IPSF – Implementing transition finance principles – Interim report

International
Platform on
Sustainable
Finance

Implementing transition financeprinciples – Interim report
December 2023

IPSF – Implementing transition finance principles – Interim report

International Platform on Sustainable Finance
Implementing transition finance principles – Interim report

Table of contents
Executive Summary ................................................................................................................................................1
I.

Evolving climate transition finance ecosystem ...............................................................................................3
1.

Credibility: Identification of risks, needs and opportunities, and science-based real-sector target setting ..... 5

1.1.

Overview of the IPSF transition finance target-setting principles and other relevant principles ......5

1.2.
Assessing risks and opportunities for responding and contributing to the transition towards a lowercarbon economy, climate resilient economy. .................................................................................................6

2.

3.

4.

1.3.

Setting climate ambition with regard to the Paris Agreement and relevant national commitments 7

1.4.

Pathway approaches in target-setting ................................................................................................9

1.5.

Conclusions and recommendations for further work ......................................................................14

Disclosure: Governance and transparency around credible transition planning .....................................15
2.1.

Applying IPSF transition finance principles to transition planning...................................................15

2.2.

Climate-related and sustainability reporting standards and transition planning ............................16

2.3.

Alignment of transition plan guidance and frameworks with IPSF success factors .........................18

2.4.

Opportunities and challenges of transition plans for SMEs and EMDEs ..........................................21

2.5.

Conclusions and recommendations for further work ......................................................................21

Financing: Effective finance and engagement by the financial sector and monitoring metrics ..............23
3.1.

Embedding credibility within transition finance ..............................................................................23

3.2.

Transition finance strategies: GFANZ guidance for financial institutions .........................................23

3.3.

Types of financing available to meet companies’ transition finance needs.....................................24

3.4.

High-level overview of approaches to mobilise finance and enable it to scale with integrity.........26

3.5.

Approaches to engage for real economy impacts ............................................................................27

3.6.

Monitoring metrics...........................................................................................................................29

3.7.

Conclusions and recommendations for further work ......................................................................35

Assessment...............................................................................................................................................36
4.1.

Guidance, recommendations and best practices on transition plans ..............................................36

4.2.

Net Zero Data Public Utility ..............................................................................................................37

4.3.

Verification, validation and assurance .............................................................................................37

4.4.

Climate alignment assessments .......................................................................................................39

4.5.

Enhancing transition plan assessment with AI .................................................................................41

IPSF – Implementing transition finance principles – Interim report

4.6.
II.

Conclusions and recommendations for further work ......................................................................41

Use cases and practical examples.................................................................................................................43
1.

The EIB Group’s Paris Alignment for Counterparties (PATH) Framework .................................................43

2.

Step by step approach to transition planning for the emerging and developing market context ...........44

3.

Japan’s Transition Finance Model Project ................................................................................................44

III.

Conclusions ..............................................................................................................................................46

IV.

Annexes ....................................................................................................................................................48

Annex 1: Credible transition finance process steps .........................................................................................48
Annex 2: Implications of IPSF transition finance delivery principles for the credible transition plan content andimplementation ................................................................................................................................................49
Annex 3: Mapping of Transition Plan success factors against relevant transition plan frameworks ...............52
Annex 4: Key elements of transition finance frameworks ...............................................................................60
Annex 5: Credible use of high-quality carbon credits, when appropriate and permitted ...............................62

Acknowledgements and disclaimer
This interim report is coordinated by the European Commission together with the IPSF Swiss and Japanese
members as co-chairs of the IPSF Transition Finance Working Group, with substantial contributions received
from IPSF members and observers.
The recommendations proposed are voluntary and build on existing public and private initiatives.

IPSF – Implementing transition finance principles – Interim report

Executive Summary
This interim report provides an overview of the ongoing International Platform on Sustainable Finance (IPSF)
work on transition finance, building upon the foundational Principles outlined in the 2022 IPSF Transition
Finance report for robust transition targets (target-setting principles) and for demonstrating the capacity toachieve those targets (delivery principles).
The interim report identifies four dimensions of transition finance: credibility, disclosure, financing, andassessment. These dimensions encompass various principles, strategies, and considerations for effectivelytransitioning to a sustainable and climate-resilient economy. The dimensions are intricately linked to thepractical steps involved in the transition finance process, each representing the stages that institutions mustnavigate to achieve meaningful transition outcomes. This holistic approach enhances the credibility andeffectiveness of climate transition initiatives, bridging the gap between ambition and action. Overall, the reportunderscores the vital role of sustainability reporting, and comprehensive transition plans. It emphasises theneed for comparable data and open data platforms, for collaboration among initiatives to support and assessclimate efforts effectively.
It is important to note that transition finance can cover a wide range of transitions, considering various climate
and environmental goals and social objectives. For the purposes of this interim report, and as an important
starting point, the IPSF has focused on climate, i.e. the transition to achieve Paris Agreement goals.
The significance of transition plans
Central to the discourse on transition finance, transition planning is emerging as a catalyst for concrete change.
It is a powerful tool, embedded within corporate strategy, to guide organisations and financial institutions
towards more sustainable pathways, as they look to navigate the complexities, risks and opportunities of thetransition. The disclosure of transition plans will help to establish a robust, credible and comparable set offorward-looking information on companies’ strategic ambition, strategies, actions and financing needs
throughout the transition. As a result, transition plan disclosures will serve many purposes. They enablefinancial institutions to identify and channel investments into companies actively reducing carbon emissions,
therefore helping align financial flows with climate goals. Furthermore, they foster transparency, enabling
stakeholders to make informed decisions and investors to assess the credibility and ambition of companies’
endeavours. Therefore, transition plan disclosures are foundational to the provision of credible transition
finance.
Use cases and practical examples
The IPSF believes providing use cases helps illustrate the practical implementation of transition finance; somefirst use cases have been included in this interim report. These examples include the EIB Group’s Paris
Alignment for Counterparties (PATH) Framework, the European Bank for Reconstruction and Development’s(EBRD) step-by-step approach to transition planning for emerging and developing markets, and Japan’s
Transition Finance Model Project.
In the subsequent stages, following this interim report, the IPSF would aim to delve into more use cases andpractical examples. This expansion could involve a more in-depth analysis of the coordinated phase-out of coaland a more extensive exploration of examples involving instruments for financing transition.
Recommendations for further work
This interim report underscores the evolving landscape of transition finance and identifies a number of gaps
and areas for further work, including some where the IPSF will continue discussions or where it could specificallyplay a role and add value:
1. Monitoring developments on tools and pathway approaches to setting climate ambition and1

IPSF – Implementing transition finance principles – Interim reportbenchmark against: IPSF to monitor progress to develop guidance for corporates on the different tools
and pathways available that inform climate ambition. In the absence of sufficient guidance, IPSF
members may consider issuing best practice guidance on how different tools can be used in conjunction,
in a way that enables a whole-of-economy transition to net zero.
2. Development of further international guidance to support comparability and consistency oftransition plan disclosures: We recommend that the International Sustainability Standards Board (ISSB)
consider developing further guidance for the disclosure of transition plans as part of broader
sustainability reporting, building on existing work. This should help to promote comparability andconsistency of disclosures.
3. Empowering emerging and developing countries: Recognising the particular challenges faced byemerging and developing countries, the IPSF could seek to develop more tailored approaches totransition finance. This further work would look to identify, bring together and build on ongoing
initiatives around approaches to transition plans and finance in emerging and developing countries,
avoiding duplication of work.
4. Developing frameworks that enable transition finance to scale with integrity: IPSF will continue tomonitor ongoing developments for frameworks that embed credibility within the transition financeprocess and consider where further guidance on core metrics and Key performance indicators (KPIs),
and their use to support transition finance, might be necessary to enable it to scale with integrity andeffectively.
5. Monitoring for tangible impact: In view of the importance of a comprehensive monitoring framework
for transition finance, the IPSF could promote guidelines and best practices for monitoring the progressof transition plans and the flow of capital to companies that are transitioning. IPSF members willcontinue discussing and sharing views on possible local or international measures that may be
influencing the ability of firms to access finance.

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IPSF – Implementing transition finance principles – Interim report

I.

Evolving climate transition finance ecosystem

The global community is faced with the urgent need to address climate change and to transition towards asustainable and low-carbon future, in line with the Paris Agreement and the Sustainable Development Goals(SDGs). Achieving this whole-of-economy transition requires a significant amount of capital from public andprivate sources. Supporting activities that are already green and sustainable is not enough. A much larger partof the global economy, including sectors that are currently greenhouse gas (GHG) intensive, also require
financing for their transition. Transition finance plays a vital role in facilitating this shift by providing thenecessary capital and resources to support the transformation of industries, sectors, and economies.
Building on the IPSF Transition Finance 2022 report, this interim report aims at identifying possible approaches
and providing some further guidance for transition finance. In particular, it articulates the prior Principles
around several dimensions crucial to the success of transition finance, while noting that the challenges may
differ across economies. It also points to areas where further work is needed.
Transition planning, and the disclosure of transition plans, is an important foundation for transition finance.
Transition planning supports entities to take a strategic approach to how they will manage the risks andopportunities of the transition, including the financing that they will need to deliver the actions that they willneed to take. The disclosure of these plans is a key factor in the issuance of credible transition financeinstruments. The choice of financial instruments and approaches employed by financiers and investors toengage with and influence corporates to decarbonise will also be influenced by investor preferences andrequirements.
Key dimensions and transition finance process steps
The interim report recognises the complexity of the challenges at hand and emphasises the need for a holistic
approach to ensure the credibility, transparency, effectiveness, and assessment of transition finance initiatives.
In line with the IPSF Principles to set robust targets and for a credible delivery, four key dimensions of thetransition finance process are identified: credibility, disclosure, financing, and assessment.
These dimensions and associated initiatives could be captured within a series of ‘process steps’ for transition
finance seekers (set out in Figure 1, and with further detail in Annex 1). The proposed approach, which embeds
the principles developed by IPSF and G20, illustrates the connections between economy-wide needs, corporate
plans, and investors’/lenders’ capital allocation decisions.
Figure 1: Transition finance process steps

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IPSF – Implementing transition finance principles – Interim report

Credibility
The credibility dimension, as per the 2022 IPSF Principles, focuses on assessing transition needs andopportunities and setting climate ambition. It recognises the importance of identifying viable pathways fortransitioning to a low-carbon economy and setting ambitious targets that are aligned with the goals of the Paris
Agreement (Principle 1). By thoroughly assessing transition needs and opportunities and establishing sciencebased climate ambitions, stakeholders can build a solid foundation for their transition finance strategies.
Climate ambitions should be tailored, embedding deep, rapid and sustained change (Principle 2), so that thetransition is all-encompassing (Principle 3). At the same time, the transition should be compatible with otherenvironmental and social goals, thereby adhering to the principle of Do No Significant Harm (DNSH) (Principle 4).
Disclosure
The disclosing dimension emphasises the importance of developing and disclosing a robust transition plan andreporting on performance. It involves creating a comprehensive and transparent roadmap that outlines thesteps, strategies, and milestones for achieving the desired transition outcomes (Principle 5). By disclosing thisplan and regularly reporting on performance against it (Principle 8), stakeholders can enhance accountability
and foster trust in their transition finance practices. Furthermore, strong and supportive internal governanceshould be in place to enable the delivery of the plans (Principle 6). Lastly, external stakeholder engagement
plays an important role in facilitating an organisation’s transition journey, ensuring that the latter extends
beyond internal actions to encompass the entire ecosystem (Principle 7).
Financing
The financing and assessing dimensions are interconnected and address critical aspects of the transition financeprocess.
In the financing dimension, stakeholders focus on issuing credible transition finance instruments (or lending
arrangements) that are underpinned by a robust transition plan (Principle 5). These instruments help attract
investments and channel capital towards projects and initiatives that will enable the whole-of-economy
transition. Furthermore, as a result, the design of financial instruments will also be determined by investors’
needs and preferences. In this context, it is important to highlight the proactive role that financial institutions
can play in engaging with various entities and assets to support their transition, thereby contributing to thecreation of an enabling environment (Principle 7).
Assessment
The assessing dimension involves the tools available to evaluate performance against relevant benchmarks,
sectoral pathways and other metrics to assess the effectiveness and impact of transition finance efforts(Principles 8 and 9).

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IPSF – Implementing transition finance principles – Interim report

1. Credibility: Identification of risks, needs and opportunities, and science-based real-sector target
setting
This section delves into the critical aspect of entities credibly identifying needs and opportunities and setting
climate ambition to inform their transition finance needs. Embedding credibility throughout the transition
finance process steps, starting with an entity’s strategic and rounded approach to considering how it will
prepare for and contribute to the transition, will help the market for transition finance to scale with integrity.
Therefore, this section draws out the meaning of credibility in this context with reference to the various
principles, guidelines, and frameworks. Furthermore, this section explores the significance of incorporating
science-based decarbonisation pathways at both the sectoral and national levels, providing valuable references
for entities devising their transition strategies. It also addresses the challenge of carbon-intensive lock-in andthe tools developed to safeguard against it, ensuring the credibility of transition investments.
1.1.

Overview of the IPSF transition finance target-setting principles and other relevant principles

In November 2022, the IPSF published its Transition Finance Report, which proposed a set of voluntary
Principles for robust transition targets (target-setting principles) and for demonstrating the ability to deliver on
those targets (delivery principles). These principles are based on an analysis of the global landscape offrameworks and tools, and “intended to stimulate thinking on useful common approaches within transition
finance frameworks and tools”.
Box 1: IPSF Transition Finance Report Principles for robust transition targets

The IPSF principles and other key frameworks and reports (such as the G20 Transition Finance Framework, or
the Organisation for Economic Co-operation and Development (OECD) Guidance on Transition Finance1, therecent Synthesis Report of the Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report(AR6)) highlight a number of important points for corporates and financial institutions setting their climate
ambitions:-1

Set science-based net-zero and interim targets consistent with the Paris Agreement's temperature

See Annex 4 for more details on the G20 Transition Finance Framework and OECD Guidance.

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IPSF – Implementing transition finance principles – Interim reportgoals.
-

Base targets and strategies on sectoral pathways, technology roadmaps, benchmarks or taxonomies.

-

Use transparent metrics and Key performance indicators (KPIs) for measuring performance andprogress in emissions reduction.

-

Clearly communicate the use of high-quality carbon credits and offsets, where permitted/used.

-

Develop a clear strategy with concrete actions to achieve targets, considering transition risks andopportunities.

-

Address adverse impacts on workers, communities, and consumers and engage in stakeholder dialogue.

-

Integrate the transition plan within the corporate business plan, ensuring coherence.

-

Establish a robust governance framework, including involving senior management.

-

Ensure regular disclosure of progress and third-party verification of the plan.

These key points help create credible and ambitious climate transition plans and strategies promoting
transparency and accountability, aligned with international climate goals and other environmental objectives.
With regard to these last objectives, while climate mitigation remains a paramount focus in the transition to asustainable future, it is fundamental to recognise that a comprehensive approach involves not only reducing
GHG emissions but also enhancing climate resilience, addressing broader environmental and social objectives,and adhering to the principle of DNSH (see IPSF Principle 4). Incorporating these diverse objectives withintransition finance targets amplifies the impact of financial flows, ensuring that the transition journey
encompasses not only emissions reduction but also the preservation of ecosystems, the promotion of circular
economies, the reduction of pollution, and adherence to the DNSH principle.
1.2.

Assessing risks and opportunities for responding and contributing to the transition towards a lowercarbon economy, climate resilient economy.

Companies embarking on the journey to a lower-carbon economy must assess the potential risks, needs andopportunities for their company throughout the transition. This evaluation encompasses both physical andtransition risks, as well as opportunities that may emerge as part of the widespread shift toward a lower-carbon
economy.
Scenario analysis is a powerful tool that can help companies in this endeavour. It allows companies to gain
insights into the impact of various climate trajectories on their business strategy, offering a better
understanding of potential future risks and opportunities associated with the transition. This analysis can be
performed using a range of scenarios, including those that lead to more severe physical and/or transition risks.
And, as a result, it can support companies in their efforts to assess the strategic options available to respond todifferent levels of risks and opportunities throughout the transition.
Scenario analysis can serve several important roles:
1. Setting strategic ambition: Companies can use it to define their strategic goals and chart actions
corresponding to different transition scenarios, over various timeframes. This includes acknowledging
the assumptions and dependencies required to achieve their aims, reinforcing their strategies.
2. Financial planning: It supports financial planning across these diverse scenarios. As a result, companies
gain a clearer perspective on their transition finance requirements and can seek the necessary capitalfor these endeavours.
3. Enhancing disclosures: Through scenario analysis, companies can provide more comprehensive
disclosures, boosting investor confidence in their transition finance needs. This transparency furnishes

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IPSF – Implementing transition finance principles – Interim report

investors with a deeper comprehension of the risks and opportunities they might encounter, enabling
investors to assess the resilience of a company’s transition plan.
The use of scenario analysis is expanding, bolstered by multiple frameworks, initiatives, and guidance. It’s animportant feature of corporate sustainability reporting standards, as well as transition plan disclosures. Yet,challenges persist, presenting opportunities for further advancements as capabilities to understand the impact
of different climate scenarios develop over time.
These activities align with Principles 2 and 3 of the IPSF 2022 Report, as they involve the comprehensive
evaluation of transition needs and opportunities within the context of a rapid and widespread shift toward a
net-zero economy.
1.3.

Setting climate ambition with regard to the Paris Agreement and relevant national commitments

In the pursuit of credible transition finance, the approach a company takes in defining its climate ambitions isfoundational to a company’s plan and subsequent financing needs. A company’s climate ambition is influenced
by various drivers, including:-

Scientific evidence: When setting targets for climate ambition, companies should take into account thescientific evidence regarding the scale of decarbonisation required to align with the overarching goalsof the Paris Agreement.

-

Public policy commitments, which often encompass not only carbon reduction but also broader
environmental and climate adaptation objectives.

-

National and sectoral benchmarks, pathways or taxonomies.

-

Internal assessment: A company’s own evaluation of potential risks and opportunities across varying
timeframes, coupled with the feasibility of actions they can undertake, informs their climate ambition.
It’s imperative that this assessment is strategic and take the broader economic transition into account,to avert pitfalls like “paper decarbonisation” or inadequate adaptation to climate change. A
comprehensive approach here also equips companies to handle interdependencies with stakeholders,society, the economy, and the natural environment.

Furthermore, market discipline significantly influences corporate climate ambition. Investors critically assess
the credibility of corporate ambitions concerning the broader transition and relevant public policy
commitments. Consequently, companies may also consider investor expectations when formulating theirclimate ambitions.
This process aligns with Principles 1 and 2 of the IPSF Transition Finance 2022 report. It emphasises thesignificance of assessing transition needs, identifying opportunities, and setting ambitious climate goals deeply
rooted in the principles of rapid and far-reaching transformation. These principles provide the foundation for
credible and comprehensive climate transition efforts.
Box 2: Credible transition pathways to keep global warming to 1.5°C
Scenarios presented in the latest IPCC report serve as a guide for target-setting, whether adopting a green
taxonomies approach or a pathway/roadmap approach. The Synthesis Report of the IPCC AR6 provides acomprehensive summary of the current understanding of climate change, its extensive impacts and risks, andstrategies for climate change mitigation and adaptation. According to the report, if GHG emissions continue
unabated, global warming will intensify, and according to projected scenarios and modelled pathways, it isestimated that a 1.5°C increase in global temperature will be reached by 2040.

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IPSF – Implementing transition finance principles – Interim report

Integrated IPCC assessment on climate change, impacts and risks, and climate change mitigation andadaptation

To limit global warming to 1.5°C with little to no overshoot, as well as to achieve the goal of limiting warming
to 2°C with a higher likelihood (>67%), all global-modelled pathways indicate the urgent need for substantial
and immediate reductions in GHG emissions across all sectors in this decade.
Greenhouse gas and CO2 reductions from 2019, median and 5-95 percentiles

The IPCC report includes over 200 scenarios falling into either the C1 (below 1.5°C with no or limited overshoot)or C2 (below 1.5°C with high overshoot) category, all aiming to limit global warming to 1.5°C. Among them, it
is important to note that all pathways aiming to limit global warming to 1.5°C with no or limited overshootrequire the implementation of carbon removal techniques, some of which are not deployed/existent. In otherwords, carbon removal has become an essential component to various extents, in order to effectively constrain
the rise in global temperature to 1.5°C. In these scenarios, the deployment of carbon removal techniques varies

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IPSF – Implementing transition finance principles – Interim reportbased on projected energy consumption levels and the pace and scale of renewable energy installations.
As a result, when referencing a scenario that is consistent with 1.5°C, it is crucial to specify which scenario is
employed for target-setting in transition finance activities. Additionally, providing a rationale for the selectionof a particular scenario is essential in the transition finance target-setting process.
1.4.

Pathway approaches in target-setting

The 2022 IPSF Transition Finance Report highlights the importance of incorporating science-based
decarbonisation pathways and associated targets when assessing the transition process of entities. Various
public and private sector-led initiatives have emerged, focusing on the development of transition pathways,
often at the sectoral level. These pathways serve as references for entities when formulating their transition
strategies. As already mentioned in the 2022 IPSF Report, and also by others (e.g. the Glasgow Financial Alliancefor Net Zero (GFANZ) (2021)), there may be top down and bottom up approaches to design transition pathways2.
An OECD paper on climate change mitigation scenarios3, highlights the challenges of assessing scenarios fortheir Paris consistency, emphasising the complex balance between bottom-up and top-down approaches.
The IPSF therefore believes there is a need for greater collaboration and action by multiple stakeholders to
improve the use and interpretation of climate change mitigation scenarios in the financial sector, emphasising
the significance of transparent, standardised data disclosure, improved granularity, and clearer communicationof climate outcomes and uncertainties.
Use of taxonomies in target-setting
Taxonomies have emerged as valuable tools to guide companies, investors, and financial intermediaries in theirefforts to identify and finance economic activities that contribute to climate mitigation and adaptation goals.
In June 2023, in the European Union (EU), the European Commission issued a Recommendation4 providing
guidance on how companies, investors, and financial intermediaries can voluntarily utilise the existingsustainable finance framework to finance their transition towards a climate-neutral and sustainable economy
and offering practical examples and explanations. For instance, the taxonomy can assist in setting transition
targets for specific economic activities covered by the taxonomy or, for economic activities with low
environmental impact that fall outside the scope of the taxonomy, businesses can still consider using relevant
taxonomy criteria to address residual impacts.
The synergy between taxonomies and transition plans plays an important role in effective climate transition
strategies and in facilitating the communication of targets and investments within specific sectors. Thissymbiotic relationship offers a unique proposition that can significantly enhance the efficacy of climate action.
For instance, in the EU, the requirement for taxonomy-aligned capital expenditure to be accompanied by an

2

3

4

Top-down trajectories often use integrated assessment models to understand the pathway for the entire economy to transition to
net zero. They can be used to create sector pathways and to better understand some of the interactions between different sectors
set against the overall ambition to reach net zero. However, solely focusing on a top-down approach might have the unintended
consequence of excluding companies from transition finance, where there might be a less clear or longer pathway to net-zeroemissions.
Bottom-up trajectories are typically developed by industry-led organisations and provide a practical view of what sectors can achieve
based on their unique perspectives. However, they often fail to consider the broader economy-wide perspective. Given the varying
potentials of different sectors to contribute to decarbonisation due to technological limitations or decarbonisation needs, it isessential to select pathways that assist in devising decarbonisation trajectories specific to each sector while accounting forconstraints imposed by the economy-wide carbon budget.
OECD (2023), Climate change mitigation scenarios for financial sector target setting and alignment assessment: A stocktake andanalysis of their Paris consistency, practicality, and assumptions, Environment Working Papers No. 223, (link).
See https://ec.europa.eu/finance/docs/law/230613-transition-finance-recommendation_en.pdf.

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IPSF – Implementing transition finance principles – Interim report

activity-based transition plan underscores the intertwining of these two elements. This approach ensures thatinvestments earmarked for taxonomy-aligned endeavours are effectively contextualised within comprehensive
transition strategies. This dynamic alignment facilitates a streamlined and cohesive approach toward achieving
climate goals.
Moreover, entities are increasingly recognising the value of articulating a portion of their transition financeneeds in terms of taxonomy-aligned capital expenditure as a subset of their broader capital investment
landscape, with the taxonomy serving as a unifying framework for communicating both intent and action.
Box 3: Using the EU Taxonomy to specify transition finance needs
The figure below underscores the versatility of taxonomies in diverse applications within the sphere oftransition plans.

Source: Commission Recommendation (EU) 2023/1425 of 27 June 2023 on facilitating finance for the transition to a sustainableeconomy, Annex.

The integration of taxonomies into activity-based transition plans offers a strategic advantage that goes beyond
mere compliance.
National-Sector Pathways and Sectoral Policies
Decarbonisation pathways are typically established at the sectoral level, and the IPSF (2022) recommends thedevelopment of activity-specific transition pathways as complements to activity-level taxonomy criteria. Somejurisdictions have taken steps to enhance national-sector pathways and develop accompanying sectoral policies.
For example, in Japan, the “Basic Guidelines on Climate Transition Finance” released by the Ministry of
Economy, Trade, and Industry (METI), the Ministry of Environment (MOE), and the Financial Services Agency(FSA) in May 2021 require issuers and fundraisers to articulate a transition pathway and establish targets
aligned with the Paris Agreement. To assist companies, METI and other relevant agencies are developing sectorspecific decarbonisation roadmaps that outline the effectiveness and availability of transitional and innovativetechnologies contributing to net zero by 2050. In March 2023, a roadmap for the automobile sector was newly
formulated, in addition to existing roadmaps for sectors such as iron & steel, chemistry, electricity, oil, gas,
paper & pulp, cement, shipping, and aviation. These roadmaps are subject to regular updates to account forchanging socioeconomic conditions and economy-wide perspectives. Furthermore, in June 2023, the ministries

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IPSF – Implementing transition finance principles – Interim reportissued the Follow-up Guidance on Transition Finance for Financiers to support effective dialogue between
financiers and issuers on the implementation of transition strategies and tracking progress towards
decarbonisation targets in the execution of transition finance.
In June 2023, the European Commission recommendations on transition finance mentioned that, to support
the adjustment of science-based pathways for individual companies in line with EU climate and environmental
objectives and based on the starting point of companies, it is also recommended to consult the European
Commission’s qualitative EU Transition Pathways per industrial ecosystem. Such transition pathways have beendeveloped or are in course of being developed for tourism, energy-intensive industries, chemicals, steel andmetals, mobility, construction, proximity and social economy, textiles, retail, agri-food, aerospace and defence,
renewables, creative and cultural industries, digital, electronics. Each of these transition pathways describe themost important elements that need to be addressed in an actionable plan to make the transition possible:
infrastructure, investment and funding, regulation and public governance, research & innovation techniques
and technological solutions, skills, social dimension and sustainable competitiveness.
Use of Pathways by Financial Institutions
GFANZ "Guidance on Use of Sectoral Pathways for Financial Institutions" (June 2022) provides financial
institutions with guidance and a framework to evaluate the suitability of sectoral pathways in their transition
planning and implementation efforts.
Figure 2: Financial institutions’ transition process and GFANZ pathway framework pillars

Asia Transition Finance Study Group: Launched in October 2021, the Asia Transition Finance Study Group, led
by Asian and global banks, with observers from development banks, export credit authorities, public agencies,
and finance associations, released its final report on the Asia Transition Finance Guidelines in October 2022.
The guidelines offer practical assistance to financial institutions that are beginning to provide transition financeand require support in conducting necessary assessments. The International Capital Market Association (ICMA)
Handbook is the starting point for financial institutions (FIs) seeking to understand whether the financing issuitable for transition finance, with four elements to assess (Climate Transition Strategy and Governance,
Business model environmental materiality, Science-based targets and pathways, Implementation transparency).
The FI should determine whether the fundraiser’s decarbonisation plan is aligned with the country and sectoral
pathways identified by the fundraiser’s government or other globally recognised bodies. Those pathways willbe aligned with the Paris Agreement, meaning the ones to climate (carbon) neutral/net zero if respective

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IPSF – Implementing transition finance principles – Interim reportnational governments have committed to it. The FI is also expected to assess the fundraiser’s suitability fortransition finance by comparing the fundraiser’s technology roadmap, threshold-defined taxonomies, andactivity lists to those in the Paris Agreement. Considering the limited availability of region-specific pathways
and technology roadmaps in Asia, the guidelines recommend utilising a broader range of sources for financial
institutions to assess the suitability of transition finance. Where no country or sector-specific pathway has been
compiled by the relevant government, financial institutions may refer to pathways issued by external parties
such as the International Energy Agency (IEA), Network for Greening the Financial System (NGFS), and Economic
Research Institute for the Association of Southeast Asian Nations (ASEAN) and East Asia (ERIA).
Pathway approaches offer a holistic and granular assessment of entities transitioning toward net-zeroemissions in a forward-looking manner, and with a direct reference to emissions data. It will become a powerfultool to connect emissions data reporting under climate-related disclosure regimes with credible target-setting
for transition finance.
There is a wide range of initiatives for developing credible pathways, and within this, there is a mixture of both
top-down and bottom-up approaches, which bring their own unique challenges, particularly for sectors thatmight not currently be able to align with top-down targets. For example, certain sectors might rely on thedevelopment and scaling of new technologies to achieve alignment with Paris Agreement targets but stillrequire access to finance to deliver on their near-term decarbonisation actions.
Therefore, promoting further standardisation may help transition finance and support investors in assessing
what is credible. Further work could be valuable in helping companies establish credible climate ambition at
the outset of the transition finance process. To solidify pathway approaches in the transition finance framework,
it would be worthwhile to outline critical characteristics that credible pathways should possess. This will aid
investors in confidently selecting from the available pathway options. This guidance should look to manage thebalance between maintaining ambition towards achieving a lower carbon economy, while not excluding
companies from the ability to access the finance that they need. And there could be further work to provide
guidance to support credible climate ambition for where region-specific pathways might not be available. This
will be an important area for the IPSF to continue to monitor and work on over time.
Relevant issues to consider for setting credible climate ambition
In addition to the above considerations, companies also encounter several critical issues when determining
their climate ambitions. These include the use of credible data in target setting, strategies to prevent emissionintensive lock-in during their transition journey, and (where permitted) the utilisation of verified/high-quality
carbon credits (see Annex 5 for some reference to initiatives looking into the credibility of claims and quality ofcarbon credits). Adhering to best practices in these areas, as summarised below, not only reinforces credibility
in target setting but also reduces the risks associated with greenwashing.
Approaches to safeguarding against emission-intensive lock-in
Since transition finance includes financing to transitional activities, there is potentially greater uncertainty
associated with the investment, and a greater need to exercise judgement and seek assurances about both theprofile of underlying assets and the investee’s future plans. In addressing this concern, it is particularly
important to tackle the issue of carbon lock-in.
Carbon lock-in occurs when fossil fuel infrastructure or assets, whether existing or new, hinder the transition
to low or zero-emission alternatives by persisting in their use instead of adopting potentially substitutable lowemission options. Various types of investments carry the risk of carbon lock-in, with ongoing debates
surrounding their environmental integrity. These investments primarily include natural gas, industrial fossil fuelapplications, and efficiency improvements in fossil fuel assets, particularly coal. The European Bank for
Reconstruction and Development’s (EBRD) Paris alignment methodology includes guidance on assessing carbon

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IPSF – Implementing transition finance principles – Interim report

lock-in for directly financed investments.5
The risk of lock-in undermines the credibility of transition investments and can lead to accusations ofgreenwashing, as they may impede progress towards achieving net-zero goals. To mitigate this risk, several
tools have been developed and are currently in use:-

Sectoral pathways, such as those provided by the Transition Pathway Initiative and the Science Based
Targets initiative (SBTi), assess whether an asset or company aligns with chosen decarbonisation or
net-zero trajectories.

-

Transition taxonomies, including those established by ASEAN, Singapore, Indonesia, and others,
define eligibility criteria and sunset clauses for transition activities. The EU Taxonomy includes a
specific category “transitional activities” and the related criteria could be considered as safeguards
against carbon lock-in.6-

Technology roadmaps outline future-oriented approaches to aligning with net-zero technologies,
extending up to 2050. Notably, the government of Japan has developed industry roadmaps to guide
this process.

-Portfolio-level approaches employ metrics, targets, and strategies to transition portfolios toward netzero alignment. These approaches are utilised by various jurisdictions and private sector alliances suchas those within GFANZ.

-

Entity-level approaches centre around company transition plans and associated sustainability
disclosures, as exemplified by the UK Transition Plan Taskforce and the OECD.

Building on the 2022 OECD Guidance on Transition Finance7, another 2023 OECD report8 provides an analysis
and good practices to strengthen relevant mechanisms to prevent carbon lock-in in transition finance. The
report finds that existing approaches and policy frameworks for transition finance emphasise the need to avoid
carbon lock-in, but largely do not set clear guidance or criteria on how to do so. Key findings of the report
include:

5
6

7

8

-

Existing approaches and policy frameworks for transition finance emphasise the need to avoid carbon
lock-in, but largely do not set clear guidance or criteria on how to do so.

-Transition finance definitions can be strengthened by providing clarity on how to assess feasibility as
part of eligibility criteria, and by taking a long-term approach in the assessment.

-

National sectoral emissions pathways can guide technology roadmaps, robust transition taxonomy
criteria, and similar tools, as well as allowing companies to develop credible net-zero plans and targets.

-

Sunset clauses for use of fossil fuels can reduce carbon lock-in risk for assets where a fuel switch isplanned to ensure alignment of the asset with the Paris temperature goal.

-

For assets where a fuel switch is needed to achieve alignment with the Paris temperature goal,flanking measures that ensure the switch happens in a timely manner can contribute to preventing
carbon lock-in.

-

The development of standards and policy frameworks for sustainability-linked instruments is

EBRD, ‘Methodology to determine the Paris Agreement alignment of EBRD investments’ (link).
In addition, the ESRS Disclosure Requirement E1-1 – Transition plan for climate change mitigation – also mentions information to bedisclosed in relation to locked-in emissions.
OECD (2022), OECD Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans, Green Finance andInvestment, OECD Publishing, Paris, https://doi.org/10.1787/7c68a1ee-en.
OECD (2023), Mechanisms to Prevent Carbon Lock-in in Transition Finance, Green Finance and Investment, OECD Publishing,Paris, https://doi.org/10.1787/d5c49358-en.

13

IPSF – Implementing transition finance principles – Interim reportnecessary to address emerging loopholes which increase the risk of lock-in of related investments.
The report’s findings and good practices are relevant to policymakers and regulators who have developed orare considering developing transition finance policies (for example, taxonomies, roadmaps, or guidance),
standards for green, transition and sustainability-linked debt, frameworks for corporate transition plans, orbroader climate-related disclosure frameworks.
1.5.

Conclusions and recommendations for further work

In this section, we have explored a range of transition finance-related initiatives with a specific focus on thecredibility dimension. It is encouraging to note the substantial progress made in developing frameworks toenhance the credibility of transition finance in alignment with the principles outlined in the 2022 IPSF report.
Nevertheless, as also mentioned, several gaps and challenges persist, necessitating further attention and action,from IPSF but also from other relevant international fora/bodies, including:-Consistency of pathways: Credible pathways are an essential component of transition finance, not only
within pathway approaches but also in green taxonomies approaches. Presently, numerous pathwayrelated initiatives are progressing independently. Further work to compare and contrast these
initiatives may support companies and investors and promote further comparability and/or suggesting
further standardisation/critical characteristics of credible pathways. The IPSF will continue to monitor
progress in this space and consider best practice for how these tools can be used to support ambitionsetting, in a way that enables a whole-of-economy transition to net zero.

-

Climate data availability: Promising developments, such as the development of International Financial
Reporting Standards (IFRS) S2 and European Sustainability Reporting Standards (ESRS), along withongoing efforts by data-related initiatives like the Future of Sustainable Data Alliance (FoSDA) and NetZero Data Public Utility (NZDPU), suggest a continuous improvement and availability of credible climate
data. However, a comprehensive analysis may still be required to determine the extent to which thesedevelopments can and have filled existing data gaps.

-

Carbon lock-in, carbon credits: The establishment of principles and guidelines pertaining to carbon
lock-in, carbon credits, and offsets marks a positive step forward. It is essential to continue shaping
these guidelines to ensure they effectively contribute to the credibility of transition finance.

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IPSF – Implementing transition finance principles – Interim report

2. Disclosure: Governance and transparency around credible transition planningGood corporate disclosure is a key ingredient for the issuance of robust transition finance instruments.
Transition plans are emerging as a global norm in global corporate reporting. Companies that have performed
an effective and holistic cross-organisation exercise on transition planning, and have produced a credible
transition plan, are able to lay effective foundations for financing their transition. In this section, we expand on
the IPSF Transition Finance Principles to look at existing available frameworks and the key requirements ofdisclosures for transition finance.
2.1.

Applying IPSF transition finance principles to transition planningThis interim report focuses on the disclosing dimension of the transition finance landscape, particularly highquality and credible entity-level transition plans. Transition plans play a vital role in conveying decision-usefuland comparable information. They support transition finance through various use cases:- Capital allocation and stewardship: investors are able to assess investee entities’ transition paths to inform
investment decisions, and to align with their own climate objectives and transition plans. Investors canalso use transition plans to inform their stewardship, including prioritising engagement activities andidentifying escalation points.
- Market for credible transition-oriented financial instruments: enabling alignment of debt instruments(such as Sustainability-Linked Bonds) to credible decarbonisation pathways. Transition plans help lenders
assess the credibility of transition-oriented debt instruments against the issuer’s decarbonisation plans.
They also show whether the issuer’s transition plan is aligned with a 1.5°C pathway or other, industryspecific pathways. Providing transparency over these elements supports the requirements of guidancefrom ICMA and Climate Bonds Initiative (CBI) (see Section 3 on the financing dimension).
The application of IPSF transition finance Principles 5 (comprehensive transition plan), 6 (internal governance),
7 (external engagement), and 8 (external reporting) to the transition planning process is central to thedisclosure dimension. These Principles serve as the foundational framework for creating and communicatingon high-quality and credible entity-level transition plans.
The IPSF’s analysis on the implications of the IPSF Principles for the successful implementation of transition
planning, including wider ecosystem development is set out in Annex 2. Table 1 below consolidates andsummarises this information into a set of proposed ‘success factors’ for high-quality transition plans. By aligningwith these success factors, reporting entities can enhance the quality, credibility, and comparability of theirtransition plans, contributing to the overall effectiveness of the transition finance ecosystem.
Table 1: Factors for successful transition plans
Success factors for process steps of ‘developing
Success factors for ‘setting climate ambition’and disclosing a robust transition plan’ andprocess step
‘reporting on performance against the plan’
Internal targets should be set with reference Transition plans need to include both concrete
to/benchmarked from external targets
transition targets and a credible strategy to meetthose targets
Targets should extend to 2050 (or be aligned Transition plans should describe board andwith national commitments) and include interim senior management level oversighttargets

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IPSF – Implementing transition finance principles – Interim report

Target setting should include all material scope Transition plans should describe how internal
1, 2 and 3 emissions and activities
polices support transition
Transition plans should enable users to identify Transition plans must be a living strategy, subject
which stages of transition the reporter is at, to regular re-evaluation and updating
including the impact of its current technology
profileTransition targets should focus on reducing Transition plans should describe external
emissions rather than relying on offsets
engagement with key stakeholders, including
supply chain partners
Transition plan objectives should, at a minimum, Financial sector reporters should describe client
avoid harming the achievement of other engagement in their Transition plansobjectives (including social and environmental)
Organisations should publicly disclose theirtransition plans in a way that makes themcomparable
External reporting on those plans and theirimplementation should be done on annual basis(minimally)

2.2.

Climate-related and sustainability reporting standards and transition planning

Transition planning refers to the strategic process through which organisations assess their current state, set
climate-related targets, and outline actions to align with a net-zero future. Transition plans, on the other hand,
are formal documents that encapsulate the outcomes of this planning process, detailing specific steps,
timelines, and strategies for achieving these targets. Material information from an entity’s transition planshould be included in its general-purpose financial reports, as part of its wider climate-related reporting, withmore detailed information perhaps published periodically in a standalone report.
Existing and developing climate-related and sustainability reporting standards play a crucial role in transition
planning. While these standards may not explicitly require transition plans, they often contain implicit
requirements and guidance related to the disclosure of such plans/strategies for transition. The IPSF Transition
Finance Report (2022) provides a summary 9 of current practices for corporate and financial institution
transition plans. It also includes relevant features of disclosure frameworks, target setting methodologies,
assessment methodologies and investor groupings10.
Specific requirements of climate-related and sustainability reporting standards adopted or being developed byjurisdictions will increasingly support the further development of entity-level transition plans. Table 2 outlines
some specific transition plan requirements of internationally recognised climate-related reporting standards.
It is worth noting that the content and manner of disclosure should be determined through the lens of investor
and impact materiality, meaning the information that is decision-useful and can influence the capital allocation

910

See 2022 IPSF Transition Finance Report, page 59.
See 2022 IPSF Transition Finance Report, Annex, Table 2.

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IPSF – Implementing transition finance principles – Interim report

decisions of users of general-purpose financial reports. This principle applies to both climate-related andsustainability reporting standards, as well as emerging frameworks for transition plan disclosure. Additionally,
the ESRS mandates that if a company determines that climate change is not a material topic and, therefore,chooses not to report in accordance with the standard, it must provide a comprehensive explanation outlining
the conclusions drawn from its materiality assessment.
Table 2: Transition plan requirements of selected climate-related / sustainability reporting standards
Specific requirement to Specification about the Requirement to disclose
have a transition plan?
content (or level of any transition plan?
ambition)ofatransition plan?
International
Sustainability
Standards Board(ISSB) (inauguralstandards, IFRS S1and IFRS S2,June 2023)

No explicit requirement tohave a transition plan but
implicit in requirements,
including “how the entity
has responded to, andplans to respond to,climate-related risks andopportunities in its
strategy and decisionmaking, including how theentity plans to achieve any
climate-related targets it
has set and any targets it isrequired to meet by law or
regulation” (14(a))

No specification about
the level of ambition orcontent of a transition
plan, but does require
disclosures of targets
and metrics (including
cross-industry and(SASB-based) industrybased GHG metrics)

Requirement to disclose“the climate-related risks
and opportunities that
could reasonably be
expected to affect theentity’s prospects” (9(a))
and “the effects of thoseclimate-related risks andopportunities on theentity’s strategy anddecision-making, including
information about its
climate-related transitionplan” (9(c))

European
Sustainability
Reporting Standards(ESRS)11

Disclosure requirements inrelation to transition plans
are proportionate andcontingent on theundertaking having these,
which may depend on thesize, capacity, resources,
and skills of theundertaking.

(a) Transition plan toreach climate
neutrality by 2050
requires disclosure
about theundertaking’s
mitigation efforts
with the limiting of
global warming to
1.5°C in line with
the Paris
Agreement(a) No requirement todisclose if theundertaking does nothave a climatetransition plan. No
requirement to discloseeither if climate is not
relevant to thecompanies’ specificcircumstances.

11

The ESRS distinguish between the disclosure of sustainability targets and transition plans. This flexibility allows the market and real
economy to tailor their transition finance requirements according to their needs. While comprehensive transition plans are essential
tools for major corporations in high-impact sectors, they may not always be suitable for SMEs or companies with lower impacts. In
such cases, science-based targets could prove to be a more fitting approach.

17

IPSF – Implementing transition finance principles – Interim report(b) If disclosing atransition plan on
biodiversity, theundertaking may
explain how it will
adjust its strategy
and businessmodel to improveand achievealignment with
relevant policy
goals and targets.
Task force on
Climate-related
Financial Disclosures(TCFD)

No explicit requirement tohave a transition plan but
implicit in requirementswith additional guidance inGuidance on Metrics,
Targets, and Transition
Plans (October 2021).

No specification but
guidance includes
characteristics ofeffective transition
plans (Guidance on
Metrics, Targets, andTransition Plans,
October 2021, page 40)

In case the undertaking
does not have atransition plan in place,it shall indicate
whether and, if so,when it will adopt atransition plan.
(b) Disclosure of transition
plan on biodiversity is
voluntary.

Guidance for Strategy
Recommended Disclosure(b) states that
“Organisations that havemade GHG emissions
reduction commitments,
operate in jurisdictions thathave made suchcommitments, or haveagreed to meet investor
expectations regarding
GHG emissions reductions
should describe their plans
for transitioning to a lowcarbon economy”

From this analysis, several conclusions can be drawn:- Requirement: while climate-related reporting standards may not explicitly mandate the production of atransition plan, they can be considered implicit requirements. Reporting entities can be expected toconsider these requirements and take necessary actions to fulfil them.
- Content: climate-related reporting standards provide broad guidance on the content of transition plans,
but do not provide detailed specifications. This lack of specificity may result in variability in the content oftransition plans, making it challenging for users to interpret and compare plans across entities. However,some standards do specify appropriate metrics that can be used for transition planning, particularly when
they are industry-specific, thereby supporting comparisons between entities.
- Disclosure: standards may require the disclosure of transition plans where they exist.
The development of the NZDPU could help to provide open access to comparable high-quality data. The
Recommendations for the Development of the NZDPU (November 2022) “aim to contain a central repository
for emissions reduction targets that will allow for users to filter and compare organisations’ targets based on
sector, scope, and ambition”. More details on the NZDPU can be found in sub-section 4.2.
2.3.

Alignment of transition plan guidance and frameworks with IPSF success factors

Approaches to the disclosure of transition planning are crucial for the success of transition plans, in line with
Principles 6 (internal governance) and 8 (external reporting) of the 2022 IPSF Transition Finance Report. The

18

IPSF – Implementing transition finance principles – Interim reportprevious section identified how reporting standards support and provide the basis for transition planning. Thissection focuses on detailed transition plan guidance and assesses how well it aligns with the success factors
identified in Table 1.
There are a number of initiatives underway to try to establish guidance and frameworks for best practice indisclosure of transition plans. These frameworks should, where possible, look to provide guidance that builds
from existing disclosure recommendations for sustainability-related disclosures in general purpose financial
reports. In doing so, they will ensure alignment and integration with those standards and enable more effective
reporting on transition plan elements. For instance, the UK Transition Plan Taskforce (TPT) has developed adisclosure framework for good practice transition plans that builds on and supplements the corporate reporting
standards published by the International Sustainability Standards Board (ISSB) as well as drawing from GFANZ’s
framework and guidance for credible, comprehensible and comparable transition planning. By taking aninternational perspective, the TPT aims to support the development and convergence of approaches totransition planning and transition plan disclosures internationally and to that end, the TPT is engaging with anumber of the different international organisations and standard setters.
In the EU ESRS, when disclosing its transition plan, an undertaking is expected to provide a high-level
explanation of how it will adjust its strategy and business model to ensure compatibility with the transition toa sustainable economy and with the limiting of global warming to 1.5°C, in line with the Paris Agreement andthe objective of achieving carbon neutrality by 2050 with no or limited overshoot, as established in theEuropean Climate Law. The ESRS ensure a very high degree of interoperability between EU and global standards
and to prevent unnecessary double reporting by companies by taking into account discussions with the ISSB
and the Global Reporting Initiative (GRI). With the adoption of the ESRS, the EU goes further than any othermajor jurisdiction to date in terms of integrating the ISSB standards into its own legal framework. In doing so,
the EU makes a major contribution towards the development of a coherent global framework and towards theglobal comparability of reported sustainability information12.
It is encouraging to see ongoing work to develop guidance and best-practice frameworks around transition plan
disclosures that elaborate on disclosure recommendations within broader reporting standards. However, as
noted in the section above, given the increase in different standards, benchmarks and frameworks aroundtransition plan disclosures there is a risk of confusion what constitutes as best practice, in particular for entities
that operate over multiple jurisdictions. Therefore, it may be important to promote international consistency
and interoperability in this space. This could be an area that for instance the ISSB, over time, looks to further
elaborate their disclosure expectations on.
Annex 3 builds upon the mapping in the IPSF Transition Finance Report (November 2022) to determine whether
the IPSF success factors (see Table 1) are addressed in the detailed transition plan guidance. The findings are
summarised in Table 3 below.

12

The approach of integrating ISSB disclosure requirements into ESRS is also fully in line with the ambition of the recent IOSCO decision
to endorse ISSB sustainability-related disclosure standards.

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IPSF – Implementing transition finance principles – Interim report

Table 3: How detailed transition plan guidance addresses IPSF transition finance Principles success factors13
Name

Type

Relevance forTransition Plans

Coverage of TP
content ‘successfactors’: ambition

Coverage of TP
content ‘successfactors’: plan andperformance

UK Transition
Plan Taskforce

Transition
plan
disclosure
framework

Disclosure
framework
specifying content
of credible transition
plans

Requires disclosure of
the degree ofalignment with
relevant externalbenchmarks (e.g.,
Paris).

Requirescomprehensive
disclosures against planand performancefactors.

EU ESRS

Climate andbiodiversity
transition
plans
disclosure
framework

Disclosure
framework
specifying content
of climate andbiodiversity
transition plans

When disclosing atransition plan,requirement to publish
strategy and businessmodel to achievealignment with thetransition to asustainable economy
and with the limiting of
global warming to
1.5°C in line with theParis Agreement

It covers undertaking’s
progress in
implementing thetransition plan.

OECD
Guidance on
Transition
Finance

Guidance –includingdescription ofwhat credible
transition
plans should
contain

Include 10 elementsof credible
corporate climatetransition plans

Requires all theelements of the“ambition” successfactors (recognisingthat target dates mayvary by sector andjurisdiction)

Requires all theelements for “plan”
and “performance”
success factors14

EIB

Counterparty
Parisalignment
framework

Requests highemitting and highvulnerability
counterparties todevelopdecarbonisation andresilience plans and
TCFD reports

Requires mostelements, but does not
specify a level ofambition needed

Requires public
disclosure

13

14

In case undertaking
does not have a
climate mitigationtransition plan in place,it shall indicate
whether and, if so,when it will adopt atransition plan

The scope/application of the EIB and EBRD examples is intended for counterparties rather than having a broader applicability (unlike
the other examples in the table).
The only element that is not included in the Guidance is the one concerning financial sector reporters describing client engagement,
as the Guidance is focused on non-financial corporates.

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IPSF – Implementing transition finance principles – Interim report

European Bank
for
Reconstruction
andDevelopment(EBRD)Counterparty
Parisalignment
frameworkfor partner
financial
institutions inemerging anddeveloping
countries

Requests transition
plans from somefinancial institutions

Requires different
Requires public
elements of the plan,
disclosure of coredepending on theelements of the planbaseline level ofclimate practices of thecounterparty, inrecognition of the needfor step-by-step
approaches in lessdeveloped countries.

The EU ESRS establishes disclosure requirements related to action plans, targets, policies, scenario analysis, andtransition plans, which are contingent on the undertaking having these provisions. The ESRS also outlines
Minimum Disclosure Requirements, which undertakings must incorporate when disclosing information
concerning their metrics and targets. These requirements are proportionate, considering the size, capacity,
resources, and skills of the undertaking. Furthermore, the framework mandates the inclusion of transition plansthat underscore alignment with international targets and policy objectives.
The proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) would introduce the mandatory
requirement for in-scope companies to have a transition plan to ensure that the business model and strategyof the company are compatible with the transition to a sustainable economy and with the limiting of global
warming to 1.5 °C in line with the Paris Agreement.
2.4.

Opportunities and challenges of transition plans for SMEs and EMDEs

Emerging approaches in transition finance and planning increasingly rely on data to demonstrate alignment
with 1.5°C pathways. However, while there is a need to accelerate the transition of small and medium-sizedenterprises (SMEs), that are key to supply chains, of developing countries and certain entities in emerging anddeveloping economies (EMDEs). In many regions, the establishment of frameworks supporting the provision ofrobust data, sectoral pathways, and relevant expertise may not scale quickly enough to support transition
finance effectively, potentially diverting capital away from these SMEs/markets. Interoperability approaches
should account for the status of developing markets and their different transition trajectories, given the needto reach global goals and their role in global supply chain considerations15.
To address these concerns, credible transition planning and disclosures can play a crucial role in facilitatingclear communication of transition strategies.
There is a need for further efforts to embed transition planning in these areas while learning from evolving bestpractices. This includes understanding the primary challenges and opportunities in corporate transition
planning and developing practical solutions to address identified issues, providing guidance on essential
elements of sustainability policy frameworks or enabling environment. Organisations like the IPSF, in
collaboration with international agencies and development banks, could facilitate the exchange of bestpractices and information to support these endeavours, building from existing work that is underway.
2.5.

Conclusions and recommendations for further work

This section reviews the IPSF Transition Finance Principles and draws out ‘success factors’ needed to embedtransition plans. These success factors are matched to the process steps for transition finance and implications
considered for those responsible for the preparation of transition plans. The following conclusions are15

See 091323-synthesis.pdf (imf.org).

21

IPSF – Implementing transition finance principles – Interim reporthighlighted:- Development of further international guidance to support comparability and consistency of transition
plan disclosures: Climate and sustainability reporting standards are expected to promote the development
and disclosure of transition plans. As a result, various standards and guidance documents incorporate
provisions for transition plans, but the level of detail provided varies and there is a risk of inconsistencies
developing. Therefore, the IPSF recommends that ISSB consider developing further guidance for thedisclosure of transition plans as part of broader sustainability reporting, building from existing work. Thisshould help to promote comparability and consistency of disclosures.
- Empowering emerging and developing countries: Further work is needed on transition finance and theapplication and disclosure of transition planning for SMEs and EMDEs. This work should be undertaken incollaboration with organisations that are already progressing on this issue, to avoid duplication. This work
could consider whether there might be some prioritisation of different transition plan elements that arematerial to enable the provision of transition finance to SMEs or companies in EMDEs, as well as whether
there may be simplified methods to support the assessment of credibility of transition plans and finance,
for example, where there might be data gaps.

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IPSF – Implementing transition finance principles – Interim report

3. Financing: Effective finance and engagement by the financial sector and monitoring metrics
Once companies have identified their transition finance needs, they will need to consider the most appropriate
form of financing to deliver actions, projects and initiatives that will enable the whole-of-economy transition.
This section explores the financing dimension of climate transition and engagement strategies in the financial
sector to embed credibility and integrity within the transition finance market. Furthermore, the section
explores some of the challenges with the reporting of financed emissions and ongoing work to develop
solutions to address those issues.
3.1.

Embedding credibility within transition finance

Building on Principle 5 (comprehensive transition plan) of the 2022 IPSF Transition Finance Report, it is essential
for companies to demonstrate their commitment and that their transition plans are not just abstract aspirations
but are backed by concrete, well-structured actions. When organisations consider their financing options in thiscontext, it is key to ensure that they align with the disclosed financial needs outlined in the transition plan. Thisalignment assures investors and lenders that their resources are being directed toward tangible and actionable
sustainability initiatives. It also mitigates risks and aligns with investors’ and lenders’ goals, making the financing
more appealing to these stakeholders.
In this step of the process, companies should hence carefully consider the most suitable options for transition
financing to meet their financial needs. This may involve issuing credible transition instruments or exploringalternative financing solutions. Regardless of the financing method chosen, it should directly address thefinancial needs identified and disclosed in the financial planning section of the transition plans.
This connection is vital because it enables investors to evaluate whether the company’s strategic ambition andpathway are credible and ambitious enough. For instance, the ESRS and TPT include disclosure of financial
planning, resources, impacts on financial position, financial performance, and cash flows in the short, medium,and long term. The TPT framework (sub-section 2.3) advises entities to disclose details about how it isresourcing or plans to resource activities necessary to achieve the plan’s strategic ambition. This disclosure
should include both qualitative and quantitative estimates of resourcing requirements. The TPT framework also
recognises that entities might be able to provide more precise information on short-term financing needs.
Providing this information in transition plan disclosures is instrumental in establishing credibility within thetransition finance market right from the beginning. It allows investors to assess the intended purpose andcredibility of transition finance instruments. This transparency can facilitate market discipline, leading to theenhanced design of transition finance instruments and covenants.
3.2.

Transition finance strategies: GFANZ guidance for financial institutions

In November 2022, GFANZ published the “Financial Institutions Net-zero Transition Plans” report, which
outlines four key financing strategies that define transition finance:- Climate solutions: Financing or enabling entities and activities involved in developing and scaling climate
solutions. This strategy promotes the adoption of low-emission technologies and services, including
nature-based solutions, to replace high-emission alternatives, remove GHGs from the atmosphere, or
accelerate the net-zero transition in a just manner. For example, this could include financing a company
that produces green hydrogen or supporting a regenerative agriculture project.
- Aligned: Financing or enabling entities that are already aligned with a 1.5°C pathway. This strategy
supports climate leaders and signals the financial sector’s expectation of transition alignment from thereal-economy companies they engage with. An example of an aligned entity could be a company with a
SBTi-validated target, demonstrating progress towards the target through performance reports. It could
also include companies whose climate transition plans and performance are assessed by the World
Benchmarking Alliance.

23

IPSF – Implementing transition finance principles – Interim report- Aligning: Financing or enabling entities committed to transitioning in line with 1.5°C-aligned pathways.
This strategy supports both high-emitting and low-emitting firms that have robust net-zero transition plans,
set targets aligned with sectoral pathways, and implement changes in their business operations to achieve
their net-zero targets. An example could be a manufacturer implementing energy efficiency and clean
energy projects to reduce Scope 1 and 2 emissions or a retailer engaging with its supply chain to invest in
projects that reduce Scope 3 emissions.
- Managed phase-out: This strategy involves the identification and planned early retirement of assets toachieve significant emissions reduction while managing issues of service continuity and community
interests. GFANZ considers this activity crucial for reducing global emissions and facilitating a smooth andequitable economic transition. An example could be a fossil fuel power plant identified for early
decommissioning, consistent with the broader net-zero trajectory. In June 2022, GFANZ published the“Managed Phaseout of High-emitting Assets” report, which outlines an initial approach to identify assets
suitable for managed phase-out, along with potential financial mechanisms and guidance for developing
credible asset-level phase-out plans. In June 2023, the GFANZ Asia-Pacific (APAC) Network initiated a public
consultation on voluntary guidance for financing the early retirement of coal-fired power plants in the
APAC region. Additionally, the ASEAN Taxonomy for Sustainable Finance Version 2 (March 2023) andSingapore-Asia taxonomy public consultation (28 June 2023) also consider the criteria for early phase-out
of coal fired power plants in Asia.
These strategies provide financial institutions with a framework for assessing whether specific assets, activities,
or clients align with the transition and how they can support them. In particular, the framing of transition
finance strategies in this way is instrumental in clarifying the objectives of transition finance and outlining theways in which financial institutions can actively contribute to guiding entities toward net-zero emissions.
This section is strongly tied with Principle 5 of the 2022 IPSF Transition Finance Report. It underscores thesignificance of financial institutions considering the four key financing strategies for transition finance,
encompassing climate solutions, aligned entities, aligning entities, and managed phase-out. These strategies
are instrumental in defining the comprehensive nature of transition finance plans, addressing a broad spectrumof entities, activities, and assets aligning with net-zero transitions. The framework created by these strategies
offers clarity on the objectives of transition finance and delineates how financial institutions can play an activerole in guiding entities toward net-zero emissions. This approach to transition finance closely aligns with theprinciples of transition planning, which emphasise the necessity for transition plans to be both comprehensive
and credible, ultimately highlighting the significance of actions over promises (per Principle 5). Moreover, thissection resonates with Principle 7, particularly in outlining how financial institutions can engage with various
entities and assets to support their transition, thereby fostering active external engagement to cultivate anenabling environment.
In the following sub-sections, we will delve deeper into the array of choices available to financial institutions in
the realm of transition finance. These choices encompass a spectrum of strategies and approaches, providing
flexibility for institutions to tailor their transition finance efforts according to their specific circumstances andpriorities.
3.3.

Types of financing available to meet companies’ transition finance needs

A range of transition-related financing instruments is available to facilitate the journey to a sustainableeconomy. This includes labelled options such as:- green loans or bonds, which typically refers to the financing of activities that can already be deemed as“green” (often with reference to a taxonomy);- sustainability-linked loans or bonds, which are loans or bonds that aim to facilitate and support
environmentally and socially sustainability economic activity by incentivising the borrower’s achievementof ambitious, predetermined performance targets;

24

IPSF – Implementing transition finance principles – Interim report- transition bonds, are labelled bonds that a used to fund a firm’s transition to achieve their climate
objectives; and- equity-related instruments/investment products.
However, a significant portion of the whole-of-economy transition might be delivered through non-transition
labelled products. For example, small or medium-sized enterprises may use existing corporate lending
relationships to address financing needs identified within their transition plan.
As a result, it may be important to consider how to embed the foundations provided by good transition planningand disclosure within the broader capital markets and lending ecosystem. This might include the extent thatthe disclosure of forward-looking information is incorporated by underwriters in pricing the issuance of new
debt or by credit rating agencies in the credit assessment of securities. This is an area where regulation may
need to adapt over time to further enhance the credibility of the transition finance market.
In this dynamic landscape of transition financing, it is crucial to consider the Principles of the 2022 IPSF
Transition Finance Report. Principle 5 underscores the significance of comprehensive transition plans. Financial
instruments, such as green loans and sustainability-linked bonds, should not only align with taxonomies but
also contribute to the broader objective of facilitating the transition to a sustainable economy. This necessitatesrobust transition plans that encompass a variety of assets, activities, and entities.
Blended finance: Fostering collaboration
Blended finance, combining public and donor capital with private investments, emerges as another promisingsolution. This approach can de-risk climate projects and mobilise private funds, facilitating a morecomprehensive climate financial ecosystem. The NGFS plays a pivotal role in promoting blended finance. With
its global membership of central banks and regulators, the NGFS can establish best practices, offer guidance,
and address regulatory barriers to enhance blended finance adoption. The NGFS is developing a comprehensive
handbook, which will draw from past case studies, outline essential elements for a mature climate blended
finance ecosystem, and present best practices to scale up blended finance for climate adaptation and mitigation,
fostering a sustainable transition in emerging market and developing economies and beyond.
The role of taxonomies
Taxonomies have various uses to offer. They can find applications in entity or activity-level transition plans,investment plans, milestones, and intermediate targets as part of a credible transition strategy. For instance,in the EU, the recommendation on facilitating finance for the transition to a sustainable economy advocates arange of transition-related financing instruments to facilitate the journey to a sustainable economy. It
encourages undertakings to utilise options such as green loans, sustainability-linked loans, and sustainability
bonds to fund their transition efforts. These instruments align with taxonomy criteria and sustainability targets,ensuring both financial viability (of transition efforts) and environmental integrity. Additionally, therecommendation emphasises the role of financial intermediaries and investors in operationalising transition
finance strategies. They are urged to consider corporate disclosures, EU climate benchmarks, and theTaxonomy framework to identify suitable projects. The recommendation also promotes engagement anddialogue between these stakeholders, promoting a collaborative approach towards sustainable financialtransformation. Acknowledging the unique challenges of the transition, aside from general lending and financial
solutions, the recommendation invites financial intermediaries to consider offering transition-specific financing
solutions, and provides a few examples of relevant loans and financial products, such as those based oninvestment that help increase the share of taxonomy-aligned activities carried out by an undertaking in ameaningful way.
Driving capital flow and monitoring progress
While there is no shortage of guiding principles in place to shape financial institutions’ actions in transition
finance, the true measure of success lies in their ability to substantially redirect capital flows. The goal is to25

IPSF – Implementing transition finance principles – Interim reportchannel financing not only towards already green endeavours but also to those in the process of transitioning
to greener practices. This includes scaling up financial support for these evolving initiatives. Accountability iskey, not just at the individual institution level but also at a macro-level. In this respect, it becomes imperative
to establish a macro-level framework for monitoring progress in transition finance. Such a framework will
enable us to track and evaluate the impact of these guiding principles on the broader financial landscape. There
have been discussions about the global international financial architecture, with some stakeholders calling forbroader reform.16 And such a monitoring framework could feature as part of that.
3.4.

High-level overview of approaches to mobilise finance and enable it to scale with integrity

In terms of mobilising finance for transition, diverse guidance resources have emerged to steer financial
institutions, seeking to align their actions with the principles of comprehensive and credible transition, as
highlighted in Principle 5 of the IPSF’s 2022 Transition Finance Report. This guidance spans various aspects,
from the design of financial instruments, including fund labelling, to the structuring of financial schemes. Thissection provides an overview of different market-led and regulatory initiatives that are intended to strengthen
the robustness of transition finance products and enable the market to scale with integrity. Such initiatives,with a strong emphasis on credibility and transparency, directly resonate with IPSF Principle 5, reinforcing theimportance of transition plans that are both comprehensive in scope and firmly grounded in reality. Moreover,these initiatives echo the spirit of Principle 7, emphasising the need for financial institutions to actively engage
with a spectrum of entities and assets, creating an enabling environment for a sustainable transition.
Guidance for issuers
ICMA’s Handbook: In December 2020, ICMA released the “Climate Transition Financing Handbook”, providing
high-level, principles-based guidance for climate transition bonds. The handbook outlines recommended formsof financing and disclosure requirements to ensure the credibility of the transition. It specifies four key
elements for disclosure: 1) Issuers’ climate transition strategy and corporate governance, 2) Consideration ofenvironmental elements in the business model, 3) Alignment of the climate transition strategy with scientifically
based goals and pathways, and 4) Transparency of information regarding implementation. In June 2023, ICMA
issued its first update of the Handbook. It includes dedicated recommendations for climate-themed green,sustainability and sustainability-linked bonds and acknowledges the development of “climate transition” bonds
in certain jurisdictions. It includes new annexes with illustrative disclosures, infographics and a list of wider
market and official sector guidance for climate-themed bonds.
Climate Bonds Initiative (CBI): In April 2023, the CBI launched a new Certification Scheme for entities, assets
and sustainability-linked debt. The purpose of the certification is to signal to investors that the relevant
corporate is on a Paris-aligned pathway of 1.5°C. It focuses on key aspects needed to demonstrate a credible
transition for debt instruments – for both labelled debt but also regarding wider general-purpose debt andequity investment.
Loan Market Association (LMA): In August 2023, the LMA published guidance on sustainability-linked loan
terms.
The following examples of regulatory initiatives are intended to improve transparency and the credibility oftransition-related investments.
Portfolio Scoring
Switzerland: The Swiss Climate Scores were launched in June 2022 to enhance portfolio-level transparency andcomparability with respect to the alignment of financial investments with the goals of the Paris Agreement.
These scores encompass several indicators that assess the current situation (e.g., emissions or exposure to highemitting sectors) as well as forward-looking aspects (e.g. the share of the portfolio subject to a net-zero target,

16

For example, this report by Aviva Investors: How to reform the financial system for a net-zero world - Aviva Investors.

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IPSF – Implementing transition finance principles – Interim report

engagement strategy, and potential global warming level). The scores allow for different investment strategies(e.g. aligned portfolio or aligning portfolio with robust engagement strategy). The scores will undergo regularreviews to reflect evolving practices. Notwithstanding their voluntary nature, several financial institutions haveor are in the process of rolling out the scores to help investors better factor in climate aspects in their decisions.
Fund labelling
United Kingdom: The Financial Conduct Authority (FCA) published a consultation paper (CP22/20) on
Sustainability Disclosure Requirements and Investment Labels, which sought feedback on new disclosure
requirements for asset managers, as well as the introduction of a sustainable investment labelling regime. The
FCA proposed three investment labels as part of the consultation:- Sustainable Focus: Products with an objective to maintain a high standard of sustainability in the asset
profile by investing to meet a credible environmental and/or social sustainability standard or aligning withspecified sustainability themes. At least 70% of assets in a sustainable focus product must meet the
specified environmental and/or social sustainability criteria.
- Sustainable Improvers: Products with an objective to deliver measurable improvements in thesustainability profile of assets over time. These products invest in assets that are not currently
environmentally or socially sustainable but show potential for improvement, including through the
influence of stewardship activities.
- Sustainable Impact: Products with an explicit objective to achieve a positive and measurable real-world
impact. These products invest in assets that provide solutions to environmental or social problems,particularly in underserved markets or to address observed market failures.
The purpose of these labels is to help consumers navigate the market for sustainable investment products andto build transparency and trust. Of these labels, Sustainable Improvers is typically most aligned with thetransition finance goals of supporting higher emitting sectors to improve their carbon emissions over time. But
all the labelled funds will likely have a role in the whole-of-economy transition to a lower carbon economy.
3.5.

Approaches to engage for real economy impacts

While the initiation of transition finance may begin with a small step of providing specific financial instruments,
it should evolve into a broader strategic orientation for entire portfolios. Transition finance must go beyond
the realm of instrument design, becoming a fundamental strategy embedded throughout financial
institutions.17 To truly integrate the concept of transition finance into the core of each institution’s operations,
it is of paramount importance to institutionalise a strategy. This strategy should actively engage with highemission activities or entities within their portfolios, aiming to significantly reduce emissions originating fromthese sources. Furthermore, while financial market participants can make progress towards net-zero aligned
portfolios by divesting from carbon-intensive industries, this strategy alone does not provide capital tocompanies that are actively transitioning to net zero.
The 2022 IPSF Transition Finance Report emphasises the importance of engagement strategies for incentivising
companies to reduce their emissions. It highlights that transition finance and transition risks are interconnected,
meaning investments in transitioning to lower-emitting and more sustainable economic activities andcompanies contribute to the financial sector’s resilience by reducing transition risks on their balance sheets.
IPSF transition finance Principle 7 emphasises the significance of client engagement by financial market
participants. This section sets out some of the published guidance intended to support investors in their client
engagements, both in relation to any commitments made and on delivering real-world decarbonisation.

17

This, for example, was a key message within the FCA’s discussion paper DP23/1: Finance for positive sustainable change: governance,
incentives and competence in regulated firms (fca.org.uk) The discussion paper explores how sustainability objectives can beembedded across a firm’s governance, incentives, skills and capabilities.

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IPSF – Implementing transition finance principles – Interim report

The G20 Sustainable Finance Report, published in October 2022, includes recommendations to enhance thecredibility of private sector financial institution commitments. Recommendation 2 explicitly acknowledges the
crucial role of engagement by financial institutions:“Recommendation 2 - Engage with clients to align practices with appropriate sectoral pathways andengage with client and portfolio companies to encourage and, if feasible, enable them to make voluntary
net-zero commitments and implement them.”
In the “Financial Institutions Net-zero Transition Plans” released in November 2022, GFANZ presents a set ofrecommendations covering foundations, governance, implementation strategy, engagement strategy, metrics,
and targets. Engagement with clients and portfolio companies is a key element of the proposed engagement
strategy.
Global regulatory bodies echo this sentiment. In July 2022, the FSA in Japan published the “Supervisory
Guidance on Climate-related Risk Management and Client Engagement”, which places proactive support forclients in dealing with climate change at the core of financial institutions’ actions. The guidance provides
supervisory dialogues between the FSA and financial institutions, offering approaches and case studies on
engaging with clients, particularly focusing on regional banks for reference.
In Singapore, the Monetary Authority of Singapore (MAS) published in May 2022 “Information Papers on
Environmental Risk Management” for banks, insurers and asset managers, which highlighted that financial
institutions can play an active role in facilitating their clients’ transition. This includes encouraging clienttransition towards sustainable business practices and enhancing their environmental risk disclosures over time,
which in turn mitigates financial institutions’ own environmental risks. In October 2023, MAS issued a set of
consultation papers proposing guidelines on transition planning by banks, insurers and asset managers. The
proposed guidelines set out MAS’ supervisory expectations for financial institutions to have a sound transition
planning process to enable effective climate change mitigation and adaptation measures by their customers
and investee companies in the global transition to a net-zero economy and the expected physical effects ofclimate change.18
In December 2021, the Hong Kong Monetary Authority (HKMA) shared with the industry a number of soundpractices19, adopted by banks to support the transition to carbon neutrality. It is noted that some banks catalyse
decarbonisation efforts through working closely with their clients and assisting them to transition by, forexample, offering transition financing, facilitating clients to obtain green certification and assessment, as wellas promoting clients’ awareness of climate change-related issues and opportunities. In August 2023, the HKMA
also set out some high-level principles on transition planning to assist banks in maintaining safety andsoundness in the transition.20 Specifically, the principles highlight the importance of engaging with clients.
The EU’s direction, as highlighted in the Banking Package of 2021 21 and the European Central Bank’s (ECB)
report on good practices for climate-related and environmental risk management 22 , underscores thesignificance of transition planning in empowering financial institutions to champion the decarbonisation of thereal economy while adeptly navigating transition risks. These strategic pathways collectively foster a resilientand sustainable financial environment. Central to this drive, the EU Banking Package introduces fresh regulatory
benchmarks tailored for effectively managing environmental, social, and governance (ESG) risks within banks.
These standards harmonise with established ECB supervisory expectations for ECB-supervised banks, with anoteworthy expansion of focus to encompass ESG dimensions beyond climate and environmental concerns.
The obligatory integration of transition plans emerges as a pivotal component, obliging banks to formulate

18

19
20
21
22

See https://www.mas.gov.sg/news/media-releases/2023/mas-proposes-guidelines-for-financial-institutions-on-transitionplanning.
See https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2021/20211208e1a1.pdf.
See https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2023/20230829e1.pdf.
See https://finance.ec.europa.eu/publications/banking-package_en.
European Central Bank, ‘Good practices for climate-related and environmental risk management’, November 2022.

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IPSF – Implementing transition finance principles – Interim reportthese plans while furnishing supervisory bodies with the authority to ensure and assess their implementation.
The extent of these changes, especially for banks outside direct ECB supervision, may hinge on the priorities
set by respective national supervisors. The foundation of sustainability rests at the core of these novel
regulations. Banks are now mandated to methodically recognise, unveil, and effectively manage sustainability
risks, encapsulating the entirety of ESG factors, as indispensable facets of their risk management strategies.
The Institutional Investors Group on Climate Change (IIGCC) Net Zero Bondholder Stewardship Guidance
provides corporate bondholders with a foundational framework to enhance their climate stewardship practices,building on IIGCC’s Net Zero Stewardship Toolkit for listed equities and practical steps aligned with the Net Zero
Investment Framework (NZIF). The Guidance identifies and addresses key challenges and opportunities acrossdifferent bond types, highlights best practices in bondholder stewardship and investors’ ability to achieve longterm outcomes.
The centre piece of the Guidance outlines bondholder specific considerations for engagement and theimportance of alignment between the issuance, the issuer’s climate transition strategy and net-zero alignment
over time. The Guidance emphasises the importance of a long-term approach across the financing lifecycle andengaging across the ecosystem.
Considering the emerging and developing country context, the EBRD’s “Methodology to determine the Paris
Agreement alignment of EBRD investments” laid out an engagement approach with the EBRD’s financial
institutions clients. The approach, focused on supporting transition planning, differs depending on the entity’s
starting point when it comes to their business practices in relation to climate change. Specifically, the EBRD
developed a matrix, demonstrating the progression of climate practices of financial institutions, including theincremental steps along the TCFD dimensions of governance, strategy (covering policies, financial products, andengagement with clients and peers), risk management, metrics and targets, and disclosure.
The essence of transition finance lies in its commitment to addressing emissions at their source. Instead of
avoiding sectors with high emissions, finance is expected to become a proactive solution for emissions
reduction in the real economy. This principle underpins the core of transition finance, but it also introduces
certain risk considerations. Financial institutions that actively engage with clients on their strategies to manage
the transition can reduce the transition risks associated with their exposure to high-emission activities orentities. Moreover, their actions can help reduce physical risks that might either impact them directly or
indirectly through the broader economy. This further underscores why it is important for a company to take astrategic and rounded approach to transition planning – recognising that their contributions to the economywide transition might impact their own future climate-related risks.
This risk-reduction aspect of transition finance has prompted global regulatory bodies to emphasise theimportance of engaging with clients involved in emissions-intensive activities. It also re-emphasises why
disclosure of a company’s engagement plans as part of a transition plan disclosure can provide investors with
relevant information to understand a financial institution’s strategy to reduce risk. The interaction between
transition finance and climate-related risks presents a compelling case for further exploration withininternational fora. Designing an effective regulatory and supervisory system to facilitate this interaction is an
evolving challenge that requires continued attention and collaboration on a global scale.
3.6.

Monitoring metrics

It is important to note that a substantial proportion of financial institutions’ GHG emissions lie in Scope 3
emissions as part of their financed emissions. In light of this, there is an expectation for financial institutions todisclose not only their own GHG emissions, but also the emissions associated with their financed activities.
Financing the transition of companies in hard-to-abate sectors is crucial for facilitating the society-wide shift
towards net-zero emissions. However, financial institutions that provide such financial support may temporarily
experience an increase in financed emissions and risk exposures in the short term. This is due to theirheightened exposure to companies that are in the process of transitioning.

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IPSF – Implementing transition finance principles – Interim report

These potential short-term side effects can create disincentives for financial institutions to engage in transition
finance and may lead to divestment in unnecessary cases. It’s crucial to comprehend that financed emissions,while initially contributing to overall climate-positive outcomes, might not reflect immediate results due to thelag inherent in transition processes. However, providing transition finance to the real economy enables thefinancial sector to fulfil its financing function during the transition, reduces transition risk over time, andsupports the sector in making an orderly transition. Transition finance and related investments can effectively
reduce financial transition risk in the future, even if they may not be automatically subject to less financial risk
than other investments.
To address this incentive problem, financed emissions could be complemented with other, forward looking
indicators. This information enables a forward-looking and comprehensive assessment that takes into accountthese temporary effects and supports a holistic approach to encourage transition finance.
The development of a menu of forward-looking metrics represents a critical next step in reinforcing thecredibility and accountability of financial institutions involved in transition finance-related activities.
Additionally, it contributes to strengthening the assessment dimension (as discussed in detail in section 4), forinvestors engaging in transition finance activities. As various organisations work on this front, it will soon
become imperative to assess the outcomes of these endeavours and extract valuable insights. These insights
can then serve as a foundation for shaping future reporting guidelines tailored to the unique demands offinancial institutions involved in transition finance. This iterative process is vital in ensuring that transition
finance not only aligns with ambitious climate goals but also remains transparent and accountable throughout
its implementation.
Then, with the aim of addressing the shortcomings of a backward-looking financed emissions metric, several
proposals have been already made on a set of complementary metrics. Those proposals could be categorised
into two groupings.
One group is for enhancing the financed emissions calculation so that it would be consistent with the purposeof transition finance. The Japan’s Public and Private Working Group on Financed Emissions for Promoting
Transition Finance (JPPWG) has proposed the idea of classifying separately transition assets that are defined as
the use of proceeds for transition finance instruments and calculating financed emissions for the transition
assets and those for the rest respectively, thereby providing transparency for contributions of transition financeactivities to the pathway of financed emissions. In a similar vein but a different focus, GFANZ has proposed theuse of an Expected Emissions Reduction (EER) metric that seeks to quantify the expected real-world emissions
impact and has further proposed the attribution of EER to the financing entity in a similar manner for financed
emissions calculations.
Another grouping is for attempting to identify alternative metrics that would complement a financed emissions
metric. Examples of such efforts are summarised in Table 4 below. GFANZ’s proposal on EER itself is a
proposition of alternative metrics and it advocates an Emissions Reduction Potential method (ERP) for financing
to the aligned and the aligning and an Avoided Emissions method (AE) for financing to climate solutions andmanaged phase-out. ERP is the method that attempts to capture the difference between a business-as-usual(BAU) emissions pathway and a company’s forward-looking emissions profile enabled by its transition efforts.
AE compares the difference between life-cycle emissions in a BAU case and those in a climate solutionemployed case but, in the case of managed phase-out, it will be allowed to look into how much emissions will
be potentially avoided by retiring a high-emitting activity earlier than initially planned.
The development of complementary metrics such as these would augment the scope 3 emissions disclosure
framework for financial institution and provide more clarity to how their transition finance efforts will have areal-world impact in terms of emissions reduction. Essentially, they will likely become an integral part of thetransition finance ecosystem and it will be important to consider how they might be reflected into the overall
regulatory system governing transition finance, including disclosure requirements for financial institutions.

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IPSF – Implementing transition finance principles – Interim report

Table 4: Examples of metrics
Examples of metrics
Efforts on real-economy
transition
Metrics related to efforts
for real-economy transition.
Includes avoided emissions
to transition based
indicators.

Explanation•

Financial institutions may disclose fundraisers
avoided emissions (impact created by the use of
specific products or services) as financial institutions’avoided emissions.

Amount, absolute or proportion of•
portfolio aligned with net-zero targets
or Paris Agreement

Indicates the financial institution portfolio’s degree ofat the point of calculation/disclosure. Financial
institutions may select criteria to assess alignment
according to their policy.

Avoided emissions (by specificproducts and/or services)23•

Temperature ratings

Execution capability for
decarbonisation-related
measures
Metrics related to thedegree of progress offinancial institution’s
decarbonisation plan.

23

Allows assessment for the degree of alignment withtemperature objectives of investments,
commitments, and reduction targets of portfolio
companies.

Amount or proportion of finance•companies with transition strategies orrelated projects

Focuses on supporting companies promoting thetransition and decarbonisation of society by replacing
high-emission products and services with lowemission alternatives.

Future reduction effects throughtransition finance (limited to use ofproceeds instruments)•

Indicates the contribution of transition finance todecarbonisation by calculating and disclosing theemission reductions attributable to transition financeout of the total GHG reductions expected from acompany in the future.

Physical indicators•

Indicates the contribution towards specific projects.
Examples of indicators include the number offinanced managed phaseout projects, or thegeneration capacity of renewable energy investment
projects.

Decarbonisation contribution(currently under development by
GFANZ)•

Indicator to quantify the associated decarbonisation
contribution impact of financial institutions’ assets.
The indicator is currently (October 2023) underdevelopment, thus it is needed to closely follow thediscussions toward the finalisation of these metrics.

amount, number, or proportion of
portfolio covered by key policies•

Key policies are expected to include the following:- Fossil Fuel Policy- Deforestation Policy

Amount, number, or proportion of•
products and services that are aligned
to the net-zero transition plan

One of the indicators represent the extent of financial
institution’s net-zero transition plan execution.

The “avoided emissions” metric refers to emissions savings that occur outside of a company’s value chain. Emphasising avoided
emissions can help identify opportunities with a positive impact and facilitate financing for climate solutions. At the same time, due
to its nature of relying on counterfactual scenarios, the metric needs to be used carefully, so as to not be conflated with real world
emissions reductions. In March 2023, the World Business Council for Sustainable Development (WBCSD) published the “Guidanceon Avoided Emissions: Helping business drive innovations and scale solutions toward Net Zero”. This guidance outlines five key areas
for making credible claims on avoided emissions: (1) Defining avoided emissions, (2) Leveraging avoided emissions, (3) Ensuring thelegitimacy of the contribution, (4) Assessing avoided emissions, and (5) Reporting avoided emissions. As highlighted in the WBCSD
report, ‘avoided emissions’ should be reported separately from GHG inventory footprints. When properly employed, this tool
becomes a potent instrument for financial institutions to identify climate solutions with substantial emissions reduction potential.
Given that this metric is still in its early stages of deployment, it becomes crucial to establish a set of best practices. Leveraging
successful cases can then facilitate the application of this metric to various potential use cases across the financial sector. Thisapproach ensures that the metric is employed effectively and consistently, contributing significantly to emissions reduction efforts.

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IPSF – Implementing transition finance principles – Interim report

Includes plan execution,
governance andengagement.

Amount, number, or proportion, of •clients or portfolio companies withclimate-related engagement activities

Possible indicators include the number or proportion
companies and/or the amount of finance/investment
to such engaged companies (includes academia &government authorities)

Number or proportion of employees •and board members involved indecision-making and efforts on climate
related affairs

Possible indicators include:- Employees and management who havecompleted climate-related training- Specialists on climate change and other related
issues- Management and board members withremuneration linked to the progress against andachievements of climate-related targets- Amount of human capital investment to enhancecapacities

The demand for transparent and accountable transition plans has surged as one component of forward-looking
information. Effective disclosure of transition plans hinges on the use of clear, quantifiable metrics andbenchmarks, often tailored to specific industries to address their unique challenges. Work to enable investors
and financial institutions to assess the credibility of any commitments within those plans is an important stepto embedding credibility within transition finance. A key component of this will be companies’ ongoingsustainability and corporate reporting disclosures, which will provide regular updates on corporates’ strategy
and carbon emissions that will inform investors of progress against any short-term targets in particular. This isfurther reinforced by requirements to update transition plan disclosures both regularly and where there might
be material changes in a company’s strategy. In addition to ongoing sustainability reporting, and in line withthe evolving sustainability landscape, stakeholders now seek forward-looking insights that go beyond historicalperformance metrics to complement this information.
A number of initiatives are underway that attempt to help users better assess an individual company’scommitments against sector peers and broader transition pathways. One notable example is the Transition
Pathway Initiative (TPI), which operates as a research and data hub in the financial and corporate sectors’transition to a low-carbon economy, aligning with Principle 9 of the 2022 IPSF Transition Finance Report. It
analyses companies based on their “management quality” and “carbon performance”, evaluating the qualityof their governance and management in dealing with carbon emissions, aligning with TCFD recommendations.
The assessment of management quality uses a series of indicators to place companies on a range from“unaware of climate change as a business issue” to those that are demonstrating performance across all
management indicators. The carbon performance assessment allows for the translation of emissions targets
made at the international level into sectoral benchmarks, against which the performance of individualcompanies can be compared.
The Transition Pathway Initiative represents just one facet of enhanced climate disclosure. Another noteworthy
player in this landscape is the investor-led initiative Climate Action 100+. It seeks to elevate corporatetransparency and accountability in climate action. Stakeholders work together to encourage companies toenhance their corporate disclosure practices and implement well-defined transition plans, all while adhering to
the recommendations of the TCFD and other sector-specific and regional guidance. This fosters resilience incompanies’ business strategies and facilitates well-informed investment decisions.
The Climate Action 100+ Net-Zero Company Benchmark, designed to assess companies’ alignment with ten key
indicators, mirrors the commitment priorities of Climate Action 100+. This benchmark, akin to TPI,
demonstrates the value of data-driven assessments and multi-stakeholder collaboration in reshaping corporate
climate disclosure. Anchored in data analysis and enriched by insights from leading climate researchorganisations, it offers a robust model for assessing companies’ alignment with the ambitious goal of achieving
net-zero emissions.

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IPSF – Implementing transition finance principles – Interim report

Initiatives such as TPI and the Climate Action 100+ Net-Zero Company Benchmark play an important role insteering the ongoing transformation of the corporate landscape, thereby adhering to Principle 7 of the 2022
IPSF Transition Finance Report. They drive transparency, facilitate data-driven decision-making, and inspire acollective shift towards a more sustainable future. As they set new standards and garner support from a
growing cadre of initiatives, they hold the potential to guide the corporate world toward greater accountability
and a sustainable future.
The development of such tools play an important role in the broader transition finance ecosystem, particularly
when supported by clear and transparent methodologies that allow investors to understand how any
judgements on underlying data and assumptions have been made. Over time, the disclosure of further
information through sustainability reporting or transition plan disclosures may support to further increase therichness and sophistication of such tools.
Box 4: Benchmarking companies using public disclosures: The Climate Action 100+ example24
Climate Action 100+ has set forth an agenda for company engagement with the aim of securing commitments
to reduce emissions, enhance governance, and improve climate-related financial disclosures and transition
plans. This effort is geared towards creating sustainable value for shareholders. In alignment with their fiduciary
responsibility and as institutional investors, Climate Action 100+ members are aiming to address the financial
implications of climate change. They work closely with invested companies to encourage actions that contributeto the global goal of halving GHG emissions by 2030 and achieving net-zero emissions by 2050, aligning with
the Paris Agreement’s ambition to limit warming to 1.5°C.
Key features of the Climate Action 100+ Net-Zero Company Benchmark:•Comprehensive assessment: The offers a comprehensive assessment of companies’ commitment toachieving net-zero emissions. It delves into various aspects of a company’s operations, including its
governance, emissions reduction targets, and climate-related lobbying efforts.

•

Data-based evaluation: The framework relies on publicly disclosed information from companies, including
their annual reports, financial filings, and CDP disclosures. This reliance on publicly available data ensurestransparency and objectivity in the assessment process.

•Collaboration and expertise: The development of this benchmark involved the collaborative efforts ofnearly 50 signatories, investor network experts, and leading climate research and data NGOs. This multistakeholder approach reflects the urgency and complexity of the climate challenge, demonstrating that acollective effort is essential to drive meaningful change.

•

Research and analysis: To carry out the company disclosure research and analysis, the initiative partneredwith TPI. In collaboration with their research and data partners, including the Grantham Research Instituteon Climate Change and the Environment at the London School of Economics (LSE) and FTSE Russell, TPI
plays an important role in conducting in-depth analysis and ensuring the integrity of the assessment
process.

Summary of the 10 disclosure indicators and sub-indicators:
1. Net Zero GHG emissions ambition (2050 or sooner)
Sub-Indicator 1.1: Ambition for net-zero GHG emissions by 2050 or sooner.
2. Long-Term GHG reduction targets (2036-2050)

24

See https://www.climateaction100.org/wp-content/uploads/2021/10/V1.1-Disclosure-Framework-assessment-methodologyOct21.pdf.

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IPSF – Implementing transition finance principles – Interim report

Sub-Indicator 2.1: Target for GHG reduction between 2036 and 2050.
Sub-Indicator 2.2: Covers at least 95% of scope 1 & 2 emissions and relevant scope 3 emissions.
Sub-Indicator 2.3: Alignment with the 1.5°C global warming goal.
3. Medium-Term GHG reduction targets (2026-2035)
Sub-Indicator 3.1: Target for GHG reduction between 2026 and 2035.
Sub-Indicator 3.2: Covers at least 95% of scope 1 & 2 emissions and relevant scope 3 emissions.
Sub-Indicator 3.3: Alignment with the 1.5°C global warming goal.
4. Short-Term GHG reduction targets (up to 2025)
Sub-Indicator 4.1: Target for GHG reduction up to 2025.
Sub-Indicator 4.2: Covers at least 95% of scope 1 & 2 emissions and relevant scope 3 emissions.
Sub-Indicator 4.3: Alignment with the 1.5°C global warming goal.
5. Decarbonisation strategy (target delivery)
Sub-Indicator 5.1: Decarbonisation strategy to meet long and medium-term GHG reduction
targets.
Sub-Indicator 5.2: Commitment to ‘green revenues’ from low-carbon products and services.
6. Capital allocation alignment
Sub-Indicator 6.1: Efforts to decarbonise future capital expenditures.
Sub-Indicator 6.2: Disclosure of methodology for Paris alignment of future capital expenditures.
7. Climate policy engagement
Sub-Indicator 7.1: Paris Agreement-aligned climate lobbying position.
Sub-Indicator 7.2: Paris Agreement-aligned lobbying expectations for trade associations.
Sub-Indicator 7.3: Process to ensure trade associations lobby per the Paris Agreement.
8. Climate governance
Sub-Indicator 8.1: Board oversight of climate change.
Sub-Indicator 8.2: Executive remuneration scheme includes climate performance elements.
Sub-Indicator
opportunities.

8.3:

Board’s

capabilities

toassessandmanage9. Just transition (under development)This indicator is being further developed for future assessments.
10. TCFD disclosure
Sub-Indicator 10.1: Commitment to implement TCFD recommendations.

34

climate-related

risks

and

IPSF – Implementing transition finance principles – Interim report

3.7.

Conclusions and recommendations for further work

In scaling up transition finance, the establishment of a coherent framework is paramount. This framework
should not only activate transition finance-related actions within financial institutions but also empower themto effectively monitor and report their progress. As demonstrated in this section, such a framework seems tobe emerging, yet it remains in its early stages of development and requires nurturing in the right direction. In
light of this, several key actions are recommended in the following areas:-

Continue to build on initiatives to enable the transition finance market to scale with integrity: A
number of initiatives are underway to embed the right foundations for the provision of finance tocompanies that are seeking to reduce their carbon emissions. As the different labelled and unlabelledtransition finance instruments and products continue to evolve, these frameworks and regulatory
initiatives might need to adapt, building on best practices and strengthening the integrity of thetransition finance ecosystem. The IPSF will continue to monitor ongoing developments for frameworks
that embed credibility within the transition finance process and consider where further guidance might
be necessary.

-

Monitoring framework: The development of a comprehensive monitoring framework for transition
finance is crucial, both at the individual institution level and at macro-level. Initiatives like GFANZ areprogressing toward establishing such frameworks within individual institutions. However, there iscurrently no equivalent effort focused on macro-level monitoring. To address this gap, convening
stakeholders and fostering collaboration will be essential to drive progress toward a macro-levelmonitoring framework. The IPSF could promote guidelines and best practices for monitoring andassessing the progress in developing credible transition plans and finance frameworks. IPSF members
will continue sharing views on possible local or international measures that may be influencing theability of firms to access finance.

-

Climate-related risks nexus: To ensure that actions undertaken by financial institutions translate into
tangible real-sector emissions reductions, exploring the intricate relationship between transition
finance and climate-related risks is imperative. In collaboration with ongoing work from organisations
such as international standard setters that are considering the materiality of climate-related risks, this
could help to better understand and enable the mitigation of both transition and physical climaterelated risks faced by financial institutions.

-

Forward-looking metrics: The development of a set of forward-looking metrics tailored specifically fortransition finance is a priority, in line with Principle 9 of the 2022 IPSF Transition Finance Report(underscoring the need for credible assessment mechanisms). These metrics should complement theexisting financed emission metric and provide a more nuanced assessment of the decarbonisation
impact of transition finance. This is essential to prevent the mechanical use of the financed emission
metric from inadvertently discouraging financial institutions from engaging in transition finance.
Progress is being made in this area, through market-led initiatives such as GFANZ. It would be
worthwhile for the IPSF to continue monitoring and sharing best practices in order to inform ongoing
efforts in developing a set of complementary forward-looking metrics that might become embedded
within the transition finance ecosystem.

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IPSF – Implementing transition finance principles – Interim report

4. Assessment
This section provides an overview of the main existing approaches for evaluating the credibility, ambition, andprogress of private sector commitments, as well as assessing their vulnerability to physical and transition risks.
The assessing dimension will be a key step to legitimising transition finance, and enabling the transition financemarket ecosystem to develop in a way that supports investing for the whole-of-economy transition. Transition
plan disclosures are just one component in the suite of tools available to investors to benchmark performanceof entities and assess the effectiveness and impact of transition finance efforts.
Over time, as discussed above, some of these tools will embed within the broader market ecosystem anddevelop into new market norms for investment in patient capital, for example in relation to investment horizons,
performance monitoring and reporting horizons and pricing of climate risks over the course of the asset
maturity.
It is important to note that this overview represents a current snapshot, as some of these approaches are still
being developed and may expand in scope and coverage over time. For the purpose of this discussion, only
approaches that fully disclose their methodologies for utilising publicly available firm-specific data will beconsidered. Aggregate sustainability ratings and indices, despite their value for market participants with limited
sustainability expertise, are not included in this analysis.
4.1.

Guidance, recommendations and best practices on transition plans

The guidance, recommendations, and best practices on transition plans, such as the TCFD Guidance, GFANZ
Guidance on Transition Plans, NGFS Stocktake on Financial Institutions’ Transition Plans and their Relevance toMicro-prudential Authorities25, ECB best practices for climate-related and environmental risk management, UK
Transition Plan Taskforce Disclosure Framework (and accompanying guidance), and Planet Tracker Transition
Plan Assessment Template, mentioned in previous sections (see section 3), serve as valuable starting points forassessing the credibility and ambition of private sector commitments, aligning with the principles laid out in the2022 IPSF Transition Finance Report. These frameworks, templates, and principles-based approaches can guidethe identification of core elements in effective transition plans and provide specific guidance for formulating
credible strategies and concrete targets. They play a crucial role in capturing aspects related to the quality ofmeasures (e.g. engagement coverage, joint engagements and engagement strength) and a wider range ofindicators. Analysing multiple indicators and concrete targets is particularly important in assessing thecredibility of a transition plan and identifying potential vulnerabilities during the transition.
However, principles-based guidance alone cannot ensure strong comparability, and best practice metrics arestill emerging for many indicators. While they emphasise the connection between the current state andforward-looking plans, they may be less suitable for factoring in past efforts (e.g. if a company has alreadypursued ambitious goals and only more challenging emissions remain) and assessing a firm’s track record inachieving its targets.
As frameworks for disclosing transition plans continue to evolve and gain broader adoption, it is expected thatvariations in the quality and comparability of disclosures will arise across the real economy, highlighting theneed for standardised assessment mechanisms, in alignment with Principle 9 of the 2022 IPSF Transition
Finance Report. An important consideration is how to help companies enhance their capabilities in this realm
without hindering their ability to secure financing for their transition efforts, in keeping with the overarching
objective of empowering the financial sector to play a pivotal role in achieving net-zero emissions while
managing the risks associated with the transition.

25

See https://www.ngfs.net/sites/default/files/stocktake_on_financial_institutions_transition_plans.pdf.

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IPSF – Implementing transition finance principles – Interim report

4.2.

Net Zero Data Public Utility

The concept of the NZDPU aligns with the spirit of the 2022 IPSF Transition Finance Report, particularly
highlighting the need for transparency and robust data in assessing climate transition efforts, thereby
advocating for standardised and credible assessment mechanisms (Principle 9). It is designed to be an open
data platform that presents climate-related information from private sector firms and financial institutions in acomprehensive and comparable manner. Initially, the NZDPU will focus on emissions and emissions target data
across all Scopes (1, 2, and 3), including carbon credit data. It will also provide information on the methodology
used and whether the data has been verified. Additional data categories, such as exposures to high-emitting
sectors, facilitated emissions, and climate solutions targets, may be included at a later stage. A pilot version of
the platform is scheduled to launch at COP28. The Climate Data Steering Committee (CDSC), comprised ofinternational organisations, countries, and data providers, provides strategic guidance to the NZDPU. At thisstage, it is important to note that the NZDPU is in a test phase, with still limited coverage and comparability.
The NZDPU aims to enhance stakeholders’ ability to assess forward-looking commitments by enabling morecomprehensive comparisons:a) over time, by providing historical, current, and forward-looking emissions data;b) across institutions and sectors, through a set of standardised core indicators for all companies; andc) across jurisdictions, by mapping methodological differences between regional standards.
The datasets will enable assessment of:1) firms’ ambition based on forward-looking targets compared to sectoral averages or industry
benchmarks;
2) progress over time; and3) firms’ ability to fulfil commitments by comparing original targets with actual values.
Additionally, the platform will employ a system of flags to assess the comprehensiveness, quality, and coverageof the data provided by firms, identifying any unreported or unverified data categories, assets undermanagement, or other relevant information.
The NZDPU aims to provide free access and ensure ease of use, allowing a wider range of stakeholders to assess
private sector commitments and reducing disclosure costs for firms that rely on the platform for reporting their
Scope 3 emissions. This is particularly important for developing countries and small and medium-sizedenterprises (SMEs) with limited resources and capacity.
While data upload to the NZDPU is currently voluntary, firms have an incentive to disclose comprehensive andgranular data. Market participants will interpret non-disclosures, omissions, or poor quality as red flags.
Improved comparability may drive firms to strengthen their climate efforts over time. However, governments
play a crucial role in establishing appropriate disclosure frameworks to support the climate data ecosystem andensure the availability of decision-useful climate data.
In its initial stage, the Public Utility will primarily focus on emissions, as definitions, methodologies, and datacollection for emissions are more standardised. The trade-off for increased data comparability within the
NZDPU is a narrower range of indicators that could otherwise be valuable for assessing private sector transition
efforts. Nonetheless, the NZDPU plans to add additional indicators over time, potentially also covering
qualitative aspects such as governance and strategy.
4.3.

Verification, validation and assurance

In the context of the 2022 IPSF Transition Finance Report, the processes of third-party verification, validation,
and assurance play a critical role in ensuring the integrity and credibility of transition plans. These processes

37

IPSF – Implementing transition finance principles – Interim reportalign with Principle 8, which emphasises the significance of external reporting and the need for transparency.
These verification and validation procedures aim to provide stakeholders with confidence in the accuracy andreliability of historical and forward-looking disclosures, supporting transparency and accountability in thetransition finance domain.
-

Verification refers to evaluating historical emissions data, the elements of transition plans including
forward-looking ambition and emission reduction targets, and business and financing plans, etc.
Verification assesses whether disclosures are materially correct and conform to specific carbon
accounting criteria, standards or guidance, such as the GHG Protocol or ISO 14000 Standards, andalignment with the corporate strategies alignment of the targets and action plan with the latest climate
science. Here, a great variety of verification standards exists, with one example of prevalent guidance
being ICMA’s Transition Finance Handbook.

-

Validation refers to the process that evaluates forward-looking targets, assumptions, methodologies
and processes to assess whether they are credible, science-based and help achieve stated climate goals.
One example involves verification of company targets based on the Science Based Targets initiative(SBTi).

-

Assurance, i.e. the outcome of verification or validation, can be done with various levels ofcomprehensiveness and reliability. In the case of limited assurance, third-party auditors may interview
management, review analytical procedures, and evaluate internal controls for data collection.
Reasonable assurance involves more extensive tests, evidence gathering, and side visits and allows theauditor to form conclusions with a high level of certainty although the cost of these audits issignificantly higher.

For transition bond issuers and any other high-emitting sectors in need of financing, verification is particularly
critical in ensuring the credibility and robustness of data in relation to transition. Since third-party verifiers canplay a role of independent verification for the fund-raiser, they are expected to uphold independence andfairness while demonstrating professional skills. Japan, the UK, and the EU have proposed or introduced a codeof conduct or regulatory provisions for verification providers to ensure transparency and quality.
Verification is provided by entities such as second-party opinion providers, accounting firms, and businessconsultants, with a diverse range of assessment methodologies. Recently observed market enhancements
include the launch of evaluation services regarding the credibility of elements in transition plans. The common
elements include ambition and GHG emission reduction targets, accompanying action and financing plans,robustness of emission calculation methodology and data, governance of planning and monitoring, review anddisclosure of transition plans.
It is also closely related to data quality and can significantly enhance comparability when a common verification
standard is adopted. The existence of multiple verification standards, albeit with slight methodologicaldistinctions, can impede comparability across these standards. Creating a mapping of variances inmethodologies and assumptions could facilitate stakeholders in understanding potential differences more
effectively. Moreover, ongoing initiatives like the work conducted by the International Auditing and AssuranceStandards Board (IAASB) in developing a sustainability reporting assurance standard might contribute toachieving greater consistency. The IAASB standard aims to elevate trust and confidence in sustainability
information, which is essential for investors, regulators, and other stakeholders. It closely aligns with theobjective of credible assessment mechanisms mentioned in Principle 9 of the 2022 IPSF Transition Finance
Report. The International Organisation of Securities Commissions (IOSCO) has also been actively involved in thisarea, publishing a report in March 2023 regarding international efforts to establish a global assurance
framework for sustainability-related corporate reporting. 26 A potential future consideration is the role ofassurance for forward-looking statements within transition plans, which warrants close monitoring as part of26

FR04/23 Report on International Work to Develop a Global Assurance Framework for Sustainability-related Corporate Reporting(iosco.org).

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IPSF – Implementing transition finance principles – Interim report

the broader transition finance ecosystem.
Similarly, certification schemes hold substantial potential in helping investors gauge the degree to which themethodologies behind claims and commitments outlined in transition plan disclosures meet specific standards.
However, ensuring transparency around these schemes is essential to enable investors to differentiate between
certified and uncertified aspects of a disclosure and assess the overall credibility of the transition plan.
Validation, in particular by showing that forward-looking targets are science-based, i.e. compatible with limiting
global warming to 1.5° or 2°C above pre-industrial levels, can ensure that targets meet certain minimum criteriawith respect to methodology and benchmarks. SBTi has also developed sector-specific guidance to better tailor
methodologies, frameworks and requirements to the specificities of individual sectors. The SBTi Net Zero
Standard and sectoral guidance still allow for significant leeway in determining what should be included or
excluded when calculating emissions targets of various Scopes. For instance, although Scope 3 targets are arequirement under the SBTi Net Zero Standard, a near-term Scope 3 target is not required if a company’s Scope
3 emissions are less than 40 percent of total Scope 1, 2 and 3 emissions. SBTi near- or medium-term target
certification (e.g. 2030 targets) can thus confer credibility to levels of ambition that may fall short of achieving
net zero by mid-century. In addition, although 100 percent of GHG emissions need to be validated by SBTi,companies are allowed to exclude 5 percent of emissions of Scopes 1 and 2 combined and 5 percent of Scope
3. Companies also use offsets and insetting to various extents to meet their goals.
Nevertheless, targets represent just the initial step and must be translated into concrete and credible
decarbonisation plans with regular progress disclosure. While target validation is an effective means of ensuringa baseline level of credibility, it alone cannot provide the high degree of comparability and consistency needed
to fully assess a company’s actions, ambition and integrity.
Verification, validation and assurance will be important to ensure a minimum level of disclosure quality andintegrity in target setting. In fact, various jurisdictions will start requiring assurance of emissions disclosures.
For instance, the EU CSRD will require limited assurance, with the aim to move to reasonable assurance overtime. New Zealand will also require limited assurance on GHG emissions starting in October 2024. Furthermore,
the SEC draft disclosure rules would require larger companies to obtain limited assurance for their Scope 1 and2 emissions, with the intent to move to reasonable assurance and to widen the coverage of companies overtime. Nonetheless, it will be important to clarify to stakeholders that verification, validation and assurance
should be seen as ways to avoid incorrect, misleading and insufficiently credible disclosures and targets, rather
than ways to vouch for the credibility, ambition and high integrity of disclosures or to promote greatercomparability.
4.4.

Climate alignment assessments

In the context of the 2022 IPSF Transition Finance Report, climate alignment assessments play an importantrole in enhancing transparency and comparability, adhering to Principle 8, which underscores the importanceof external reporting, comparable transparency, and consistency. These assessments serve as mechanisms for
gauging the specific contribution of financial institutions to achieving net-zero goals, supporting externaltransparency and accountability while facilitating cross-jurisdictional comparisons.
The tests can incentivise ambitious action by providing a basis for governments and financial institutions torefine their climate policies and strategies. The Paris Agreement Capital Transition Assessment (PACTA) tests,
which utilise an open-source methodology, offer a useful means for jurisdictions to assess the climate alignmentof financial institution portfolios in a comparable manner. If the results are disclosed, these tests can evenenable cross-jurisdictional comparisons. They allow for an evaluation of whether the commitments made byfinancial institutions are effectively implemented and result in tangible outcomes, such as reduced direct
exposures to high-emitting sectors. Several alignment assessment methodologies other than PACTA exist. Suchmethodologies each make different methodological choices based on different perspectives that make results

39

IPSF – Implementing transition finance principles – Interim reportcurrently hard to compare.27
However, it is important to note that climate alignment assessments currently only cover listed equity, bonds,
and, in some cases, real estate and sovereign bonds, which represent only a portion of the total investment
value of financial institutions. Non-listed financial products (e.g. private equity) and other off-balance sheet
activities (e.g. facilitated emissions) are not adequately considered. At present, jurisdictions tend to offer theseassessments on a voluntary basis, without requiring financial institutions to disclose their results, or only allow
access to aggregate results for progress assessment. As a result, the ability of the general public to assess the
progress of individual institutions is often limited. Furthermore, there are limitations regarding thecompleteness and quality of the voluntarily uploaded data from financial institutions, as they may choose to
upload only selected portfolios, and the data lacks verification. Climate alignment tests are inherently forwardlooking and quantitative, providing snapshots of specific points in time, and may be less suited to capturing
qualitative information. However, they can be complemented by qualitative questionnaires that help capture
the efforts made by financial institutions in terms of strategy (e.g. engagement with portfolio firms), processes,
governance and risk management.
To address these complexities and broaden the scope of climate alignment assessments, various considerations
warrant attention. The diversity of methodologies employed by different assessments introduces disparities inresults, emphasising the need for harmonisation and standardisation. Furthermore, the global applicability andlegitimacy of these initiatives require careful cultivation, considering their predominantly developed-country
origins. Leveraging existing international frameworks and business standards, like the OECD’s Responsible
Business Conduct Due Diligence Guidance, can enrich assessments while promoting consistency.
Ultimately, embracing a comprehensive approach is crucial. Alongside GHG-based indicators, a holistic
dashboard of finance-related indicators, encompassing climate solutions’ scalability and resilience, can provide
a nuanced perspective. Furthermore, assessing alignment from both mitigation and resilience angles andexpanding coverage to underrepresented asset classes, including private equity and sovereign bonds, are vitalsteps in ensuring environmental integrity and policy relevance. As these methodologies evolve, clear guidanceon emission reduction targets, offset treatment, and scenario variability is indispensable to strengthen theireffectiveness and impact in navigating the financial sector towards climate goals.
Box 5: Paris Alignment Initiative
The Paris Alignment Initiative was launched by Switzerland and the Netherlands at the United Nations
Secretary-General (UNSG) Climate Action Summit in 2019. It calls upon UN member states and financial
institutions to pledge their commitment to assess and monitor the climate impact and alignment of theirfinancial flows with the 1.5°C target of the Paris Agreement. The initiative aims for a minimum review of 50
percent of total portfolios, with the ultimate goal of achieving 100 percent coverage over time. A key
component of this initiative is conducting climate impact assessments based on the open-source PACTA
methodology and exchanging best practices. To date, several states and subnational actors have conducted
PACTA tests28, but only some are official members of the initiative29.

27

28

29

See also OECD (2022), “Assessing the climate consistency of finance: Taking stock of methodologies and their links to climate
mitigation
policyobjectives”, OECD
Environment
Working
Papers,
No.
200,
OECD
Publishing,Paris, https://doi.org/10.1787/d12005e7-en.
Austria, Brazil, Colombia, Denmark, Finland, France, Italy, Japan, Liechtenstein, Luxembourg, Mexico, Norway, Peru, Spain, Sweden,
Switzerland, UK, State of California, New York State, and EIOPA.
Denmark, Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Spain, Sweden, and Switzerland.

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IPSF – Implementing transition finance principles – Interim report

4.5.

Enhancing transition plan assessment with AI

Artificial Intelligence (AI), with strong safeguards and subject to the quality of data that is fed, could be used to
scrutinise transition plans and climate-related commitments in the financial sector, and thus have atransformative impact on the financial sector. AI is increasingly recognised as a tool that can be used to
scrutinise these essential documents. Recent initiatives, such as the collaborative project between WWF, theUniversity of Zurich, and the University of Oxford, are positive examples of AI-driven innovation that aims toautomate and refine the scrutiny of transition plans.
By harnessing advanced machine learning, data analytics, and natural language processing, AI can process large
datasets, identify alignment with science-based targets, and gauge the feasibility of achieving net-zeroemissions by 2050. It can be used as one tool to ensure that companies are not engaging in greenwashing.
Speed is another benefit of AI in this context. It can quickly assess numerous transition plans, enabling a morecomprehensive analysis within the financial landscape. AI is also invaluable for market conduct authorities,
offering automated tools to screen for misleading claims and statements. Financial supervisors can utilise AI toassess risk exposure at a granular level and push for more ambitious transition plans.
4.6.

Conclusions and recommendations for further work

This section has provided an overview of approaches that can help evaluate the credibility, ambition, andprogress of the private sector. While each approach has its own merits in assessing targets and transition plans,
they also come with certain limitations of which stakeholders should be mindful. Here is an overview of key
dimensions where gaps remain, indicating areas where further work might be warranted:-

Comparability and consistency: The ability to compare the ambition and progress across institutions,sectors and jurisdictions will remain at the core of any assessment of climate efforts. Disclosure
requirements and standards, as well as verification, validation and assurance can contribute greater
consistency in disclosures, but usually cannot ensure full comparability. Discrepancies between carbon
accounting methodologies and the flexibility offered by target setting frameworks with respect toassumptions and methodologies also hinder full comparability. Promoting full transparency on
methodological assumptions is therefore paramount. Initiatives such as the NZDPU, due to their easyto-use interface, can promote greater comparability in a way that might allow for better assessmentsof the ambition of company targets. They are nonetheless strongly reliant on global efforts to ensuredisclosure consistency or at least to map out discrepancies.

-

Coverage: Many initiatives only allow for partial assessments of transition efforts, especially withrespect to the type and number of institutions covered or the limited asset coverage (e.g. assets undermanagement, types of financial assets). Policymakers have a role to play in promoting the active use of
new data platforms such as the NZDPU, common methodologies for additional asset classes anddisclosures more broadly.

-

Data quality: Verification and assurance are important to ensure a minimum level of data quality andconsistency. In line with Principle 8 of the 2022 IPSF Transition Finance Report, engagement among
stakeholders – including verification providers, fund raisers, financial institutions – needs to bestrengthened to collect the accurate data calculated with the appropriate methodologies. Efforts by
the IAASB to develop standards that would ensure baseline sustainability assurance standards is awelcome step towards strengthening data quality.

-

Comprehensiveness: Initiatives vary in terms of the breadth of indicators that they recommend. They
also have tended to focus on emissions and emissions targets in a first step, but should also attempt tocapture other useful indicators of commitment and ambition, even if they are of a more qualitative
nature. Combining various indicators will also be important when assessing commitment credibility,
ambition and progress.

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IPSF – Implementing transition finance principles – Interim report-

Cost and accessibility: Allowing for a wide range of stakeholders to mainstream climate considerations
into their decision-making will be key to accelerating the transition. Easy and open access to climate
data will be essential and will be facilitated by the NZDPU. Nonetheless, it will remain important toprovide the necessary support, capacity building and proportional approaches to lower the disclosureburden for smaller firms and in developing country contexts.

-

Assessment of the ability to deliver: Commitments and targets will need to be matched with more
concrete strategies, plans and processes to be credible. Ensuring transparency at regular intervals withrespect to transition plans will be essential to assess whether forward-looking commitments areaccompanied with credible actions.

-

Progress tracking ability: Initiatives that allow to track progress over time in an easy way andadequately take past efforts into account, notwithstanding potential restatements, will be important.
The NZDPU will facilitate progress tracking, in particular for quantitative indicators such as emissions.
Climate alignment assessments, notwithstanding their various methodologies, can help assess progressof institutions over time if such assessments are carried out at regular intervals.

Notwithstanding the gaps and challenges highlighted, combining multiple approaches and leveraging the workof various initiatives can foster cross-pollination and strengthen the existing architecture for evaluatingcompanies’ transition efforts over time. It is essential, however, that these approaches are complementary,interoperable, and converge on a core set of metrics for disclosures. This will prevent global fragmentation andensure comparability across assessments. For example, the guidance, recommendations, and best practices
provided by different initiatives can be instrumental in defining robust indicators of best practices. These
indicators and elements of credibility can then be integrated into the NZDPU.

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IPSF – Implementing transition finance principles – Interim reportII.

Use cases and practical examples

The IPSF recognises the value of presenting use cases to demonstrate the practical application of transition
finance. This interim report incorporates several initial use cases to exemplify real-world scenarios. These
instances encompass the EIB Group’s Paris Alignment for Counterparties (PATH) Framework, the EBRD’s stepby-step approach to transition planning tailored for emerging and developing markets, and insights fromJapan’s Transition Finance Model Project.
In subsequent phases, following this interim report, the IPSF would aim to extend its efforts in exploring
additional use cases and practical examples. This may include a more detailed examination of the orchestrated
phase-out of coal30 and further exploration of instrument-based examples for financing transition. Notably, the
IPSF will ensure complementarity with the work of the G20 SFWG. This could involve a closer examination ofvarious financial instruments such as green and transition bonds/lending (use-of-proceed type instruments),
sustainability-linked bonds/lending (KPI-linked instruments), and equity-related instruments encompassing
both active and passive strategies. The exploration may also touch upon blended finance mechanisms.

1.

The EIB Group’s Paris Alignment for Counterparties (PATH) Framework

Published in 2021, the EIB Group’s PATH framework31 considers the Paris alignment of the wider activities of
its counterparties in addition to the Paris alignment of the operations financed by the EIB. The PATH framework
focuses on high-emitting counterparties (including those in hard-to-abate sectors) as well as those exposed toa high degree of physical risk from climate change. It ensures that EIB counterparties are taking steps towards
decarbonising their business activities and strengthening their resilience to climate change.
The PATH framework builds on (anticipated) regulatory requirements and promotes transparency byrequesting its counterparties to develop and publish decarbonisation/resilience plans and reports in line with
the TCFD recommendations if they do not already have them in place. Decarbonisation plans would need tocontain short to mid-term quantitative emission reduction targets as well as options over a longer time horizon
to achieve carbon neutrality towards mid-century, with pathways compatible with 1.5°C goal or withinformation on how the entity plans to adjust to get to such a pathway. This allows EIB to encourage andsupport its clients in ambitious decarbonisation, even in the hard to abate sectors, where low carbon solutions
are not yet widely available. The PATH framework also identifies a number of incompatible activities, such as
making investments in new thermal coal mines, where the EIB in general will not support a project withcorporates that continue to engage in these activities.
2022 was the first full year of implementation of the PATH framework. During that year, 19 corporate clientsand 64 financial intermediaries were screened in for further assessment of their alignment strategy and public
disclosures, according to the PATH framework. Following the assessment, five of the corporates were
contractually required to publish their decarbonisation plans and one to develop and publish its physical climate
risk management capacity. Of the 64 financial intermediaries, 48 were contractually required to publicly
disclose in line with the recommendations of the TCFD.
The EIB simultaneously provided advisory support for some counterparties. The first advisory assignments were
initiated in the European Union, through the InvestEU Advisory Hub. These included supporting a leading Italianmanufacturer of wood-based products in the development of a corporate decarbonisation plan, considering its
additional corporate exposure to the chemicals sector (classified as high-emitting).
It is clear that the PATH framework will need to change over time, reflecting the changes in EU legislation, global30

31

In this context, the IPSF would take into account relevant initiatives, including the Coal Transition Accelerator (CTA) as announced at
COP28.
See link.

43

IPSF – Implementing transition finance principles – Interim reportclimate policies, latest scientific knowledge and the progress of EIB’s counterparties against the goals of theParis Agreement and stakeholder expectations, as well as lessons learned during the application of theframework – but it will remain core to supporting our clients in their transitions.

2.

Step by step approach to transition planning for the emerging and developing market context

In 2021 the Board of Governors of the EBRD approved a commitment to align the EBRD’s activities with thegoals of the Paris Agreement. Engagement on transition planning with the EBRD’s clients in the financial
institutions sector is an important part of how EBRD aims to meet this commitment.32
The EBRD’s diverse client includes banks of different sizes, spanning across different jurisdictions in emerging
and developing countries. For this reason, the EBRD expects that the shape and form of transition plans of theirpartner financial institutions will depend on the organisation’s transition stage. The EBRD’s methodology
differentiates between three stages of climate practices, labelled as “early stage”, “developing practice”, and“advanced practice”. In their engagements with clients, they work on understanding the baseline level ofclimate practices of their counterparties, and then encourage banks to make realistic step-by-step
improvements from this baseline.
The EBRD is still testing its approach, with a determination to adapt, based on early experiences with clientsand developments in the external environment on transition planning. Their early engagement experiences
have generally been with banks which are at very early stages of incorporating climate change in their businesspractices. They expect banks to (i) make a clear commitment to Paris alignment, (ii) put together an action plan
outlining how they aim to improve their climate practices within two years, and (iii) disclose core elements ofthe plan. Consider Xac Bank, the EBRD’s long-standing client in Mongolia. With the support of the EBRD’s
Corporate Climate Governance Facility, the bank is being supported by consultants in their transition planning,
starting with understanding climate risks affecting them.
The lack of approaches to transition planning for emerging and developing countries is an obstacle for
institutions in these regions in taking meaningful action on climate change. Most advice on climate risks andopportunities, and on transition planning, is made by and for large global banks and corporations. Faced withless knowledge on climate change, with less climate-related data, and also less capacity to generate this data,banks in emerging and developing countries need more guidance on what elements of transition planning theyshould prioritise immediately, and what elements can be tackled at a later stage. The debate on the credibilityof transition plans will also need to be adjusted for emerging and developing countries, where transition plans
are expected to be largely qualitative in the next years.

3.

Japan’s Transition Finance Model Project

In Japan, METI provides subsidies for the assessment costs for cases conforming to its Basic Guidelines, which
serve as good models in issuing transition finance instruments through its Transition Finance Model Project.
The project has certified 21 projects from various industries, such as steel, shipping and aviation, gas, power,
and other hard-to-abate sectors. Combined with the creation of relevant guidelines and roadmaps, thecumulative amount of transition finance issued in Japan surpassed 1 trillion yen (approximately USD 6.7billion)
in 2023.
In terms of the approval process, second-party opinion providers – who are consulted by the issuer – summarise
the feature of a particular transition finance issuance and prepare the application for subsidies. Based on theapplication, a reviewing committee comprised of experts, such as university professors, evaluates its credibility.
Subsidies are provided for expenses associated with second party evaluation for approved cases. METI

32

For more details, see the Methodology to Determine Paris Agreement Alignment of EBRD Investments available here.

44

IPSF – Implementing transition finance principles – Interim reportsummarises and publishes the outline for approved cases to improve the quality of the transition financemarket.
FY 2021
Companies

Industry

1．Nippon Yusen Kabushiki Kaisha

Shipping

Overview

Second Party Opinion

2．Mitsui O.S.K. Lines, Ltd.

Shipping

Overview

Second Party Opinion

3．Kawasaki Kisen Kaisha, Ltd.

Shipping

Overview

Second Party Opinion

4．JFE Holdings, Inc.

Iron and steel

Overview

Second Party Opinion

5．Japan Airlines Co., Ltd.

Aviation

Overview

Second Party Opinion

6．Sumitomo Chemical Co., Ltd.

Chemicals

Overview

Second Party Opinion

7．Tokyo Gas Co., Ltd.

Overview

9．IHI Corporation

Gas
Power
generation
Heavy industry

Overview

Second Party Opinion
Second Party Opinion①
Second Party Opinion②
Second Party Opinion

10．Osaka Gas Co., Ltd.

Gas

Overview

Second Party Opinion

11．Mitsubishi Heavy Industries, Ltd.

Heavy Industry Overview

Second Party Opinion

12．Idemitsu Kosan Co., Ltd

Petroleum

Second Party Opinion

8．JERA Co., Inc.

Overview

Overview

FY 2022Companies

Industry

2．TOHO GAS Co., Ltd.

Power
generation and Overview
retailGas
Overview

3．Tokyo Gas Co., Ltd.

Gas

Overview

Second Party Opinion

4．Kirin Holdings Co., Ltd.

Foods

Overview

Second Party Opinion

5．Japan Airlines Co., Ltd.

Aviation

Overview

Second Party Opinion

1．Hokuriku Electric Power Co.

45-Second Party Opinion

IPSF – Implementing transition finance principles – Interim report

III.

Conclusions

This interim report provides a comprehensive description through the complex landscape of climate transition
finance, unveiling the intricate challenges, the pressing needs, and promising opportunities it presents. It
underscores the urgency of transitioning to a low-carbon, climate-resilient future while dissecting the nuancesthat underpin this transformative process.
Throughout this report, we have consistently referenced the Principles of the 2022 IPSF Transition Finance
Report. These Principles have served as a foundational framework guiding our analysis. They have been key inshaping the structure and content of this new report, helping us address the critical elements of transition
finance. By continually linking our findings to these Principles, we have maintained a strong connection to thework previously undertaken by the IPSF to advance transition finance.
Transition plans are emerging as pivotal in transition finance. As a part of corporate strategy, they can guidecompanies and financial institutions toward a more sustainable path. Transition plans embody commitment,
transparency, and accountability in the journey to mitigate climate change. They offer a structured approachfor organisations to navigate the complex challenges of the transition, outlining concrete strategies, targets,and actions that bridge the gap between intent and implementation. Importantly, they provide a credible basis
for financial institutions to channel investments toward companies that need finance to reduce their carbon
emissions, and empowers investors to evaluate the credibility and ambition of these efforts.
Moreover, the disclosure of transition plans fosters transparency. Emerging best-practice frameworks
encourage financial institutions and companies within the broader economy to disclose their climate-relatedrisks and opportunities, enabling stakeholders to make informed decisions. Transition plans are hence notmerely a piece of the climate finance puzzle; they are a cornerstone.
Looking ahead, the development and implementation of transition finance frameworks will require
collaboration among regulators, financial institutions, and businesses to overcome any challenges. As thereport covers numerous sectors and jurisdictions, it reveals a multitude of emerging issues for further
consideration. For example, challenges remain in quantifying emissions reductions, addressing the nuances of
supporting the decarbonisation of hard-to-abate sectors, and accommodating differing regional contexts.
Achieving international harmonisation in the structure and reporting of transition plan disclosure frameworks
will be essential for fostering comparability and consistency. Furthermore, the development of disclosure
frameworks must support a global transition, enabling the provision of finance to businesses of all sizes and in
all regions. Special attention should be given to emerging and developing markets, where capacity building andtailored approaches will be vital in supporting climate action.
By continuously linking our discussions to the previously established Principles in the 2022 IPSF Transition
Finance Report, we have ensured that the work presented in this report is firmly grounded within thisframework of transition finance. This report not only builds on previous efforts by the IPSF but also identifies
areas where the IPSF can further contribute to the advancement of transition finance, based on the evolving
landscape and the challenges we have identified. It sets out the idea that the work is far from complete. To
advance the discourse on transition finance, a number of potential areas for further work are laid out, inparticular where the IPSF could make meaningful contributions to enable progress:
1.

Monitoring developments on tools and pathway approaches to setting climate ambition andbenchmark against: IPSF to monitor progress to develop guidance for corporates on the different tools
and pathways available that inform climate ambition. In the absence of sufficient guidance, IPSF
members may consider best practice guidance on how different tools can be used in conjunction, in a
way that enables a whole-of-economy transition to net zero.

2.

Development of further international guidance to support comparability and consistency oftransition plan disclosures: We recommend that ISSB consider developing further guidance for thedisclosure of transition plans as part of broader sustainability reporting, building on existing work. This

46

IPSF – Implementing transition finance principles – Interim report

should help to promote comparability and consistency of disclosures.
3.

Empowering emerging and developing countries: Recognising the particular challenges faced byemerging and developing countries, the IPSF could seek to develop tailored approaches to transition
finance. This further work would look to identify, bring together and build on ongoing initiatives aroundapproaches to transition plans and finance in emerging and developing countries, avoiding duplicationof work.

4.

Developing frameworks that enable transition finance to scale with integrity: IPSF will continue tomonitor ongoing developments for frameworks that embed credibility within the transition financeprocess and consider where further guidance on core metrics and KPIs, and their use to support
transition finance, might be necessary to enable it to scale with integrity and effectively.

5.

Monitoring for tangible impact: In view of the importance of a comprehensive monitoring framework
for transition finance, the IPSF could promote guidelines and best practices for monitoring the progressof transition plans and the flow of capital to companies that are transitioning. IPSF members willcontinue discussing and sharing views on possible local or international measures that may be
influencing the ability of firms to access finance.

This report hence outlines a number of areas for advancing the field of transition finance and setting the agenda
for the IPSF.
Moving through the dynamic terrain of transition finance, this report highlights the important role ofsustainability reporting, climate data platforms, and comprehensive transition plans. Collaboration among
various initiatives and frameworks is paramount to prevent fragmentation and ensure a united front inassessing climate efforts. In the face of the global climate crisis, transition finance plays a crucial role in bridging
the gap between ambition and action. Transition finance, anchored by robust and credible transition plans,
holds the promise of aligning economic prosperity with environmental sustainability. This report serves as a
guide, providing insights for the road ahead and contributing to a more sustainable, climate-resilient future. It
serves as a resource for stakeholders in the financial, regulatory, and corporate sectors, offering insights tonavigate the evolving landscape of climate transition finance.

47

IPSF – Implementing transition finance principles – Interim reportIV.

Annexes

Annex 1: Credible transition finance process steps
Process step

Credibility

Opportunities

Ambition

Setting climate ambition with regard to
the Paris Agreement and relevant
national commitments

Planning

Developing and disclosing a robusttransition plan as part of mainstream
financial reporting

Disclosing

Performance

Instruments

Assessing and financing

Assessing transition needs, considering
how to respond to, prepare for andcontribute to a rapid and orderly wholeof-economy transition to net zero

Reporting on performance against theplan on an ongoing basis

Issuing credible transition financeinstruments to meet financing needs
identified in the transition plan

Expectations

Meeting investors’/lenders’ needs andexpectations

Benchmarking

Benchmarking performance
relevant sectoral pathways

againstRelevant content

Comments/Gaps/Questions

Principles: G20 (2022; 2023); IPSF; OECDIs there sufficient Government action / direction? If not,what should corporates ‘respond to’? And how should
corporates ‘have regard to’ Paris if they lose confidence
that 1.5°C is achievable?

Frameworks: ACT; CBI; CSL; SBTi; CDP; JETP; EU PSF
Reports: IPCC AR6
Credible use of credits/offsets: VCMI

Frameworks for disclosure:-

TCFD; TCFD guidance on metrics, targets andtransition plans-

ISSB (ED of S2)

-

ESRS

-

TPT (Disclosure Framework guidance)

-

NZPDU

Credible instruments:

International Fora/collaborators: G7, G20, OECD, CBI

We should be able to rely on standards/initiatives such as
ISSB, ESRS, TPT to deliver a coherent framework fortransition plan disclosures. That said, are there areas inwhich we should encourage more sector-specificguidance, including in respect of metrics/KPIs?
International Fora/Collaborators: ISSB, GRI, ESRS/EFRAG,
TPT, NZPDU-LMA: SLL Principles

How can regulators work with industry to design/ensure
the availability of credible transition finance instruments
and practices that: (i) can scale with integrity; and (ii)align with regulators’ and investors’ needs andexpectations?

-Portfolio scoring (e.g Swiss Climate Scores)

Collaborators: ICMA-

EU GBS-

ICMA: Transition Finance Handbook-

ICMA: SLB Principles

Investors’/lenders’ expectations:
-

IIGCC

-

ClimateAction100+-

GFANZ (cfr. the following report)

-

TPI

-

WBCSD Guidance on avoided emissions

48

Can we identify the appropriate pathways/metrics/KPIs
that should be used to benchmark performance and giveinvestors confidence to invest in the transition?
Collaborators: GFANZ; IIGCC; TPI, EIBIPSF – Implementing transition finance principles – Interim report

Annex 2: Implications of IPSF transition finance delivery principles for the credible transition plan content and implementation
Theme

Principle

Sub-principle

TP Content: implication for reporting entity
Success factors for ‘ambition’process step

Targets

1. The (collective)
goal is to keep global
warming to 1.5°C

1.1. Scientific community sets
1.5°C aligned criteria thatcompanies and financial market
participants can benchmark their
KPIs against

Internal targets should be set withreference to/benchmarked fromexternal targets

Success factors for ‘plan’ and‘performance’ process steps

TP implementation: implications forbuilding the ecosystem

Top-down sector targets are needed toenable entities to align targets withsector pathway

1.2. Recognition of regional
differentiation in transition
target setting
1.3. Tailoring transition targets
and metrics by use(r)2. Targets mustembed deep, rapid
and sustained change

3. Transition is allencompassing

2.1. Targets will be differentiatedby sector
2.2. Targets extend to 2050

Targets should extend to 2050 andinclude interim targets

2.3. Targets will be differentiatedaccordingtotransition
technologies

Need to describe the overall
impact of existing age/technology
profile on targets

Sector targets should be clear on theage/technology profile benchmark used

2.4. Transition targets should
address all material emissions

target setting should include allmaterial scope 1, 2 and 3
emissions

Further guidance needed on overcoming
practical challenges on calculating scope
3 emissions

2.5. Verified/certified offsets arefor last mile emissions

Transition targets should focus on
reducing emissions rather thanrelying on offsets.

A need for high-quality and credible
carbon offsets

3.1. All material economic
sectors need transition targets

All sectors must produce transition plans

3.2. Challenge is for everyone

All entities have a part to play in thetransition, irrespective of their current
transition status

3.3. Recognise different stages of

TP should enable users to identify

49

An agreed taxonomy is needed toIPSF – Implementing transition finance principles – Interim report
Theme

Principle

Sub-principle

transition

DeliveryTP Content: implication for reporting entity
Success factors for ‘ambition’process stepwhich stage of transition thereporter is at

Success factors for ‘plan’ and‘performance’ process steps

standardise reporting of progress against
sector pathways

4.
The
climatemitigation transition
must be compatible
with
other
environmental andsocial goals

4.1. Transition criteria can marry
multiple objectives

5. The transition planissufficiently
comprehensive to becredible

5.1. Plan provides sufficient
information to assess delivery
capability

Transition plans need to include
both concrete transition targets
and a credible strategy to meetthose targets

5.2. The transition plan has nomaterial omissions

All material activities should becovered by the TP

5.3. The transition plan covers
the short-, medium- and longterm

the TP should cover the full
timeframe

6.1. Board level oversight

TP should describe board level
oversight

6.2. Internal policy alignment

TP should describe how internal
polices support transition

6.3. Internal monitoring andcorrection mechanisms in place

the TP must be a living strategy,
subject to regular re-evaluation
and updating

7.1. Supply chain engagement

The TP should describe external
engagementwithkey
stakeholders, including supply
chain partners

7.2. Client engagement byfinancial market participants

Financial sector reporters should
describe client engagement intheir TP8.1. Comparable transparency

Organisations

6: Put in place strong
internal governance

7: Promote active
external engagement
to create enabling
environment

8: External reporting

4.2 The transition has to be just

TP objectives should, at aminimum, avoid harming theachievement of other objectives(including
socialandenvironmental)

50

TP implementation: implications forbuilding the ecosystemshouldpublicly

IPSF – Implementing transition finance principles – Interim report
Theme

Principle

Sub-principle

TP Content: implication for reporting entity
Success factors for ‘ambition’process stepand engagement

over transition plans

Success factors for ‘plan’ and‘performance’ process steps
disclose their transition plans in a
way that makes them comparable

TP implementation: implications forbuilding the ecosystem

External reporting on those plans
should be done on annual basis

9:
Credibleassessment
mechanisms

8.2. Verification

An ecosystem of verifiers andstandardised approach to verification isneeded

8.3. Interactive communication
mechanism
betweenstakeholders

Needengagement
betweenallstakeholders to develop and share bestpractice

9.1. Transparent and consistentassessment
mechanism/certification
schemes are needed

Consistent assessment methodologies toreduce subjectivity is needed51

IPSF – Implementing transition finance principles – Interim report

Annex 3: Mapping of Transition Plan success factors against relevant transition plan frameworks
EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Framework

Internal targets
should be set withreference
to/benchmarked
fromexternal
targets

ESRS do not contain substantial
requirements for companies toadopt transition plans or to set
targets. (ESRS are disclosure
requirements). However, if acompany has adopted atransition plan it shall provide
disclosures to understand its
mitigation efforts to ensurethat the company’s businessmodel and strategy aresustainable and compatible
with the Paris Agreement andthe objective of achieving
climate neutrality by 2050 inrelation to European Climate
Law. (ESRS E1 para 16) sets out
detailed
disclosure
requirements on transition
plans and para 34 specificallyon targets, which should begross GHG emission reduction
targets.

The
framework
includesdisclosure requirements anddoes not specify a level ofambition. It is designed to build
on and supplement IFRS S2.

Targets
shouldextend to 2050
andincludeinterim targets

ESRS E1 article 34 (e): GHG
emission reduction targets
shall at least include target
values for the year 2030 and, if
available, for the year 2050.
From 2030, target values shallbe set after every 5- year period
thereafter.

Does not specify target dates
but includes a requirement todisclose target dates including
short, medium and long term
targets.

Ambition

Relevant
process step

(October 2023)

It uses the concept of a
‘Strategic Ambition’ (whichshould be anchored incorporate strategy) as the basis
for internal target setting. The
framework requires disclosureof the extent to which theentity’s Strategic Ambition isaligned with “any externalrequirements, commitments,
science-basedtargets,transition
pathways,roadmaps, or scenarios” andalignment of metrics andtargets with latest agreements
on climate change.

Moreover, the company shall52

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)

Element 1: a corporatetransition plan will set out its
net-zero targets, in line withthe temperature goal of the PA.
Targets will specify theunderlying assumptions andmethodologies,
andinparticular how they relate totheselected
globaltemperature goal. Targets are
set based on science, i.e. in amanner consistent with the
IPCC Special Report on Global
Warming of 1.5°C, to ensure noor limited overshoot of 1.5°C
globally above pre-industrial
levels. The plan will include an
explanation as to how thetargets compare to the relevant
NDC and national net-zerotarget, if any.

Para 4.10 requires a mid-term,
rolling, quantitative emission
reduction target.

The target dates for achieving
net zero may vary by sector andjurisdiction, as achieving net
zero by 2050 globally can entail
different levels of effort bydifferent
sectorsandindustries, and commitments
by national jurisdictions vary. It
is important for companies thatchoose a below 2°C scenario to

The EIB PATH Framework
requests the following twoelements in a decarbonisation
plan:

Para 4.11 states that in order tobe on track, decarbonisation
should take place at 4.2% on anannual linear basis. (Global
emissions need to fall by thatrate from 2020 in order to limit
the annual mean global
temperature increase to 1.5°C)

1.
A
mid-term,rolling,
quantitativeemission
reduction target (e.g. 5 to 10
years into the future – i.e.
aligned to the typical financial

IPSF – Implementing transition finance principles – Interim report
Relevant
process step

EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Framework(October 2023)

disclose its current base year
and baseline value, and from2030 onwards, update the baseyear for its GHG emission
reduction targets after every
five year period thereafter.

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

provide a reasoned anddetailed justification to explain
why being consistent with a
1.5°C scenario is not possible
for them. Long-term targets
should be accompanied byinterim (e.g. 3/5 years)
quantifiable, detailed and timebound targets, which shouldreflect the need for global GHG
emissions to peak by 2025.

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)
relationship through an EIB
corporate loan);
2. Options over a longer time
horizon to achieve carbon
neutrality
towards
midcentury.

Targetsettingshould include allmaterial scope 1,
2 and 3 emissions
and activities

ESRS E1 para 34 (b): GHG
emission reduction targets
shall be disclosed for Scope 1,
2, and 3 GHG emissions, either
separately or combined. The
undertaking shall specify, incase of combined GHG
emission reduction targets,
which GHG emission Scopes (1,2 and/or 3) are covered by thetarget, the share related toeach respective GHG emission
Scope and which GHGs arecovered.

Requirement to disclose any
targets for scopes 1,2 and 3
emissions
reduction.
The
frameworkalso
requiresdisclosure of non-GHG targets
including operational andengagement targets.

Credible targets will coveremission scopes 1, 2 and, as arule, 3.

Guidance to counterparties
indicates that targets should
cover 95% of scope 1 and 2
emissions for all counterparties
and in addition two thirds ofscope
3emissionsforcounterparties in airports,
commercial vehicles, passenger
cars and integrated oil and gas.
(SBTi
Corporate
ManualVersion 2.0 December 2021)

TP should enable
users to identify
which stages oftransition
thereporter is at,
includingtheimpact of its
currenttechnology profile

Since ESRS are about thedisclosures on companies’
sustainability impacts, risks andopportunities in an annual
sustainability statement. ESRS
disclosure requirements are
not linked to / limited to thosein climate change transition
plans, which would be too
narrow. For example ESRS2

The
frameworkrequirescomprehensive disclosures toenable the user to assess theirstage of transition compared totheir own Strategic Ambition.
This includes requirements todisclose
implicationsonbusiness model, and actions anentity is taking or plans to takein its business operations and

The transition plan willarticulate the transition risks
and opportunities that thecompany expects to face in the
short-, medium- and long-term,
as well as any foreseen
limitations, constraints, anduncertainties
totheachievement of the plan’stargets.
Assessingthe

Transition plan has to be madepublic which would provide
information to users on whatstage of the transition theentity is at.

53

IPSF – Implementing transition finance principles – Interim report
Relevant
process step

Transition targets
should focus on
reducing
emissions rather
than relying on
offsets.

EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Framework

para 48 (b) is relevant here but
it is not included in a transition
plan: a company shall disclose:
the current and anticipatedeffects of its material impacts,
risks and opportunities on its
business model, value chain,strategy and decision-making,and how it has responded orplans to respond to theseeffects, including any changes it
has made or plans to make toits strategy or business model
as part of its actions to address
particular material impacts orrisks, or to pursue particularmaterial opportunities.

products and services toachieve
their
Strategic
Ambition.

likelihood of achieving theplan’s targets using multiple
climate-related
scenarios,
wheneverfeasible,will
increase the plan’s credibility.

In ESRS, “GHG emission
reduction” is a defined term
and is gross without any
offsetting. (Offsetting can only
be considered in relation to
net-zero targets or GHG climate
neutrality claims (see ESRS E1
para 60 and 61). Definition GHG
emission reduction in Annex IIof the Delegated Act: Decreasein the undertaking’s Scope 1, 2,
3 or total GHG emissions at theend of the reporting period,
relative to emissions in thebase year. Emission reductions
may result from, among others,
energyefficiency,
electrification,
suppliers’
decarbonisation, electricity mix

The framework advocates a‘strategicandroundedapproach’totransition
planning,
includinganexplanation of how- anorganisation will meet climate
targets and contribute to theeconomy-wide
climatetransition. It also requires
detailed disclosures about any
carbon credits used. The
framework also states that"good
practicetransition
plans…
shouldprioritise
decarbonisation through directabatement over purchasing
carbon credits”.

A credible transition plan will
not consider carbon credits andoffsets as an alternative to
cutting a company’s emissions
today or as a reason for delayed
mitigation action, but rather aspart of the portfolio of
solutions to accelerate thepathway to net zero. Bestpractices for transition plansthat do consider the use ofoffsets
includeexplicitly
describing any intended use ofcarbon credits and offsets, thebasis for their carbon removal,
the applicable verification or
certification
scheme,thequality criteria to be used toassess credibility of offsets, and(October 2023)

54

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)

According to para 4.13 “Therole of offsetting in the planshould be clearly presented, inparticular where reliant on thevoluntary carbon market. In linewith good practice, corporate
plan should clarify whether
offsets are used to supplement,
rather than substitute for,reductions in emissions within
the corporate value chain – andthe impact of offsetting on the
proposed target. Plans should
be
clear
about
the
criteria/approach to be used tosource offsets.”

IPSF – Implementing transition finance principles – Interim report
Relevant
process step

EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Framework(October 2023)

decarbonisation, sustainableproducts development orchangesinreportingboundaries or activities (e.g.,
outsourcing,
reducedcapacities), provided they areachieved
withintheundertaking’s own operations
and upstream and downstream
value chain. Removals andavoided emissions are notcountedasemission
reductions.

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)

considering not including themin the GHG inventory and as acontribution to GHG targets.
Best practices also include
providing an explanation of theadditionality and permanenceof the offsets, the extent towhich they are being used as alast resort and clearly stating
the share of emissions to be
mitigated using offsets (whichshould decline over time) andtheir explicit role in thecompany’s mitigation strategy.

ESRS is much broader than aclimate change transition plan.
ESRS
cover
all
ESG
sustainability
matters.
Therefore,
an
ESRS
sustainability
statement
provides disclosures about allmaterial impacts, risks adopportunities of all material
ESG matters.

Includes requirements todisclose “whether and how theentity is pursuing theseobjectives and priorities in amannerthat
capturesopportunities, avoids adverse
impacts for stakeholders andsociety, and safeguards thenaturalenvironment”,
including the process by whichthese impacts have been
identified, assessed and taken
into account.

A transition plan should
consider not only mitigation
targets but also adaptation andother environmental and social
objectives. Credibility can beincreased by articulating how
the company intends to apply
the DNSH Principle, both atactivity- and entity-level.

Do No Significant Harm to
Adaptation is covered if
counterparties screened in forhigh physical climate risk arerequired to develop a resilienceplan. For the time being,
compatibility
with
other
environmental&socialobjectives not specificallyrequired
howevermanyelements covered by EIB’s
Environmental&
SocialStandards.

Transition plansneed to include
bothconcretetransition targets
and a credible
strategy to meetthose targets

Climate TP needs to include
GHG
emission
reduction
targets, an explanation of how
the undertaking’s targets arecompatible with the limiting of
global warming to 1.5°C in linewith the Paris Agreement.

Requirement for the TP
prepared to disclose any
targets they have and describe
in detail the planned actions tomeet those targets. This
includesimplementation
actionsandengagement
actions to support the Strategic

A credible transition plan will
set out a clear strategy on thepath the company intends totake to achieve its targets. To
be credible, a transition plan
will set out concrete actions to
be taken to achieve the definedtargets and the capital

Para 4.10 requires a mid-term,
rolling, quantitative emission
reduction target.

Plan and PerformanceTP
objectives
should,ataminimum, avoid
harmingtheachievement ofother objectives(including social
andenvironmental)

Disclosure Requirement E1-4

55

Para 4.11 states that in order tobe on track, decarbonisation
should take place at 4.2% on anannual linear basis (Global
emissions need to fall by that

IPSF – Implementing transition finance principles – Interim report
Relevant
process step

EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Frameworkspecify further disclosures ontargets related to climatechangemitigation
andadaptation.

Ambition.

(October 2023)

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

investments
needed.
Connected to the previous
point, the plan also will
describe any strategy andprocess for the responsible
retirement for high-emitting
corporate assets.

Regarding actions ESRS E1-3
requires the company todisclose its climate change
mitigation and adaptation
actions and the resources
allocatedfor
their
implementation.

Again, this is part of thebroader ESRS remit and notpart of a climate changetransition plan. The ESRS 2
mandatory
GOV(ernance)
disclosure
requirements
includingrole
andresponsibilities,
incentive
schemes, reporting, etc.

Para 4.12 states that where thisis not the case, the company
should explain/motivate its
existing targets and makereference to future actions on
optionstoaccelerate
decarbonisation.
Specifically, para 4.18 statesthat corporates would becontractuallyrequiredtocreateandpublishanalignment strategy, or revise
theirexistingalignment
strategy to address the points
set out in paras 4.10 to 4.12 andreport to EIB accordinglySpecific disclosures in ESRS E1
para 29 including current andplanned key actions and their
expected outcome in terms of
GHG emission reductions.

TPshoulddescribeboard
level oversight

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)
rate from 2020 in order to limit
the annual mean global
temperature increase to 1.5°C).

Requirementtodescribe
Board-level governance of TP

For the climate changetransition plan ESRS E1 para 16(i) requires to disclose if thetransition plan is approved bytheadministrative,
management and supervisory56

The plan will be subject toboard and senior management
approval and oversight.

PATH framework does not set
out governance requirements
apart from TP being madepublicIPSF – Implementing transition finance principles – Interim report
Relevant
process step

EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Framework

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)

Requirement to disclose any
policies and conditions that anentity uses or plans to use inorder to achieve the Strategic
Ambition of its transition plan.

A credible transition plan willbeintegrated
into
the
corporate business plan andwill make direct reference tothe company’s financial planand be done concurrently withfinancialreporting.
The
transition plan will be linked tothe company’s purchasing planfor engagement with suppliers,
the marketing/sales plan fortheengagementwithcustomers as well as be linked
to the policy/advocacy plan, forthe engagement with tradeunions, industry associations,and policymakers.

PATH framework does not set
out specific requirements

Recommendation to updateafter significant changes or at
the latest every three years.
Material information should be
included in the annual report,
and additional periodic standalone reports are regarded as
best practice.

A credible plan will clearly
defineaprocessandresponsibilities for regularmonitoring and reporting of
progress towards targets, aswell as for any timely andregular revision and update ofthis plan (e.g., on an annual
basis), to take stock of lessons
learnt, revisit assumptions, andidentify levers for action,
especially in areas that may befalling behind.

The mid-term targets aresupposed to be “rolling” andthe plan must be public, which
implies a “living document”. No
specific re-evaluation andupdate(October 2023)

bodies.
TPshoulddescribe
howinternal polices
support transition

Again, as ESRS are broader thana climate change transition
plan. For an ESRS sustainability
statement the company shallunder ESRS E1 para 22 describe
its policies adopted to manage
its material impacts, risks andopportunities
relatedtoclimate change mitigation andadaptation.
The disclosure required byparagraph 22 shall contain theinformation on the policies theundertaking has in place tomanage its material impacts,
risks and opportunities related
to climate change mitigation
and adaptation.

The TP must be alivingstrategy,subject to regular
re-evaluation andupdating

Requirement for explanation of
the undertaking’s progress in
implementing the transition
plan.
Companies subject to ESRS
must publish every year asustainability
statement
covering all material ESG
related impacts, risks, andopportunities. Specifically on
climatechangerelateddisclosures ESRS requires
updating of GHG targets andbaseline values.

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IPSF – Implementing transition finance principles – Interim report
Relevant
process step

The TP should
describe external
engagement withkey stakeholders,
including supply
chain partners

EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Framework

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)

Stakeholder engagement is adefined term in ESRS. ESRS 2
para 43: The undertaking shalldisclose how the interests andviews of its stakeholders aretaken into account by theundertaking’s strategy andbusiness model.

Requirementtodiscloseengagement with stakeholders
including the value chain,industry, government, public
sector, communities and civilsociety.

A whole-of-entity approach willbe essential in both the design
and implementation of thetransition plan, involving all
relevant stakeholders (workers,
suppliers, consumers, impacted
communities, if any, etc.).

According to para 4.14, “theplan should also indicate to theextent possible how the
proposed alignment strategy
takes into account of theinterestsofstakeholders,
including in particular social
partners. Disclosure on theseissues can help inform andshape measures to ensure a justtransition.”

The framework is sector neutral
but includes a requirement todisclose engagement withvalue chain. It specifies that for
financial services entities, thisincludes engagement and,
where
relevant,otherstewardship activities, withinvestee companies, loanclients and relevant financial
market intermediaries. This is
supported by guidance forfinancial services sectors which
provides further details on
relevant
disclosuresandsignposts sources of additional

Not covered (the Guidance
focusesonnon-financial
corporates)

PATH framework requires
financial institutions to reportin line with TCFD but does notlayout
specificclientengagement(October 2023)

Para 44 The undertaking shalldisclose a description of: (a) its
stakeholder
engagement,
including: i. the undertaking’s
key stakeholders; ii. whether
engagement with them occurs
and for which categories of
stakeholders; iii. how it isorganised; iv. its purpose; andv. how its outcome is taken into
account by the undertaking.
Financial sector
reporters should
describe
clientengagement
in
their TPESRS do not yet have sector
specific standard but thegeneraldisclosuresonstakeholder
engagement
would
includeclients.
Stakeholders are a definedterm in ESRS and include
business partners.

58

IPSF – Implementing transition finance principles – Interim report
Relevant
process step

EU ESRS adopted by theEuropean Commission on 31
July 2023

UK Transition Plan Taskforce
Disclosure Framework(October 2023)

OECD Guidance on Transition
Finance: Ensuring Credibility ofCorporate Climate Transition
Plans (October 2022)

EIB - The EIB Group PATH
Framework
Supporting
counterpartieson
theirpathways to align with theParis Agreement (version 1.1
October 2022)

A credible transition plan willcontaincompany
commitments to regularly
disclose targets (and underlying
assumptions) and progress
towards their achievement, toboth internal and external
stakeholders. The company will
pursue third-party verificationof its plan and related targets.

Decarbonisationplans,
resilience plans and TCFD
reports need to be madepublic. External reporting on anannual basis is not requested

guidance.
Organisations
shouldpublicly
disclosetheirtransition plans ina way that makes
them comparable
External reportingon those plans
should be done on
annual basis

TP publicly disclosed as part ofannualsustainability
statements prepared under
ESRS to target audiences(including
affectedstakeholders) for each financial
year under harmonised EU
rules, ensuring comparability of
TP.

The framework is intended toenablecomparability
byproviding a set of consistent
disclosure requirements whichis consistent for all entities.
Recommendations to publish
transition plan as a standalone
document and report against it
annually,withmaterial
information (including annual
progress updates) in general
purpose financial reports.

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IPSF – Implementing transition finance principles – Interim report

Annex 4: Key elements of transition finance frameworks
In October 2022, the G20 Sustainable Finance Report introduced a transition finance framework along withrecommendations to enhance the credibility of commitments made by private sector financial institutions. Of
particular relevance to target-setting by financial institutions are two recommendations:- Recommendation 3 – Accompany end-date targets to achieve net zero with science-based, time-boundinterim targets that are benchmarked against credible tools, pathways, and frameworks. These interim
targets should demonstrate a feasible path towards net zero and ideally include a thorough baseline analysis
of current portfolio emissions performed at the time the commitment is made (within two years of making a
net-zero commitment). Additionally, adopting an emissions target to be achieved within a certain timeframe,such as a mid-term five-year target, is encouraged. Commitments and targets should be science-based andideally verified by a third party.
- Recommendation 7 – Provide publicly available, consistent, and comparable information on metrics,
scenarios, methods, and benchmarks used to set targets. Financial institutions that have committed to a netzero target should disclose a consistent and comparable range of metrics to assess progress in implementing
their net-zero strategy and priorities. This may include targets for GHG emissions or intensity reductions,
support for climate solutions and sustainable finance, transparency on engagement strategies, and metrics
related to portfolio alignment, such as implied temperature rise, internal implementation, and, where
relevant, retirement of GHG-intensive assets. The information provided should be interpretable, supported
by up-to-date science, transparent in terms of methodology, and consistent over time.
The OECD Guidance on Transition Finance outlines ten elements of credible corporate climate transition plans,some of which are relevant to target setting. This guidance emphasises the importance of anchoring transition
finance transactions, such as sustainability-linked bonds (SLBs) and transition bonds, in entity-wide net-zero plansthat align with the temperature goal of the Paris Agreement. By doing so, the risk of greenwashing in transition
finance can be significantly reduced, instilling confidence in investors and promoting market scalability. The
guidance recognises the role of existing tools and frameworks in both transition and sustainable finance, such as
taxonomies, sectoral pathways, technology roadmaps, and sustainability reporting standards. Leveraging thesetools can enhance the credibility and comparability of corporate transition plans, maximising their impact andenvironmental integrity.
The ten elements of credible corporate climate transition plans identified in the OECD Guidance are as follows:
1. Setting temperature goals, net-zero, and interim targets: Net-zero and interim targets should be sciencebased, consistent with an IPCC 1.5°C reference scenario, and cover all relevant GHG emissions. Interim
targets should reflect the need for global GHG emissions to peak by 2025. In certain justified
circumstances, companies may choose reference scenarios consistent with limiting warming to below 2°C.
2. Using sectoral pathways, technology roadmaps, and taxonomies: Net-zero and interim targets should bebased on available sectoral pathways, technology roadmaps, and, where possible, taxonomies. The planshould clarify how future operating and capital expenditures will be allocated to achieve these targets.
3. Measuring performance and progress through metrics and KPIs: Climate change mitigation-related
metrics and KPIs should cover lifecycle GHG emissions and be measurable and externally verifiable.
Targets and reporting should include scope 3 emissions as a rule, and any omissions should be limited,justified, and clearly explained.
4. Providing clarity on the use of carbon credits and offsets: The use of carbon credits and offsets should be
limited and carefully explained to mitigate the risk of undermining the credibility of transition plans.
5. Setting out a strategy, actions, and implementation, including preventing carbon-intensive lock-in: A clear
strategy and concrete actions should be outlined to achieve the company's targets, including addressing
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IPSF – Implementing transition finance principles – Interim reporttransition risks and opportunities over time. The plan should assess the risk of carbon-intensive lock-in,
provide a responsible retirement plan for high-emitting assets where relevant, and establish mechanisms
to prevent lock-in for existing and future assets and infrastructures at risk.
6. Addressing adverse impacts through the DNSH Principle and due diligence for Responsible BusinessConduct (RBC): Transition plans should consider not only mitigation goals but also other environmental
and social objectives, ensuring no harm is done to them. Conducting risk-based due diligence based on
the OECD Due Diligence Guidance for Responsible Business Conduct (RBC) can operationalise the DNSH
Principle within transition plans. This helps companies identify, prevent, mitigate, and account for actualand potential adverse impacts associated with their operations, supply chain, and other business
relationships.
7. Supporting a just transition: Measures should be taken to mitigate negative impacts on workers, suppliers,
local communities, and consumers, in line with relevant International Labour Organisation (ILO) and OECD
principles and guidelines. Credible transition plans involve regular, continuous, and inclusive stakeholder
engagement and social dialogue.
8. Integrating with financial plans and ensuring internal coherence: The transition plan should be integrated
into the corporate business plan, making explicit reference to the company's financial plan. Both plans
should be developed concurrently, ensuring coherence.
9. Ensuring sound governance and accountability: A whole-of-entity approach should be adopted to monitor
and report on the design and implementation of the transition plan. The plan should be subject to senior
management approval and oversight and involve all relevant stakeholders.
10. Transparency and verification, labelling, and certification: Progress on targets should be regularly
disclosed, and third-party verification of the plan and its targets should be ensured.

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IPSF – Implementing transition finance principles – Interim report

Annex 5: Credible use of high-quality carbon credits, when appropriate and permitted
As mentioned in the 2022 IPSF Transition Finance Report, verified/certified offsets should be used only for last
mile emissions and not as a primary part of a decarbonisation strategy.
The Voluntary Carbon Market Integrity Initiative (VCMI) released in June 2023 its Claims Code of Practice whichaims to give companies a rulebook to follow for making credible climate claims using carbon credits on their pathto net zero. The Claims Code has three tiers of claims that companies can make – Platinum, Gold and Silver, eachof which recognises investment in GHG emission reductions and removals above and beyond corporate action tomeet their science-aligned targets. These tiers reflect the level of ambition of companies: on the Silver tier,companies purchase high-quality credits for between 20 and 60 percent of remaining emissions after making
progress towards decarbonisation targets; the Gold tier requires purchasing between 60 percent and 80 percent
of emissions, and a Platinum tier purchase offsets 100 percent or remaining emissions. The steps that a company
must undertake to make a VCMI Claim:-

It must first meet VCMI’s Foundational Criteria, which serve as the backbone of an ambitious and robust
climate strategy.

-

It must then select which VCMI Claim to make (Platinum, Gold or Silver).

-To make the claim, the company must select carbon credits which meet stringent quality thresholds inline with the Integrity Council for Voluntary Carbon Markets (IC-VCM) Core Carbon Principles (CCPs).

-

The company must disclose information to support its claim and conduct independent validation andassurance in line with the VCMI MRV and Assurance Framework (to be published in November 2023).

-

Finally, disclosure and reporting on how a company uses, or plans to use carbon credits to achieve its
climate ambition will be an important part of ensuring credible use of carbon credits.

While VCMI focuses on the integrity of the claims made by individuals and businesses buying carbon credits, otherinitiatives (e.g. The Integrity Council for the Voluntary Carbon Market) stress and look into the integrity of the
carbon projects and carbon credits themselves, as only high-quality offsets should be used, following strict quality
criteria, no double-counting and requirements regarding additionality as well as measures to address
impermanence.

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