(IFRS)Foundation,isapos
8、itivedevelopment,butbroaderinitiativesarerequiredtopromoteclimatefinance.Inparticular,transitionfinanceinhard-to-abatesectors(suchassteel,chemicals,cement)remainsunderdeveloped,despitetheurgentneedtofinanciallysupporttheiremissions-reducingefforts.Thispaperprovidesanoverviewofvariousapproachestoward
9、transitionfinanceintendedtoenhancecredibilitywhileaddressingtheirchallenges.Keywords:transitionfinance,carbonbudget,hard-to-abatesectors,ISSBClimate-RelatedDisclosures,taxonomy,traffic-lightclassificationsystemJELClassification:G15,G32,Q01,Q54Contents1. INTRODUCTION11.1 WhatHamperstheFurtherProgress
10、ofClimateFinance?11.2 ISSBStandardsPromotingStandardizationofCorporateDisclosure31.3 RecentGrowingAttentionstoTransitionFinance31.4 RecentInitiativestoEnhanceTransitionFinance52. TRANSITIONFINANCEANDLABELINGAPPROACHESINCAPITALMARKETS.62.1 InternationalCapitalMarketsAssociation(ICMA),sTransitionFinan
11、ceFramework62.2 ClimateBondInitiative(CBI),sTransitionLabelandCertification92.3 GreenEquityCriteriaandClassificationInitiatedbytheWorldFederationofExchanges152.4 ChallengesRelatedtoLabelingFinancialInstrumentsandConclusionsofSection2173. PRACTICESTOPROMOTECREDIBLETRANSITIONPLANSforEmissions-Intensiv
12、ecompanies193.1 Science-BasedTargetInitiative(SBTi)Certification193.2 DevelopingSectoralDecarbonizationApproach(SDA)213.3 UsingEnvironmentalCommonPerformanceThresholdsProposedbytheIEA263.4 IndustryTechnologyRoadMapsforTransitionFinanceDevelopedbyJapan273.5 PreventingCarbon-IntensiveLock-InandStrande
13、dAssets303.6 ChallengesRelatedtoSector-BasedApproachesandConclusionsofSection3314. TAXONOMIESFORTRANSITIONACTIVITIESINHARD-TO-ABATESECTORS.324.1 EU,sTaxonomyandTransitionFinance324.2 SingaporesTaxonomyProposalandTraffic-LightClassificationSystem384.3 ASEANTaxonomyandaTraffic-LightSystem474.4 Challen
14、gesRelatedtoTransitionActivitiesUndertheTaxonomiesandConclusionsofSection4525. TRANSITIONFINANCEFROMTHEPERSPECTIVEOFFINANCIALINSTITUTIONS545.1 DefiningTransitionFinanceandSegmentationofPortfolios545.2 AttributesofFourTransitionFinancingStrategies565.3 PromotingDecarbonizationContributionCalculation6
15、05.4 ChallengesRelatedtoDecarbonizingFinancedEmissions626. SUMMARIESANDCHALLENGES63REFERENCES691. INTRODUCTIONTheglobalcommunityneedstoexpeditethetransitionoftheeconomytoalignwiththeParisAgreementgoals,whichaimtolimittheincreaseintheglobalaveragetemperaturetowellbelow2orstrivetoachievealimitof1.5rel
16、ativetopre-industriallevels.Achievingthesegoalsnecessitatesgovernmentandcompaniestosignificantlyintensifytheireffortsinreducinggreenhousegas(GHG)emissions.Meanwhile,itisimportantforinvestorsandfinancialinstitutionstosupporttheseeffortsbyprovidingthenecessaryfinancingtosupporttheseendeavors.Climatefi
17、nanceisanemergingsectoroflong-termfinanceglobally.Itenablesgovernmentsandcompaniestosecurefundingfortheexpansionofeco-friendlyinitiativesandprojectsthroughtheissuanceofgreenorsustainability-linkedbonds(andloans).Greenbondsrepresentdebtinstrumentsinwhichtheproceedsareearmarkedforgreenprojectsandactiv
18、ities,knownasuse-of-proceedsbonds.Sustainability-Iinkedbondswithagreenfocusadjustfinancingtermscontingentontheachievementofpredefinedperformanceindicators,suchasreductionsinGHGemissions.Despitesignificantgrowth,climatefinancehasnotreacheditsfullpotentialtoattractadequateinvestmentsforsupportinggloba
19、ldecarbonizationandlow-carboncorporateactivities.Publicandprivatefinanceflowsforfossilfuelsremaingreaterthanthoseforclimateadaptationandmitigation.Thelatterfinancialflowsmustexpandsubstantiallybyafactorofthreetosixtimesgreaterthancurrentlevelsinordertolimitglobalwarmingto2or1.5oC(IPCC2023).Theprimar
20、yobstacleforpreventingfurtherexpansionofclimatefinanceliesinlimitedcorporatedisclosureandassociatedinvestors*concernsaboutgreenwashingrisk.Greenwashingarisesfromcorporatepracticesthatexaggeratetheirgreeninitiativesandprojectswithoutmakingmeaningfulemissionsreductions.1.1 WhatHamperstheFurtherProgres
21、sofClimateFinance?Severalfactorshavecontributedtotheunderdevelopmentofclimatefinance.First,manylargecompanieshavepledgedtoachievenet-zeroemissionsby2050orearlier,butwithoutdisclosingconsistentshort-andmedium-termtargets,whichdirectlyimpacttheirongoingbusinessoperations.Criticalbasicdata,suchasGHGemi
22、ssions一includingScope1(directemissions),Scope2(indirectemissionslikepurchasedelectricity),andScope3(emissionsfromsuppliersandusers)aswellasprogresstowardlong-termnet-zeroemissiontargetsareofteninadequate.Despiteincreasingcallsfrominvestorsandotherstakeholders,moreover,companies,disclosureregardingcr
23、edibleactionplansencompassingoperationalandcapitalexpendituresandsupplierengagement,aswellastheemissionsreductionpathtowardnet-zeroemissiontargets,areinsufficient.Second,therecommendationsforvoluntarycorporatedisclosuremadebytheTaskForceonClimate-RelatedFinancialDisclosure(TCFD)in2017anditsrevisedve
24、rsionin2019havepartiallycontributedtopromotingdisclosurestandardization.Forinstance,theTCFDrecommendationshaveadvocatedforaframeworkbasedonfourpillars:governance,strategy,riskmanagement,andmetricsandindicators.However,evenwiththesefourpillarsinplace,thedisclosureofGHGemissionsdata,emissiontargets,an
25、dcredibleactionplansremainssignificantlylacking.Consequently,thereexistsawidevariationindisclosureandreportingpracticesamongcompanies,makingcross-companycomparisonsextremelychallenging.Inaddition,TCFDrecommendationshavenotbeenadoptedwidelyinsomeregionsincludingSoutheastAsia.InadditiontotheTCFDrecomm
26、endations,numerousinfluentialclimate-relatedvoluntarydisclosureandreportingguidelinesandframeworkshavebeendevelopedfromvariousprivatesectororganizationsandinitiativessuchastheClimateDisclosureStandardsBoard(CDSB),sFrameworkforreportingenvironmentalandclimatechangeinformation,theValueReportingFoundat
27、ionsIntegratedReportingFramework,industry-specificSustainabilityAccountingStandardsBoard(SASB)Standards,theWorldEconomicForumsStakeholderCapitalismMetrics,andGlobalReportingInitiative(GRI),sSustainabilityReportingStandards.Whilethesedisclosureframeworkshaveintendedtoincreasetransparencyforinvestors,
28、theirdiverseapproacheshavefurthercontributedtocomplexityanddiversedisclosurepractices.Companiestendtoflexiblypicktheirpreferredreportingframeworksandonlydisclosepartoftheirreportingrequirements.Third,manyinvestorsrelyonenvironment,social,andgovernance(ESG)ratingsassignedtoeach,mostlylargelisted,comp
29、any,whichareprovidedbydozensofglobaldataproviders.ConcernsremainamongfinancialregulatorsduetothelimitedconsistencyamongESGratingsforthesamecompanyofferedbydifferentESGdataproviders,andevenwithineachsegmentofE,S,andG.ThisissuewasraisedbytheInternationalOrganizationofSecuritiesCommissions(IOSCO)in2021
30、(IOSCO2021).Consequently,investorsmightmakevaryinginvestmentdecisionsdependingonthedatasetpurchasedfromaparticulardataprovider.Whilelargeinvestorsorassetmanagementcompaniescanaddressthisissuebypurchasingdatafrommultipleproviders,smallerinvestorsareunabletodosoduetothehighdatasubscriptioncosts.Thesub
31、stantialdiscrepanciesamongtheratingsareprimarilyaresultofselectingdiverseindicatorsandallocatingthevaryingweightstoeachindicator.Furthermore,ESGdataprovidersoftenmakeestimatesformissingdatausingvariousmethodologies.Asaresult,divergencesamongtheseratingstendtobemoresignificantthantherelativelyconsist
32、entcreditratingsprovidedtobondissuersbyafewwell-establishedratingagencies.Thesmallerdifferencesincreditratingscanbeattributedtotherelativeeasinessofestimatingcreditworthiness,aspastreliablecreditdataandinformationaboutdefaulteventsonvariouscompaniesarereadilyavailable.Incontrast,forESGratings,datapr
33、ovidershavemoreflexibilitytoselectawiderangeofindicators,partlybecausecomprehensive,standardizedcorporatedisclosureonclimateaccountingislacking.Moreover,dataonhistoricalclimateeventremainlimited,particularlysincemostclimaterisks(includingphysicalandtransitionrisks)areexpectedtointensifynonlinearlyin
34、thefuture.Fourth,someinvestorsplaceapremiumondatareliability(suchasGHGemissionsdataandotherenvironmentalindicators)verifiedbyindependentverifiersforcompany-discloseddata.However,duetotheabsenceofstandardizeddisclosure,dataverificationmaynotnecessarilyfacilitatecross-companycomparisons.Furthermore,ma
35、nygreen,sustainabilitybonds,andsustainability-linkedbondsareissuedwithsecond-partyopinionscertifyingthatissuersdisclosureandobjectivesadheretospecificguidelinesandstandardsestablishedbycertainorganizations,suchastheInternationalCapitalMarketsAssociation(ICMA)andtheClimateBondInitiative(CBI).However,
36、theirapproachesarequitedivergentintermsofdisclosurerequirements.GiventhatICMA,sguidelinesaremostlybasedonrecommendationsratherthanrequirements,theremaybesomediscretionamongindependentverifierswithregardtotheextentofthoserecommendationsbeingadequatelytakenintoaccountintheprocessofproducingsecond-part
37、yopinions.ThedivergenttreatmentsonthedisclosureofGHGemissionsdata,net-zeroemissionstargetand1.5pathway,anddetailedactionplansmayleadtolabeledbondswithdifferentqualities.Moreover,theactualimpactofsuchlabeledbondissuances,suchasactualemissionsreduction,remainsunclearduetolimitedcorporatedisclosure.1.2
38、 ISSBStandardsPromotingStandardizationofCorporateDisclosureAsignificantandirreversibletrendistheincreasingmomentumtowardstandardizingclimate-relatedcorporatedisclosure,especiallysincetheInternationalSustainabilityStandardsBoard(ISSB)wasestablishedbytheTrusteesoftheInternationalFinancialReportingStan
39、dards(IFRS)Foundationin2021.TheISSBreleasedtheClimate-RelatedDisclosures(IFRSS2)inconjunctionwiththeGeneralRequirementforDisclosureofSustainability-RelatedFinancialInformation(IFRSS1)inJune2023(ISSB2023a,2023b).TheIFRSS1andS2arescheduledtobecomeeffectiveforannualreportingperiodsbeginninginJanuary202
40、4,withreportingtocommencein2025.ThesestandardsweredevelopedprimarilybyincorporatingtheTCFDrecommendationsandintegratingthemwiththeGHGProtocol,aswellassomeexistingdisclosureframeworksprovidedbyorganizationssuchastheCDSB,theValueReportingFoundation,theSASB,andtheWorldEconomicForum.TheISSBwasestablishe
41、dbytheIFRSFoundationin2021inresponsetostronginvestordemandforthedevelopmentofglobalstandardsthatcanserveasabaselineforcomprehensivecorporatesustainabilitydisclosures,meetingtheinformationneedsofinvestorsandotherstakeholders,whileensuringcompatibilitywithvariousexistingdisclosureandreportingframework
42、s.IFRSS2playacrucialroleinadvancingcarbonaccounting,measuringGHGemissionswithafocusonScope3emissions,andsettingemissionstargets,essentialformonitoringprogressinemissionsreductionandtheeffectivenessofcorporateactions(Shirai2023b).SinceISSBdisclosureframeworksreceivedsupportfromtheG7,theG20,IOSCO,andt
43、heFinancialStabilityBoard(FSB),manycountriesandregionsareexpectedtomandateIFRSS1andS2withintheirjurisdictions.OnenotableissuerelatedtoIFRSS2,however,istheabsenceofarequirementforalong-termnet-zeroemissiontarget.Giventhecriticalimportanceofachievingnet-zeroemissionsbyaround2050orearlierforcountriesan
44、dmajorcompanies,itisdesirableforeachcountrytomandatelong-termnet-zerotargets,alongwithISSBdisclosurerequirements,startingwithlargepubliclylistedcompaniesinaphasedmanner.However,itisimportanttonotethatmakingIFRSS2mandatory,whileprovidinganessentialsteptowarddisclosurestandardization,isnotthesolesolut
45、ionforscalingupclimateandsustainablefinance.1.3 RecentGrowingAttentionstoTransitionFinanceInadditiontodrivingcorporateclimate-relateddisclosurebasedonISSB,sIFRSS1andS2andpromotingnet-zerotargetsforallsectorsandlargecompanies,itisimperativetoshedlightontransitionfinance,whichisoneofthemostchallenging
46、,butunderdevelopedaspectsofclimatefinance.Inrecentyears,therehasbeenagrowingemphasisonincreasingfinancingforcompaniesoperatinginhard-to-abatesectors,suchasironandsteel,cement,basicchemicals,andaviation(aswellaselectricitygenerationfromfossilfuels),tosupporttheirtransitioneffortstowardnetzero.Sofar,t
47、ransitionfinancehasbeenlaggingbehindtherelativepopularityofgreen,sustainability,andsustainability-linkedbondsglobally.Ithasnotprovidedsufficientfinanceintransitioningemissions-intensivecompaniestowardsthelevelrequiredtoachievepracticalnet-zeroemissions.Thisreflectsthefactthatsomeinvestorsassociatetr
48、ansitionfinancewithgreenwashingfinance.Otherinvestorshavebeencautiousaboutfinancingemissions-intensivecompaniesduetothelackofcleardefinitionsandcriteriafordeterminingfinancingdecisions.TheOrganisationforEconomicCo-operationandDevelopment(OECD)IndustrySurveyonTransitionFinancerevealedthatmorethan60%o
49、finvestorswerehesitanttoprovidetransitionfinance,eitheringeneralorforspecificregions,duetoinadequateclarityonhowtoassesscrediblecorporatealignmentwithapathwaythatalignswiththeParisAgreementsgoals(OECD2022).Oneprimaryreasonforthiscautionisthattransitionbondsorsustainability-linkedbondsissuedbythesecompaniesmaynotnecessarilyresultinsubstantialreductionsinGHGemissionsforthecompanyasawholeoritse
