Brave decisions: financing the transition

Fast view

Three key areas where the financial sector needs to co-ordinate better:

• Agree on a single taxonomy for classifying climate-aligned economic activities. There are currently over 200!
• Standardise ESG rating methodologies. At present, ESG ratings aren’t comparable.
• Co-ordinate reporting standards for sustainability-related information, replacing today’s confusing mix of standards.

More broadly, the world needs to build a framework for transition finance in order to encourage more financial resources towards supporting the net-zero transition.

Such a framework is essential for helping high-carbon companies transform into low-carbon companies. For example, many investors are currently unwilling to finance a coal-fired power generation company’s transition to a renewable business, which must happen to decarbonise.

In short, we need to stop dividing assets and activities between ‘brown’ and ‘green’. To get to net zero, we need to focus on turning ‘brown’ into ‘green’. Transition pathways must be established for different sectors, such as steel, aluminium, cement, aluminium, paper and coal. Based on these pathways, we can then revise the taxonomy to allow transition activities to be included in recognised transition finance. That way, financial institutions will not be fearful of participating in it.