NAVIGATINGCORPORATETRANSITIONS

A tool for financial institutions
to assess and categorise
corporates by their transition
credibility and maturity

Prepared by the Climate Bonds Initiative
Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative11. BackgroundContents
1. Background 2
2. Overview of the classification system 4
3. The proposed classification system 9
4. Guidance notes for use of the
proposed classification system to assessa corporate 16

This paper proposes a methodology toclassify corporate transitions, based on
the maturity, ambition, and credibility of
the corporate’s transition. It can be usedby any financial institution to categorise
its corporate exposures and track theirtransition progress over time. This is an
important foundation for any financial
institution seeking to decarbonise its
corporate exposure in line with its own
net-zero targets and plans. Adoption of
a common methodology by financial
institutions will ensure a consistent basis
for the measurement and management oftransition finance, and corporate and policy
engagement. The proposal builds on andnavigates between existing frameworks,
filtering to the common, core principles
and recommendations.

Current situation
Capital allocation to effectively transitioning
corporates is critical to enable the real economy
to transition to net zero. It is also critical toenable financial institutions to address theircurrent transition risks.1 Recognising this, manyfinancial institutions have joined networks
including the financial sector-specific netzero alliances that make up the coalition of
the Glasgow Financial Alliance for Net Zero
(GFANZ),2 and the Institutional Investors Groupon Climate Change (IIGCC). Banks have madecommitments to achieve net-zero emissions
by financing and facilitating ambitious climate
action to transition the real economy to net
zero by 2050. Similarly, investors have madecommitments to decarbonise and align theirportfolios with net zero. Overall, financial
institutions are increasingly reporting thevolume of sustainable finance and forwardlooking decarbonisation targets.3
To deliver on these targets, financial institutions
may adopt a variety of strategies to decarbonise.
Depending on the type of financial institution
and the nature of its activities, this might
include amending lending policies andcovenants, portfolio construction, strategic
asset allocation, engagement, selective
divestment and/or policy engagement, given
the interdependence of corporates and financial
institutions and policy makers.4

Understanding the current emissions andforward-looking transition plans of thecorporates they are financing, holding and/or facilitating is a precursor to any financial
institution’s effective corporate engagement
and capital allocation to transition. To this end,
asset managers and asset owners are analysing
the transition plans of the corporates in theirinvestment portfolios. Equally, banks areevaluating the transition plans of the corporates
in their loan books and of their corporate
advisory clients. These corporate investees,borrowers, and clients are collectively referred toas ‘corporate exposures’ in this paper.
This has resulted in the publication of numerous
frameworks dedicated to determining theessential qualities of a credible corporatetransition plan. Such frameworks provide
guidance to financial institutions evaluating theambition and feasibility of corporate transition
plans, and some also present categories thatreflect the maturity of a corporate’s transition; fromcommitment and planning, to implementation
then delivery. These categories can help financial
institutions to reduce and translate the multicriteria of credible transition plans into a uniform
corporate classification system that can be used
to support and track the financial institution’s own
transition delivery progress.
Climate Bonds published ‘Transition Finance
Mapping: Frameworks to assess corporatetransition’ in November 2023, which
demonstrated a high degree of alignment
between these frameworks in terms of thecategorisation of corporate transition maturity
and the principles underpinning credible
corporate transition plans.5 However, a notablevariation in the more specific indicators andmetrics put forward for the identification andcategorisation of credible corporate transition
was highlighted. Furthermore, the absenceof granular data and information provided
by corporates due to their nascent stage oftransition plan development and disclosure(ahead of published regulations addressing
transition plan disclosure) renders much of thisguidance inoperable by financial institutions
currently assessing corporates.

1. For example, according to the ECB Banking Supervision 2022 climate risk stress test (July 2022), banks currently generate over 60% of their interest income from counterparties in carbon-intensive sectors. Recent
analysis of 95 banks covering 75% of euro area loans for the ECB’s January 2023 report “Risks from misalignment of banks’ financing with the EU climate objectives” demonstrated that currently banks’ credit portfolios aresubstantially misaligned with the goals of the Paris Agreement, leading to elevated transition risks for roughly 90% of these banks. These risks largely stem from exposures to companies in the energy sector that are lagging
behind in phasing out high-carbon production processes and are late in rolling out renewable energy production.
2. Net Zero Banking Alliance (NZBA); Net Zero Asset Owners Alliance (NZAOA); Net-Zero Asset Managers initiative (NZAM); Paris Aligned Asset Owners (PAAO); Net-Zero Insurance Alliance (NZIA); Net Zero Financial Service
Providers Alliance (NZFSPA); Net Zero Investment Consultants Initiative (NZICI); The Venture Climate Alliance (VCA); Net-Zero Export Credit Agencies (NZECA)
3. As of 30 September 2023, over 460 financial institutions from across the Net Zero Asset Managers initiative (NZAM), the Net Zero Asset Owner Alliance (NZAOA), the Net Zero Banking Alliance (NZBA), Net Zero Insurance
Alliance (NZIA) and the Paris Aligned Asset Owners (PAAO) have set interim targets. More than 250 have committed to disclose their transition plans within the next year. GFANZ-2023-Progress-Report.pdf (bbhub.io)
4. As ‘aggregators’ of corporate transition plan analysis and capital allocation, financial institutions are in a prime position to engage with policy makers on the key elements needed from an enabling policy environment,
including clear and consistent transition plan disclosure regulations, tools to support transition finance, and industrial policy to enable and incentivise real-economy transition.
5. Transition Finance Mapping: Frameworks to Assess Corporate Transition - Climate Bonds - Nov 2023

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative2

A classification system forcorporate transitions
To address these issues, this paper
puts forward a classification system forcorporate transitions that identifies:• Five categories of corporate decarbonisationtransition maturity; and• Key indicators for a corporate’s inclusion ineach of those categories.
Its primary audience is all and any financial
institution analysing the transition of its
corporate exposures. When using these
indicators and categories as the basis of thatanalysis, financial institutions can consistently
target and prioritise corporate engagement
around the indicators that are not being met
for any specific corporate and/or corporates atthe lower end of the maturity scale, as part ofa collective push to ensure all corporates aretransitioning. This facilitates both the rapid andambitious transition of the real economy and theachievement of the financial institution’s own
net-zero goals.
The proposed classification system combinesand builds on the many frameworks that havebeen put forward to guide credible corporatetransition and transition finance assessment,
informed by the aforementioned ‘Transition
Finance Mapping: Frameworks to assess
corporate transition’.6 Its value-add over the
existing guidance is three-fold:
1. It navigates on behalf of financial
institutions the complexities anddivergences in existing guidance. It draws
on the identified alignment between the
proliferation of existing guidance where suchalignment exists, and where it does not, it puts
forwards indicators that are understood torepresent a majority or widely-held position inthat guidance.
2. It filters that guidance to the core,prioritised indicators of credible corporatetransitions. Many of the frameworks
reviewed encompass a very high number ofindicators of a credible transition, legitimately,as they are aimed at pushing corporates todevelop, implement, and disclose robust
and comprehensive transition plans. The
caveat, as mentioned above, is that many ofthese indicators cannot currently be assessed
across a large number of corporates given
the nascent stage of corporate transition plandevelopment and disclosure, particularly while
operating in advance of published regulationon corporate transition plan disclosure.
Instead, a relatively limited number of priority
indicators are selected to be used in the shortterm to indicate sufficiently credible corporatetransition until corporate transition reporting
advances. It is therefore a tractable tool tohelp financial institutions with assessing andsupporting the transition of hundreds if not
thousands of corporate exposures.
3. It comes with support from those
representing a large number of financial
institutions. This paper is a collaborative effort
from Climate Bonds Initiative, the Institutional
Investor Group on Climate Change (IIGCC), theSustainable Markets Initiative (SMI), and Climate
Arc with methodological feedback from the
GFANZ Secretariat and representatives from thefinance world.
For the avoidance of doubt, at this time the focus
is decarbonisation only. However, the indicators
do touch on the impact of that transition onother environmental and social factors.

Next steps
The proposal will be subject to consultation withthe authors of many of the existing transition
frameworks used to inform this proposal, andselected financial institutions. Feedback will begathered on:

categories and indicators into an open-source
online platform, pre-populated with existing
corporate transition data and analysis fromindependent, third-party sources that havecarried out enhanced due diligence of corporatetransition plans and progress. This would bothsupport the intention of a robust, common
approach across financial institutions and enableacceleration by taking the analysis burden
away from individual financial institutions.
Financial institutions would of course continue
to supplement their own additional elements ofanalysis to meet their own internal requirements.
Climate Bonds is also exploring how financial
institutions might use this classification
system to provide more insight into theiroverall emissions reduction targets andtheir strategy to deliver those targets, andby extension how they themselves can bemonitored for their transition progress.
Lastly, the objective is to develop equivalentclassification systems and associated indicatorsfor non-corporate entities, including publicbodies such as sovereigns and municipalities
as well as financial institutions themselves.
Financial institutions lend to, invest in, advise
and/or provide other services beyond corporate
entities and a full transition of their balance sheet
and revenues requires a broader lens.

a. Whether the categories and associatedindicators adequately capture the varying
transition maturity of corporates acrosssectors, geographies, and sizes, and hence canserve as a common approach; andb. Whether financial institutions can access thenecessary information to evaluate a corporate
against these indicators (either directly or via
third party assessors, assessment schemes ordata providers); andc. Whether this proposal does indeed represent
a value-add to existing guidance.
The classification system will also be validated byscreening the real portfolios of selected financial
institutions against the proposed categories andassociated indicators. Particular attention will be
paid to perceived anomalies/miscategorisationsof corporates, and any challenges in interpreting
the indicators or accessing the informationneeded from corporates to assess compliancewith the indicators.
A refined classification system will then be
made public for the use of financial institutions
on a voluntary basis. To further support this,
discussions are also ongoing to embed the

6. It has also been informed by the work of the ‘Assessment of Transition Plans Collective (ATP-Col). This group’s report ‘Framework and guidance to assess the credibility of companies’ Transition Plans’ (forthcoming)
provides principles and guidance to assess a company’s transition plan credibility and robustness and lists assessment points for each component of a credible transition plan.

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative3

2. Overview of the classification system
Rationale for a sharedclassification system forcorporate transitions
A number of initiatives have put forward amaturity ladder for corporate transitions wheresteps on the ladder represent progression fromcommitment to transition, to planning, to delivery ofemissions reductions until net zero is reached.
See Figure 1 for a stylised schematic of this.
By mapping (selected) indicators of an
ambitious and credible transition (plan)
to the steps on this ladder, multi-criteria
indicators for credible transitions can be
categorised into summary evaluations of acorporate’s current and planned transition.
Using these categories and associated indicators
to assess and classify corporates has multiple
benefits for a financial institution:• It facilitates aggregation and differentiation
between corporates. For example,
differentiation between corporates alreadyaligned to net-zero versus companies which
are in the process of aligning to net zero versus
those which have set targets that are not yet
ambitious enough, versus those that have madecommitments but not yet gone beyond that.
• Once aggregated and differentiated,
this information empowers financial
institutions to develop effective
engagement strategies and roadmaps
across their portfolios, including providing
active support to corporates whose transition
planning and implementation is lagging.

Figure 1: A maturity scale, or ladder, for ambitious and credible
corporate transitions
5. Already net-zero emissions
N.B. Net zero heremeans net zeronotwithstanding any
residual emissions

4. Already on Paris-aligned
pathway and credible plan
to reach Paris goals
3. Credible plan (emission
targets and delivery strategy)
to align with Paris-aligned goals
and pathway
2. Commitment to Paris goals(and some action)

1. No commitment to Paris-aligned
pathway/Paris goals• (Credible) corporate transition maturity
may in itself be a useful target metricfor financial institutions’ own transition
targets at the sectoral and/or productand/or portfolio level. Arguably, transition
maturity is a more directly influential impact
indicator for financial institutions as corporate
emissions impacts will take time to manifest at
scale and can be heavily influenced by various

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

factors, such as the size, emission intensity,
domicile, and sector of its corporate exposures.
See Box 1 for three proposals in this respect.
Furthermore, the adoption by many financial
institutions of a common classification
system enables consistent interpretations oftransition finance (and facilitation) across thosefinancial institutions.

4Box 1: Using transition maturity as a target metric for financial institutions’ transition
The IIGCC first put forward five ‘alignment
maturity’ categories as part of the
Net Zero Investment Framework (NZIF)
as a basis for investors to set portfolio
coverage targets to increase the percentage
of assets under management (AUM)
categorised as either aligning towards a netzero pathway, achieving net zero, or aligned
to a net-zero pathway, and through thestewardship process, encourage companies
to meet the associated criteria to movethrough these categories.9
The Net Zero Banking Alliance (NZBA) report‘Developing Metrics for Transition Finance’10
notes that sustainable finance and emissions
reduction metrics alone are not adequately
nuanced to capture all of the sophistication in
how financial institutions need to approachtransition finance.11
It identifies three types of transition financemetrics that banks might use to provide
additional transparency on their activities withtransitioning companies:
1. ‘Input metrics’ that reflect the volume
of financing provided to companies,
categorised to reflect an appropriate
segmentation of transition status;

Overview of the
proposed categories
The proposed categories classify corporates
according to their transition maturity, taking
into account the ambition and credibility of
their transition as they move through the key
steps to net zero.
For the majority of corporates, these steps will seethem move from commitments to plans (including
emissions reduction targets and roadmaps todeliver those targets) to implementation action
to emissions reduction, all within an enabling
governance structure.
Figure 2 provides:• An overview of those categories and what they
aim to capture;• A determination of whether exposures in eachcategory could legitimately be counted astransition and/or green finance.

2. Measurements of committed
decarbonisation, including Expected
Emissions Reduction (EER) metrics, (such as
Avoided Emissions or Emissions Reduction
Potential (ERP)) and/or Committed Emissions
Reduction (CER);12
3. A range of supporting evidence which might
include back-testing or validation of clients’committed decarbonisation plans, physicalindicators of decarbonisation, and efforts to
use transition numbers to forward project othermeasures such as sectoral net-zero targets.
Tracking corporates’ progress against type 1
metrics, specifically, their transition plans andprogress through the transition categories overtime and reporting on this at the sectoral and/or product and/or portfolio level would provide
transparency on the extent to which any financial
institution can be said to be effectively supportingand delivering transition. It would add clarity totheir transition targets and progress, supporting,
not replacing any sectoral and/or portfolio
emissions reduction metrics or decarbonisation
targets to which the financial institution has
already committed or will commit to.
Such tracking would require financial institutions
to utilise a consistent method to categorise theFive key components are utilised to organise
the selected indicators underpinning thecorporate transition categories. These are:
A. Commitment, B. Emissions Targets, C. Delivery
Strategy, D. Governance, and E. Performance.
Broadly speaking, this proposal reflects acommonality of views across a number oftransition categorisations and transition plan
guidance from a variety of sources as summarisedin the recent ‘Transition Finance Mapping:
Frameworks to assess corporate transition’.7
Figure 3 provides a high level comparison to thecategory labelling used elsewhere.
Given the purpose of this categorisation is toprovide a practical tool for financial institutions
to assess their corporate exposures, two further‘non-classified’ categories have been addedthat are not found in existing guidance. These
capture a) corporates for which insufficient
data is currently available to determine theirtransition progress of their clients. As thereport notes, to begin with, this may involvebanks defining their own transition categories
and assessing clients against them. Over time,
the aim should be to harmonise a market-wide
definition of transition finance categories topromote consistency.
Similarly, SBTi’s draft Net Zero Standard for
Financial Institutions notes the importance of
portfolio alignment targets, alongside portfolio
emissions targets.13 SBTi defines financial
institution ambition as the rate at which different
asset classes are aligned to 1.5°C pathways
in a manner that is also consistent with key
milestones needed for the transition. Bothportfolio alignment and portfolio emissions
targets can be established to track overall
progress towards long-term net-zero goals. Overthe near-term, portfolio alignment goals are
considered mandatory given that they directly
focus on the alignment of portfolio holdings
against 1.5°C pathways, while portfolio emission
targets may be used to support alignment targets
but are not considered sufficient on their own
to evaluate the contribution of a financial
institution’s actions to a 1.5°C transition given
portfolio emission metrics represent ‘lagging’indicators of the overall emissions exposure.

transition status,8 and b) corporates thathave disclosed data but this has not yet beenassessed by the financial institution due
to its own transition assessment phasing/prioritisation decisions. Understanding thenumber and emissions profile (even at a genericlevel) of corporate exposures allocated to thesecategories will assist financial institutions with
their own transition screening planning and/or
their corporate engagement strategies.
The remainder of Section 2 addresses key issues
in the determination of these categories andassociated indicators, and implications for theirapplication and interpretation. Section 3 details
the specific indicators used to assess eligibility
for each category.

7. One change has been made to that mapping. In the mapping there was provisionally an additional category ‘near net-zero emissions’. This has now been incorporated into the ‘Aligning’ category.
8. Note this is not the same as the ‘No action’ category. ‘No action’ captures those that have made no commitment, have no transition plan (however rudimentary), nor have aligned their emissions with sectoral pathways.
This category captures those that have disclosed some information on their transition, but not at sufficient depth to evaluate against the indicators in any transition category.
9. IIGCC_Investor-expectations-of-corporate-transition-plans_Final.pdf (hubspotusercontent-eu1.net)
10. Developing-Metrics-for-Transition-Finance.pdf (unepfi.org)
11. For example, financing the managed phaseout of high-emitting assets leads to increased financed emissions and emissions intensity, and does not qualify as sustainable finance in existing taxonomies. Financing
companies which are currently carbon intensive but have credible transition plans could lead to an increase in a bank’s or equity investor’s portfolio emissions in the short-term and create the view that the bank is notprogressing in line with its stated emissions reduction targets.
12. For further discussion on these metrics see: Transition-Finance-and-Real-Economy-Decarbonization-December-2023.pdf (bbhub.io)
13. The-SBTi-Financial-Institutions-Net-Zero-Standard-Consultation-Draft.pdf (sciencebasedtargets.org)

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

5

Figure 2: Understanding what the categories represent
4. Aligned

5. Netzero*

3. Aligning
2. Committed
Key components
for assessment

No analysis
undertaken

Insufficient
data foranalysis

1. No
actionA. Commitment

-

-

-

Net zerocommitment

As left

As left

B. Emissions
targets---

May have shortterm emissions
targets

Ambitious andcomprehensive
emissions targets

As left-

C. Delivery
strategy

-

-

-

-

Internally coherent,
comprehensive,
feasible, and trackabledecarbonisation action
plan, aligned withidentified decarbonisation
levers and with supporting
financial indicators

As left-

D. Governance

-

-

-

Internal
governancein place

As left-

E. Performance

-

-

-

-

Milestone actions(and financial indicators)
identified in the action
plan delivered

As left

-

-

-

-

-

Actual emissionsalign with corporate’semissions targets

Actual emissionsalign with credible
benchmarks

As left

As left

Net-zeroemissions* Net zero means net zero notwithstanding any residual emissions14
Implications forclassification ofgeneral purpose
loans to/investment in/advisory services
to corporates inthese categories

Not classified

Inadequate performance
to count as transition

Adequate performance to countas ‘transition finance’

Not classified

Inadequate performance
to count as green

Adequate performance to count as ‘green finance’n/a

14. Where residual emissions are defined as ‘greenhouse gas emission that remains after taking all possible actions to implement emissions reductions, and when net zero has been reached. All possible actions refer towhat is technically and scientifically feasible’. Per ISO’s IWA Net Zero Guidelines (IWA 42 3.2.9).

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

6

Figure 3: How other categorisations map to this proposal15,16
5. Net zero
4. Aligned
3. Aligning
2. Committed
1. No action
ClimateBonds17--

Transition

AlignedAlignedGFANZ18

Not aligned

Committed to
Aligning

Aligning

AlignedAligned

IIGCC19

Not aligned

Committed to
Aligning

Aligning Towards a
Net-Zero Pathway

Aligned to a Net
Zero Pathway

Achieving
net zero

SBTi20Not aligned

Not aligned

1.5°C Transition:
1.5°C aligned
ambition

1.5°C Transition:
1.5°C aligned
performance

Net-Zeroaligned

SMI21-

Aiming toTransition

Committed
to Transition

Transitioning-

WBA(ACT)22Not
transitioning
in a credible
and robustway

Not transitioning
in a credible androbust way

Transitioning
in a credible androbust way

Transitioning
in a credible
and robust way-

Category ‘2. Committed’ captures corporates whichhave targets but not yet a plan for how to deliver on
those targets. This includes those with a net-zerocommitment (i.e., a long-term target) only, andthose that also have short-term targets. These arecaptured in two sub-categories: ‘2a. Pledged’ and‘2b. Short-term targets only’ respectively. This subcategorisation affords additional recognition to the
not-insignificant step of developing more detailed
short-term targets. However, short-term (or any)targets without a supporting plan describing how
it is anticipated those targets will be achieved are
an insufficient basis for transition implementation.
Only once an associated delivery strategy has
been developed will a corporate move up thematurity scale to category ‘3. Aligning’.

To reflect this, a subdivision has been introducedin category ‘3. Aligning’ to create ‘3a. Aligning –short-term+ plan’ and ‘3b. Aligning – full-term
plan’. The intention is to enable corporates tobe categorised as ‘Aligning’ in the absence ofspecified medium- and long-term targets, aslong as they are demonstrating forward-thinking
in terms of how emissions reduction into themedium-term and beyond will be achieved andthat actions needed in the short-term to deliver
the future emissions reduction are planned anddisclosed so progress can be monitored.
Specifically, categorisation into ‘3a. Aligning –short term+ plan’ requires:• Short-term targets to be set and associateddecarbonisation levers and actions to deliver
those short-term targets to be identified; andOR Committed(depending onwhether haveshort-term targets)

Focussing on the short-term plan
but with a view to the longer term

However, a short-term focus only, provides noreassurance that the necessary transition will
be maintained beyond the short-term throughto net zero, particularly where action is neededin the short term for emissions reduction later,
as is commonly the case.23 This is particularly
important for those sectors where emissions
reduction will probably be back-loaded due tothe lack of available decarbonisation solutions inthe short-term.

Specifically, category ‘3. Aligning’ is intended tocapture corporates that have developed a robusttransition plan, but whose actual emissions are
not yet aligned with 1.5-degree benchmarks.
Ideally, those transition plans will be ‘complete’ inthat they will address short-, medium- and longterm targets, and corresponding short-, mediumand long-term action plans to deliver thosetargets. However, in the current nascent stage oftransition, many corporate transition plans do notestablish interim targets and associated delivery
strategies for the full timeline to net zero.
A short-term focus is a priority to both kick-start
the transition and to give a fighting chance tohalve global emissions by 2030. From a practicalpoint of view it also makes sense for a corporate
to focus here to utilise and align with theirshorter-term planning and budgeting timeframes.

• The identification of the decarbonisation
strategy and associated decarbonisation levers
that will be used to deliver any additionalemissions reduction needed over and above
those covered by the short-term targets which
together with the short-term targets emissions
reduction account for 50% of the corporate’sbaseline emissions; and any actions neededin the short term to deliver those additionalemissions reductions.
Categorisation into ‘3b. Aligning – full term
plan’ requires:• Short-, medium- and long-term targets to be
set, and associated decarbonisation levers andactions to deliver those short-, medium- andlong-term targets to be identified.
See Box 2 for note on key terminology here,
including the difference and linkages between
decarbonisation strategies, levers, and actions.

15. The categories presented in this table should not be misconstrued as implying equivalence or substitutability between the listed frameworks and their categories, nor should it be interpreted that the guidance within
the listed frameworks can replace one another, or directly correlate to the guidance provided in this note. It is noted that the transition maturity categories here draw from but do not match the four transition financing
categories identified by GFANZ — ‘climate solutions’, ‘aligned’, ‘aligning’ and ‘managed phase-out’. This is because, when assessing at a corporate level, the ‘climate solutions’ and ‘managed phase-out’ financing strategies
describe decarbonisation strategies that an individual corporate may or may not employ (depending on the nature of their economic activities) en-route to aligning with net zero. Where the corporate needs to invest in
climate solutions or phase out high emissions assets, this should be seen in their delivery strategy describing the actions that they will take to reduce their emissions. However, they are not inherently stages of transition
maturity hence are not explicitly recognised through a distinct transition maturity category.
16. The Transition Pathway Initiative’s methodology for assessing publicly listed equity does reflect an interpretation of transition status but cannot be captured in this table as the management quality levels are separated
from the emissions target and performance indicators. Furthermore, the management quality levels (of which there are six) have a more granular interpretation of management readiness, with the development andimplementation of a transition plan representing level 6.
17. Climate Bonds Standard V4.0 | Climate Bonds Initiative
18. These draw on GFANZ’s four transition financing strategies. ‘Climate solutions’ and ‘managed phase-out’ financing strategies describe decarbonisation strategies that an individual corporate may or may not employ(depending on the nature of their economic activities) en-route to aligning with net zero. Where they do so, this should be evident in their delivery strategy describing the actions that they will take to reduce theiremissions. However, they are not inherently stages of transition maturity hence are not explicitly recognised through a distinct transition maturity category here. See https://assets.bbhub.io/company/sites/63/2023/11/
Transition-Finance-and-Real-Economy-Decarbonization-December-2023.pdf
19. IIGCC’s ‘alignment maturity’ categories. These are the most comprehensive and well-developed of the categorisations listed in this table. See Investor Expectations of Corporate Transition Plans: From A to Zero (iigcc.org)
20. Noting that SBTi categories address emissions targets and performance only, not other aspects of the transition plan (delivery strategy, governance etc.,). See The-SBTi-Financial-Institutions-Net-Zero-StandardConsultation-Draft.pdf (sciencebasedtargets.org)
21. A framework to define a transition category for investors, July 2022 PowerPoint Presentation (unepfi.org)
22. The World Benchmarking Alliance’s (WBA) Assessing Corporate Transition (ACT) methodology has a scoring system for corporate transition – see https://actinitiative.org/wp-content/uploads/pdf/act_generic_methodology_v2.0.pdf. A forthcoming paper considers how these scores might be mapped to transition maturity categories: ‘ACT Assessment Categorization Framework’ (forthcoming)
23. For example, multi-year research and development programmes might be required to deliver the technologies and capabilities needed for longer-term emissions reductions or planning for and construction of new
facilities might mean multiple years of action before a new facility becomes operational.

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative7

Box 2: A note on key terminology28
The strategies that may be deployed by acorporate to decarbonise are well understood,
including building up ‘climate solutions’,
phasing out ‘stranded assets’, and/or
otherwise decarbonising its ongoing activities.
These decarbonisation strategies will be
realised by activating ‘decarbonisation
levers’. These levers are aggregated types of
mitigation actions such as energy efficiency,
electrification, fuel switching, use of renewable

Capturing ‘Climate Solutions’and ‘Enabling Activities’
The categories and associated indicators are
sufficiently generic to capture the transition
status of corporates across all sectors, sizes, andgeographies, but assume the transition process
involves the development of a transition plan toguide their 1.5 degree alignment.
However, some corporates may deliver lowemission goods and services without, or prior to,developing a formal transition plan. These include:• Corporates with inherently low-emission
activities that have not undergone any
previous decarbonisation, such as electricalutility companies using only solar or wind
power, rather than transitioning away fromfossil fuels, or car manufacturers producing only
electric vehicles rather than those transitioning
from the production of fossil fuel fleets;• Corporates whose goods or services enable
others to deliver substantial emissions
reduction, such as manufacturers of lowcarbon technologies, or those mining
transition critical minerals;• Corporates which have substantiallydecarbonised their own activities in advance ofa formal, disclosed transition plan.
These low-emission corporates are generally
not yet zero emissions, due to some relatively
immaterial emissions in the materials used intheir construction for example, which in time
will require a transition plan to address. Evenso, they deserve recognition for their relatively
low emissions today, even in the absence of atransition plan.
These activities (and corporates) are
generally described as ‘Climate Solutions’or ‘Enabling Activities’.24

energy, products change, supply-chain
decarbonisation, phase out of high-emitting
assets, and potentially divestment.
Decarbonisation actions are the corporate’s
specific actions undertaken to implement its
selected decarbonisation levers and deliver
its emissions reduction targets, throughwhich it seeks to address material impacts,
risks, and opportunities.

It is proposed that these corporates can be
categorised as ‘4. Aligned’ based on their current
emissions performance even in the absenceof a commitment and public transition plan toreach net zero.25 However, it is further proposedthat this categorisation is valid for a limited
period of five years only. If these corporates
do not deliver a net-zero commitment andassociated transition plan within that timeframe(a commitment and transition plan that meetsthe indicators for ‘3. Aligning’) they should
then be recategorised as either ‘1. No action’or ‘2. Committed’ depending on whether
they do or do not have a suitable net-zerocommitment, regardless of any ongoingemissions performance. This proposal, and thepotential for downward recategorisation, reflect
the view that all corporates will ultimately needa transition plan to govern their full transition
to net zero.

Using the categories to identify
transition financeCorporates in category ‘3. Aligning’ and category‘4. Aligned’ are determined to be crediblytransitioning to net zero. Therefore, as illustrated
in Figure 2, primary and secondary general
purpose financing (and facilitating the general
purpose financing) of these corporates can beconsidered ‘transition finance’.

This position does not conflict with a recognition
that corporates in the hard-to-abate sectors will
likely account for a significant portion of (many)financial institution’s emissions, are highly
significant to a successful transition to a net-zero
economy, and may need significant financeto enable their transition. Hence, financial
institutions may at least initially prioritise theirtransition activities on corporates in these hardto-abate sectors but transition, and the conceptof transition finance, should not be limited tothese sectors.
However, these categories can also be
considered as ‘green finance’ on the premisethat transition is a subset of green as longas the speed and ambition of that transition
is consistent with the collective goal tohalve emissions by 2030 and achieve net
zero by 2050.26 The green label has never been
restricted to net zero. Green bond proceeds are
predominantly linked to projects, assets, andactivities which are not yet net zero, whether
that be ‘Climate Solutions’ or financing thedecarbonisation of assets or asset values for
assets not yet at zero, such as buildings. Various
green taxonomies, including the EU Taxonomy
for Sustainable Activities (often known as agreen taxonomy in the current absence ofsocial criteria) include sectors and eligibility
criteria for activities and assets in the process oftransitioning.
Note: this section relates to general purpose
finance including equity investment, corporate
bonds and loans, and other general purpose
debt. It does not include finance with a specificuse-of-proceeds such as project finance ortargeted loans, which would require evaluation
to determine their eligibility to be included astransition and/or green finance.27

This determination is made on the basisof the status, ambition, and credibility of
the corporate’s transition, as evidenced bytheir transition commitments, plans, andperformance, regardless of the sector orindustry in which they operate. That is, the label‘transition finance’ is not limited to hard-to-abate
sectors because, as argued above, all corporates
not already at net zero need to transition. Even
those viewed as ‘Climate Solutions’.

24. The December 2023 GFANZ report https://assets.bbhub.io/company/sites/63/2023/11/Transition-Finance-and-Real-Economy-Decarbonization-December-2023.pdf identifies three sub-types of Climate Solutions:i) Solutions that directly reduce or remove emissions; ii) Enablers that contribute indirectly; and iii) Nature-based solutions that mitigate climate impacts and sets out two attributes for them: a) Real-economy emissions
reduction: Direct or indirect net contribution to emissions reductions should be significant and should not lead to the extension of the lifetime emissions of assets identified for phaseout. b) Expectations of net-zeroalignment: The Climate Solution’s own emissions should be reasonably expected to progress toward net zero over time.
25. That is, subject to meeting the emissions performance indicator E3 as described in Figure 4.
26. As is tested by the Indicator E3 per Figure 4.
27. Indeed, it is possible that general purpose finance and known use-of-proceeds finance for the same corporate may be differently categorised. For example, an energy utility corporate transitioning away from fossil fuelto renewable generation may be categorised as ‘3. Aligning’ on the basis of their current transition plan and stage of implementation, in which case equity investments in that company and general purpose debt raisedby that company may be considered ‘transition finance’. However, a use-of-proceeds bond issued by that same corporate to finance the installation or acquisition of solar or wind farms may be categorised as ‘4. Aligned’
given current emissions performance (in line with the discussion of ‘Climate Solutions’ above) and marketed (labelled) as a ‘green bond’.
28. These definitions of decarbonisation levers and actions are based on those in the European Union Environmental and Social Reporting Standards (ESRS): Commission Delegated Regulation (EU) 2023/2772 of 31 July
2023 supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards (europa.eu)

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative8

3. The proposed classification system
Figure 4 captures the indicators for a corporate with a transition plan.
The accompanying notes are found in Table 1 below. Box 3 provides some context for the selection of the indicators.

Box 3: Selection of the indicators
As noted above, the categories are intended todemarcate the stages of maturity of corporate transition
planning and implementation, as evidenced by thedelivery (or not) of ambitious and credible commitments
and transition plans, governance structures,and completed action with resulting emissions
reduction, which is what the indicators focus on.
Currently, the indicators are relatively limited in
number, which is intentional to both address thenascent stage of corporate transition disclosure andto accelerate assessment across a large numberof corporates. Investor portfolios, for example,

typically include stakes in hundreds, if not thousands,of publicly listed companies. This presents a challenge
when selecting these indicators from the large number
introduced across the variety of existing guidance,
despite that guidance having a high degree of alignment.
Also challenging is ensuring indicators address theambition and the credibility of the corporate transition,
both of which may be highly contingent on an individual
corporate’s circumstance. Adopting aspirational
indicators would help push corporates to improve thequality of their transition plans; however, setting an
unrealistically high bar would limit the goal of rapid andwidespread assessment, and corporate engagementby financial institutions. With these considerations in
mind, during the selection process, priority was given to
indicators that best satisfied the following requirements:• Met overarching requirements for ambition – namelyalignment not just with a net-zero goal, but 1.5
degree pathways to that goal with limited overshoot;• Consistently identified in the corporate transition
guidance previously reviewed; and• Left less room for subjectivity either in the interpretationof the indicator or in determining whether aparticular corporate satisfied that indicator; and• Could be applied to all corporates, regardless ofsector, geography or size;2965and• Should be applied to all corporates, regardlessof sector, geography or size, (i.e., essential notjust desirable and/or applicable to only some
corporate strategies); and• Assessable from information that is or is likely tobe publicly disclosed (i.e., is not likely to be subject
to confidentiality concerns); and• Could be used by all types offinancial institutions.

Figure 4: Corporate transition categories and associated indicators
5. Net zero
4. Aligned
3. Aligning
2. Committed
1. No action
2a. Pledged
A. Commitment

2b. Short term
targets only

3a. Shortterm+ plan

3b. Full plan-

A1. Public commitment
to achieving net-zeroemissions in line witha 1.5 degree sectoral
pathway with no or
limited overshoot [note 1]

As left

As left

As left

As left-

A2. The corporate has noplans to expand fossil fuelcapacity [note 2]

As left

As left

As left

As left

A3. Public commitment
to maintaining net zero
emissions

As left

29. For this reason, indicators do not for example identify specific sectoral and/or regional emissions pathways which must be followed or specific decarbonisation levers that must be addressed in the delivery strategy. Rather, they seek to set principles to capture the essence of credibility across all these variants. However, toassist users, some pre-screening and selection has been carried out following these principles. See the accompanying notes in Table 1 for more information.

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

9

Figure 4 (continued): Corporate transition categories and associated indicators
1. No action

B. Emissions targets

C. Delivery strategy

2. Committed

3. Aligning

5. Net zeroAs left

As left

2a. Pledged

2b. Short term
targets only--

B1a. Emissions inventoryof baseline emissions[note 3] addressing all
material scope 1, 2 and 3
emissions [note 4]

As left--

B2a. Short-term [note 5]
emissions targets [note6] addressing all material
scope 1, 2 and 3 emissions[note 4]As left

B2b. Short-, medium- andlong-term [notes 5, 7]
emissions targets [note 6]
addressing all material scope
1, 2 and 3 emissions [note 4]

As left---

B3a. The short-termemissions targets
align [note 9] withcredible science based
benchmarks [note 8]

As left

B3b. The short-, mediumand long-term emissions
targets align [note 9] withcredible science based
benchmarks [note 8]

As left---

B4a. The short-termemissions targets were setor reviewed no more than
two years ago [note 10]

As left

B4b. The short-, mediumand long-term emissions
targets were set or reviewed
no more than five years ago[note 10]

As left---

C1a. The delivery strategy
sets out the decarbonisation
levers envisaged to enable
the corporate to achieve
the minimum of a) a 50%
reduction in its baseline
emissions (per Indicator
B1) and b) its short-termemissions targets (perIndicator B2) [note 11]

C1b. The delivery strategy
sets out the decarbonisation
levers it is envisaged will
enable the corporate toachieve its short-, mediumand long-term emissions
targets (per Indicator B2b)
[note 11]

As left---

C2. The decarbonisation
levers to achieve the shortterm emissions targets
specifically are technologicallyand economically feasible[note 12]

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

3a. Shortterm+ plan

4. Aligned
3b. Full plan
As left

As left-

As left10

Figure 4 (continued): Corporate transition categories and associated indicators
1. No action

C. Delivery strategy-

2. Committed

3. Aligning

4. Aligned

2a. Pledged

2b. Short term
targets only

3a. Shortterm+ plan

3b. Full plan--

C3a. The decarbonisation
levers do not include theuse of offsets, except for
any residual emissions
that cannot otherwise be
mitigated [note 13]

C3b. The short-, medium- andlong-term decarbonisation
levers do not include theuse of offsets, except for
any residual emissions
that cannot otherwise be
mitigated [note 13]

As left

C4a. The key risks anduncertainties relating
to delivery of thedecarbonisation levers are(re) assessed and disclosed
annually [note 14]

C4b. The key risks anduncertainties relating todelivery of all decarbonisation
levers envisaged for thedelivery of short-, medium-,and long-term targets are(re) assessed and disclosed
annually [note 14]

As left---

C5a. Annual trackableactions to deliver the
decarbonisation levers overthe short-term are identified[note 15]

C5b. Annual trackable actions
over the short-term andinterim trackable actions
thereafter to deliver all
decarbonisation levers are
identified [note 15]

As left---

C6a. Trackable financial
milestones are identified[note 16]

C6b. Annual trackablefinancial milestones
over the short-term andinterim trackable financial
milestones over the
medium- and long-term are
identified [note 16]

As left---

C7a. The impact on key
environmental and social
factors in the short termarising from the identified
decarbonisation l evers andassociated actions, and thesteps the corporate plans totake to mitigate those impacts
are identified [note 17]

C7b. The impact on key
environmental and social
factors arising from thedelivery of the short-,
medium- and long-termemissions targets and thesteps the corporate plans totake to mitigate those impacts
are identified [note 17]

As left

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

5. Net zero11

Figure 4 (continued): Corporate transition categories and associated indicators
1. No action

2. Committed

3. Aligning

4. Aligned

2a. Pledged

2b. Short term
targets only

3a. Shortterm+ plan

3b. Full plan

-

-

-

C8a. The short-term delivery
strategy was established orreviewed no more than two
years ago [note 10]

C8b. The delivery strategy
for the short-, mediumand long-term targets wasestablished or reviewed no
more than five years ago[note 10]

D. Governance-

D1. The Board is formally
responsible for thedevelopment andimplementation of thetransition plan [note 18]

E. Performance

-

-

-

E1a. Overall, trackableinterim actions and financial
milestones identified in thedelivery strategy as being
due in the last 12 months(per indicators C5 and C6)
have been implemented ordelivered. Any delays are well
explained and have triggered,
where needed, adjustments
to the delivery strategy to stayon track with delivery of theemissions targets [note 19]

E1b. Overall, trackableinterim actions and financial
milestones identified in thedelivery strategy as being
due in the last 12 months(per Indicators C5b and C6b)
have been implemented ordelivered. Any delays are well
explained and have triggered,
where needed, adjustments
to the delivery strategy to stayon track with delivery of theemissions targets [note 19]

-

-

-

E2a. Actual emissions alignwith the corporate’s shortterm emissions targets (ifany arising during the last 12
months) [note 20]

E2b. Actual emissionsalign with the corporate’semissions targets (if any
arising during the last 12
months) [note 20]

As left

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

As left

As left

5. Net zeroAs left

As left

As left

E3. Actual emissionsalign with the corporate's
selected science-based
benchmark (per IndicatorB3) [note 20]

As left-

E4. Actual emissions at
net zero [note 20]

12

Table 1
Accompanying notes for Figure 4
1. While the global collective goal for net-zero emissions
is 2050 or sooner, a specific net-zero date is not set because
the target net-zero date for each corporate will vary
according to the nature of the activities they undertake.
Appropriate net-zero dates by sector are indicated bycredible sectoral net-zero pathways (see note 7).
At a minimum, the net-zero commitment shall cover
all scope 1 emissions and upstream scope 3 emissions.
Some scope 2 and 3 emissions may not be covered in thecommitment where the corporate has no direct control
and little influence over emissions reductions. For example,
scope 2 emissions reliant on the decarbonisation of thegrid to decarbonise electricity used, or downstream scope
3 emissions arising from other actors’ use of the company’s
products. Note however that downstream scope 3
emissions for fossil fuel related companies are not coveredby this exclusion, as ‘stranded fuels’ companies involvedin the extraction, transportation or energy generation of/from those fuels or associated trading activities should
be committed to phasing out those activities.
Where any emissions are excluded from the scopeof the commitment, this is clearly identified and therationale given.
Net zero means net zero notwithstanding any residual
emissions, which are defined as ‘greenhouse gas
emission that remains after taking all possible actions
to implement emissions reductions, and when net zerohas been reached. All possible actions refer to what is
technically and scientifically feasible.’ Per ISO’s IWA Net
Zero Guidelines (IWA 42 3.2.9)
2. If the corporate is in the business of the exploration
or extraction of fossil fuels, or is a utility company
generating or supplying power or heat generated fromfossil fuels, the corporate has, within the last year,
publicly (re)committed to no expansion* of any of thefollowing activities since 1 Jan 2023:
i. The exploration and extraction of conventional andunconventional fossil fuel reserves; orii. The exploration of new conventional andunconventional fossil fuel resources; oriii. Natural gas production; oriv. Refining crude oil to produce derivative products; orv. The supply and/or use of fossil fuels for power
generation and heat.

apply: i) Emissions intensity may only be productor physical emissions intensity (e.g., tCO2e/tonne of
cement) not economic intensity (e.g. cCO2e/$ revenue),
and ii) An absolute emissions metric may only be used
where the targets only go down, never up.

These activities include unconventional sources suchas hydraulic fracking, arctic drilling, oil sands andshale deposits.

If emissions intensity metrics are used, the corporate
should also disclose equivalent absolute emissions
targets, but these need not be benchmarked to ascience-based pathway.

*No expansion means no additional commitment ofcapex for the acquisition or leasing of new fossil fuelassets. These assets might be fixed (e.g., property, plant,
equipment) or intangible (e.g., goodwill, capitalised
licences). Already committed capex with pre-dated
board sign-off is not included in the exclusion. Capex for
maintenance of existing fossil fuel assets is permitted, aslong as it does not extend the life of those assets.
3. This emissions inventory to have been carried out
no more than two years prior to the setting of theemissions targets and any associated delivery strategy.
The scope of and methodology for assessment of theemissions included in the emissions baseline matches
that of the credible-science based benchmark selectedby the corporate for the purposes of aligning theiremissions targets (per Indicators B2 and B3).
4. Materiality is defined as at least 95% of scope 1 and2 emissions. Additionally, for companies with scope 3
emissions that are at least 40% of total emissions (scope
1, 2, and 3 emissions), at least 90% of scope 3 emissions.
5. Short-term is defined as no less than four years andno more than six. This (limited) flexibility balances thelikelihood that some corporates may be focussing ona relatively short budgeting and planning cycle, whileothers are aligning with the acknowledged significanceof the period to 2030, by which time global emissions
need to be halved compared to 1990 levels.
6. The specific intensity or absolute metric used may
be determined by the science-based benchmark the
corporate chooses to benchmark their activity against(see Indicator B3). However, the following restrictions

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

One caveat to this approach is where the sectoral
benchmarks are not captured via an emissions
metric. For example in agriculture where benchmarks
may describe best practices. Similarly, there may
be exceptions where activities are deemed to be
so low carbon that sector criteria deem them to be‘automatically eligible’ at this time.
Temperature metrics e.g., 1.5 degree aligned, are not inthemselves eligible metrics for this indicator.
7. The long-term target date is the net-zero target dateof the company. If residual emissions are anticipatedat that date, these should be clearly identified andjustified. The medium-term target date should beapproximately half-way between the short-term andlong-term target dates. That is, where a company
has set short-term emissions targets for 2030 andhas committed to net zero in 2050, its medium-termtarget date should be around 2040. Roughly tenyearly interim emissions targets balance the need for
trackable and monitorable targets, with the reality that
long-term targets will not be as forecastable or precise
as short-term targets.
Residual emissions are defined as ‘greenhouse gas
emission that remains after taking all possible actions
to implement emissions reductions, and when net zerohas been reached. All possible actions refer to what is
technically and scientifically feasible.’ Per ISO’s IWA Net
Zero Guidelines (IWA 42 3.2.9)
8. A credible science-based benchmark is one thatmeets the following principles:

1. It is consistent with a carbon budget that limits theglobal mean temperature rise to 1.5°C with a 50%
probability with low or no overshoot;
2. It may be global or regional but in either case it
has been derived from and is consistent with climate
modelling where the global carbon budget is allocatedacross time and to different regions and sectors –typically via an Integrated Assessment Model. For
example, derived from IEA climate scenarios;
3. Ideally it is sector specific. If it is not sector specificonly the SBTi’s Cross Sectoral Pathway is recognised
under these principles and use of that benchmark is
subject to the guidance set by SBTi;
4. It includes all material scopes and types of emissions
for that sector/activity (and what is material is definedin note 4);
5. It covers the full timeline to net zero/to only residual
emissions, as long as any residual emissions are clearly
identified (residual emissions are defined in note 6);
6. It does not incorporate the use of offsets i.e., it does
not assume the corporate will need to use offsets tomeet the benchmark, except in the case of residual
emissions (see note 11);
7. If the benchmark uses emissions intensity metrics, these
may be product or physical emissions intensity only (e.g.
tCO2e/tonne of cement) not economic intensity (e.g.
cCO2e/$ revenue). If it uses absolute emissions, thebenchmark should only go down over time, never up;
8. It has been produced by an independent third party, notby the corporate themselves, with climate science expert
input to the process and has been subject to public review;
9. Its technical documentation confirms that it meetsprinciples 1-7.
For convenience, a number of (sources of) benchmarks
have been pre-assessed as meeting these principles.
These are the 1.5 degree aligned sectoral pathwaysof SBTi, TPI, Climate Bonds Initiative, and the crosssectoral pathway of SBTi.
13

9. Alignment for short-term emissions targets
If the corporate has selected a sector-specificbenchmark, alignment means that:• The corporate’s short-term targets are projected toalign with their selected sectoral pathway by theshort-term target date.
If the corporate has selected SBTi’s Cross Sectoral
Pathway as its benchmark, alignment means that:• The corporate’s short-term emissions targets alignwith the Cross-Sectoral Pathway for all years up to
and including the net-zero target date.
Alignment for medium- and long-termemissions targets
If the corporate has selected a sector-specificbenchmark, alignment means that:• The corporate’s medium- and long-term emissions
targets (and any associated interim emissions
targets) are projected to align with their selected
sectoral pathway; OR• The corporate’s cumulative projected emissions
targets are less than the cumulative emissionsof their selected benchmark, assessed using
the Cumulative Benchmark Divergence (CBD)
approach developed by IIGCC.3067
If the corporate has selected SBTi’s Cross-Sectoral
Pathway as its benchmark, alignment means that:• The corporate’s medium- and long-term targets
align with the Cross-Sectoral Pathway for all years
to net zero; OR• The corporate’s cumulative projected emissions
targets are less than the cumulative emissionsof their selected benchmark, assessed using
the Cumulative Benchmark Divergence (CBD)
approach developed by IIGCC.3168

10. Categories ‘2b. Committed – Short-term targets only’
and ‘3a. Aligning – short-term’ allow for corporates tobe categorised as aligning with a 1.5 degree economy
without having set medium- or long-term emissions
targets. To minimise the risk of a corporate being classified
here but then not maintaining short-term momentum
to really drive through to net zero, the ‘short-term’targets/ transition plan respectively must be reviewed
at least every two years to extend the timeframe forshort-term targets and any associated actions.
As Category ‘3b. Aligning – long-term’ requires corporates
to have short-, medium-, and long-term targets andassociated delivery strategies, this risk is reduced.
Therefore, transition plans for those in this category need
to be reviewed and updated only at least every five years,
to maintain relevance in changing market conditions.
11. Which decarbonisation levers and actions are included
in a transition plan is not prescribed. The most likely
decarbonisation levers by sector are increasingly well
documented (see for example the sectoral guidance fromthe Transition Plan Taskforce Sector Deep Dive - Transition
Taskforce). However, each corporate will determine which
strategy and associated decarbonisation levers, and actions
to deliver those levers it will deploy and when to meet its
emissions targets in a manner that best meets its needs.
What is required is that the corporate clearly identifies
the decarbonisation levers being/to be deployed overwhat timeframe, and the contribution each lever ismaking/is expected to make to any short-, mediumand/or long-term targets set.
The levers address all sources of emissions included in
the emissions reduction targets. This includes levers/
actions related to the supply chain and any associatedengagement strategy. Similarly, levers and actions
related to any phase-out or climate solution build-up
should be covered here if achievement of the emissions
targets relies on either/both of these strategies.

30. Assessing Climate Target Alignment with cumulative benchmark divergence: CBD methodology_February2024.pdf (iigcc.org)
31. Ibid
32. For further discussion on potential emissions impact metrics see: Transition-Finance-and-Real-Economy-Decarbonization-December-2023.pdf (bbhub.io)
33. This requirement broadly corresponds to Technology Readiness Level 6 (TR6) as described here: technology readiness level-KINB27988ENN.pdf

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

Supporting information for the expected emissions
impact of each decarbonisation lever planned to deliver
the short-term emissions targets is given.3269Dependingon the nature of the decarbonisation lever, plausible
evidence may include academic studies, third party expert
verification, evidence from comparable action taken insimilar circumstances, and contractual undertakings.
As part of phase two of this project, proxies for thisindicator will be explored, most notably the existingtransition plan assessment schemes carried out by
independent third parties such as the Transition
Pathway Initiative, the World Benchmarking Alliance,
and Climate Bonds Initiative.
12. An evaluation that the decarbonisation levers
identified by the corporate are feasible is required.
Any lever should be considered commercially feasible
if it has been demonstrated in an industrially relevant
environment to be fine-tuned to a variety of operating
conditions; it is reliable and performance matches
expectations; it is interoperable with other connected
technologies; and that all environmental, regulatory,
and socio-economic issues are addressed.3370
Long-term targets may be dependent on currently
non-commercially viable levers, but if so, there must
be ongoing R&D aimed at making them viable, andtrackable milestones to monitor progress to this goal.
Supporting information is given for the technical andeconomic viability of the decarbonisation lever at thetime is it is planned to be deployed. Depending on thenature of the decarbonisation lever, plausible evidence
may include academic studies, third party expert
verification, evidence from comparable action taken insimilar circumstances, and contractual undertakings.
Assessing the viability of the decarbonisation levers is a
critical part of the assessment of the transition plan, andarguably the most complex. The guidance above provides
some direction to assessors. As part of phase two of thisproject, proxy indicators for this element will be explored,

most notably the existing transition plan assessment
schemes carried out by independent third parties
such as the Transition Pathway Initiative, the World
Benchmarking Alliance, and Climate Bonds Initiative.
13. Offsets cannot be counted towards the planned or
achieved emissions reduction needed to align with theselected science-based benchmark.
If offsets are used or planned to be used by the corporate,they can only be allocated to emissions reduction over
and above those needed to align with the selectedbenchmark. This includes bridging the gap between any
residual emissions in the end goal per the selected sectoral
benchmark and a corporate’s final net-zero emissions.
Where offsets are used to address residual emissions,the standard or methodology used/to be used to certify
the carbon credits is identified.
14. The corporate has indicated which decarbonisation
levers and/or actions are subject to particular
uncertainty and therefore pose more significant risks
to the delivery of the transition plan and attainmentof the emissions reduction targets.
These risks may relate to:• Policy and regulatory change;• The decarbonisation trajectory of the global
economy, relevant geographies, and/or sectors;• Macroeconomic trends (e.g., labour availability, costof borrowing etc.,);• Microeconomic and financial factors (e.g., availabilityof finance, relative prices);• Technological developments;• Access to corporate data and its reliability;• Shifts in client and consumer demand;• The levels of warming over the short-, medium-, andlong-term;• The physical impacts of the changing climate, andthe regional and spatial implications of these;• The effectiveness of adaptation efforts and possible
limits to adaptation, and the regional and spatial
implications of these.

1415. The corporate lays out a time-bound action plan
specifying the actions being/to be taken and over what
timeframe to ensure those decarbonisation levers canbe/are being deployed. These actions are trackable andcan be used to monitor implementation progress on,
and risks to, delivery of the identified decarbonisation
levers. For example, if the decarbonisation lever isthe deployment of a new technology, the action planshould detail the time-bound steps planned to betaken to develop and deploy that technology, frominvestments in R&D, patent registering, pilot projects,
scaling projects etc. Likewise, if the decarbonisation
lever is a switch to renewable energy, the action planshould detail the time-bound steps taken to source thatenergy, such as intentions for and source of renewableenergy certificates (RECs), and/or purchasing power
agreements (PPAs), as well as any action to install andoperate on-site generation.

the action plan. For example, percentage of productsold that is low carbon, percentage of energy fromrenewable sources/emissions intensity of energy used/
total energy emissions used, and percentage of recycled
source materials. As part of phase two of this project,proxies for this indicator will be explored, most notably
the existing transition plan assessment schemes carriedout by independent third parties such as the Transition
Pathway Initiative, the World Benchmarking Alliance,
and Climate Bonds Initiative.

This action plan identifies the actions to betaken internally by the corporate (for example,
the installation of new equipment, installation ofrenewable energy, changing the transportation
fleet, engagement with suppliers to support
decarbonisation in their activities) and which
externally (for example, the external development ofa technology upon which the corporate is dependent
to achieve its emissions reduction, or the external
greening of the grid, or policy changes by thegovernment to enable a certain outcome).

These financial milestones may not be limited to but
must include:

The actions identified are concrete. Vague descriptions
such as ‘accelerate our transition to cleaner energy
solutions’, ‘modernise our operations’ or ‘leveragegreen solutions’ without a description of the specificactions that will be taken, and the impact of thoseactions, are not eligible.
To enable stakeholders to track progress in the deliveryof the action plan, the corporate may report on progressin rolling out the action plan, and/or on business andoperational metrics that have been disclosed alongside

16. Trackable financial milestones are identified that canbe used to monitor implementation progress on, andrisks to, delivery over the short term of the identified
decarbonisation levers and associated actions.
These financial milestones are identified for the shortterm target date and one interim date between thenand the publication date of the transition plan.

• Any capex necessary to deliver the decarbonisation
levers, disaggregated by decarbonisation lever; and• Revenue impact and asset write-down arising from:• Any phasing out of certain activities and assets e.g.,fossil fuel energy generation assets and activities; and• Any ramping up of ‘green activities’*
These financial milestones are feasible. Specifically, anyestimated capex costs are reasonably sized compared to
sector peers and/or the overall plausibility is supported
by external evidence from credited third-party sources.
Material deviations are explained and supported. If
expected costs or revenue impacts are substantiallydifferent when compared to equivalent estimations
elsewhere, the corporate provides reasonable
explanation to justify this. Assumptions on growth,market demand for products, prices, and costs related
to future business mix are broadly aligned with industry
trends. As part of phase two of this project, proxy

indicators for this element will be explored, most notably
the existing transition plan assessment schemes carriedout by independent third parties such as the Transition
Pathway Initiative, the World Benchmarking Alliance andClimate Bonds Initiative.
*These ‘green activities’ are clearly defined and identified
by the corporate. Definitions might include ‘aligned with
the EU Taxonomy’ or the corporate’s interpretation of
Climate Solutions as described in the GFANZ paper:
Transition-Finance-and-Real-Economy-DecarbonizationDecember-2023.pdf (bbhub.io) or the IIGCC’s ‘Investingin Climate Solutions Listed Equity Fixed Income_Nov2023.pdf (hubspotusercontent-eu1.net)
17. At this stage, this indicator is not prescriptive
about the scope of potential impacts nor the levelof mitigation required to minimise or prevent those
impacts but is aiming to promote transparency.
However, the corporate should disclose the potential
negative environmental and social impacts of its
planned decarbonisation transition and the steps it istaking to mitigate these impacts.
18. This may be demonstrated by:• A clear public statement of the Board’s commitment
to the transition plan and the Board’s mandate todeliver the plan; or• The Board and senior executive remuneration being
linked to the delivery of the net-zero goal/emissions
reduction targets.
19. The intention here is to determine that
implementation of the transition plan is on track. The
corporate’s annual reporting shall confirm that the
trackable actions and financial targets identified in
the transition plan as due in the last annual reporting
period (per Indicators C5 and C6) have been carriedout/attained. Plausible evidence will vary but might
include management reports, board papers, audited
sustainability reports, audited financial reports, publicannouncements, evidence of capital expenditure orcontracted services or equipment, and sales contracts.
The only exception to this requirement for evidenceof the carrying out of the actions identified in thetransition plan, is if alternative, mitigating actions
have been taken that have or will achieve the sameemissions impact. However this needs to be clearly
explained and justified by the corporate, addressing
the impact not just on any current milestones andemissions performance but also the impact on any
future milestones or emissions performance also
dependent on the missed milestone.
20. To clarify, no history of alignment with thecorporate’s own targets (Indicator E2) or selectedbenchmark (Indicator E3) is required to satisfy thisindicator. That is, the corporate will meet these
indicators in the first year that actual emissions alignwith the targets/benchmark respectively.
Therefore, a corporate will be categorised as‘Aligned’ once its actual emissions align with its
selected science-based benchmark (per IndicatorB3), and there is no requirement for [X] years of pastemissions performance aligning with the selectedbenchmark before the corporate can be categorisedas ‘Aligned’. A requirement for a specified numberof years of past alignment may be too harsh whencompanies may not have the necessary data trail
and/or actual emissions may veer above or below
target year by year purely because emissions cannot
be perfectly projected and plans cannot be perfectly
implemented. The implications of this for the required
frequency of assessment are discussed in Section 4 –Guidance notes.
On this point, it is noted that the GFANZ Secretariat
proposed a two-year window to be considered
but determined that ultimately it is up to financial
institutions to assess on a case by case basis, leveraging
information ideally from the corporate’s transition plan
to support the assessment.3471

34. See https://assets.bbhub.io/company/sites/63/2023/11/Transition-Finance-and-Real-Economy-Decarbonization-December-2023.pdf

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative15

4. Guidance notes for use of the proposed classification system
to assess a corporate
Assessment of corporates
practising more than
one activity
The boundary of a corporate would ideally bea listed entity. Where a listed entity carries out
more than one business activity, each activity
should be assessed separately, applying theindicators in Figure 4 to determine the transition
categorisation of that activity. Given thatdifferent activities may be at different stages oftransition maturity, i.e., each falling into different
transition categories, a methodology is needed
to determine the overall categorisation at thecorporate level.
The following three-step methodology is
proposed and will be tested in the next phaseof this work.
1. Assign a point score to each category. For
example: ‘0. Unclassified’ or ‘1. No action’ = 0
points; ‘2a. Committed - pledged’ = 1 point; ‘2b.
Committed - short-term targets only’ = 2 points;‘3a. Aligning – short-term+ plan’ = 4 points; ‘3b.
Aligning – full plan’ = 6 points; ‘4. Aligned’ = 8
points; and 5. Net zero’ = 10 points.35
2. Assess each business activity separately todetermine which transition category it falls into
based on its compliance with the indicators foreach category.
3. Calculate a weighted-average score forthe corporate, weighting individual businessactivity category scores by either their shareof the total revenue or emissions of thecorporate.36 This weighted-average score
determines the overall score and hence
category for the corporate.
A theoretical example of this is given in Figure 5.

All indicators must be met
Given the relatively limited number of indicators,
it is proposed that a corporate/a corporate’s
business activity must meet all indicators fora category to be classified in that category.
Similarly there is no weighting of different
indicators, all are deemed equally important.

Figure 5: A worked example of the corporate aggregation methodology
Electric Utility Co. ​First activity
POWER GENERATION​(rev share = 60%)

Category 3b​
Aligning/ Full plan
(6 points)

Activity score
60% of 6 points = 3.6​

Second activity
GRID MANAGEMENT​(rev share = 30%)​

Third activity
TRADING​(rev share = 10%)Category 4 ​AlignedCategory 1 ​No action(8 points)

Activity score
30% of 8 points = 2.4​

(0 points)

Activity score
10% of 0 points = 0

Total score(First activity 3.6)​+ (Second activity 2.4) + (Third activity 0) = 6 points
Overallcategory is;1.
No action

2.
Committed

3.
Aligning

Annual (re)assessment
is required
To ensure the classifications are as current
as possible, it is recommended that financial
institutions reassess each corporate annually.
This is already standard practice in independent
corporate transition assessment schemes suchas that of the Transition Pathway Initiative andthe Climate Bonds Standard. It is a precedentthat financial institutions should follow where
they are doing their own assessments.
Given transition plans will not be reset eachyear, in interim years reassessment will need
to focus on where interim actions, targets, andmetrics laid out in the transition plan have been
met and therefore the reassessment should not
be too onerous; even less so once data accessplatforms such as those discussed in Next Steps
section above are readily available.

4.
Aligned5.
Net zero

No timeframe is imposed for a
corporate’s speed of progress
through the categories
Timeframes for a corporate’s progress throughthe categories is not prescribed here. For
the move from ‘3. Aligning’ to ‘4. Aligned’ inparticular, each corporate’s timeframe will
be determined by their specific operating
environment and transition strategy, although
checks are built into the indicators to ensure thatthe corporate’s timetable is appropriate.37
Instead, it would seem more viable for a financial
institution’s own transition targets to reflect amovement of its corporate exposures up thetransition categories over time at sector, product,
and portfolio level. This issue will be subject tofurther consideration as described under ‘Next
steps’ above.

35. These point allocations are given for the purposes of example only. The most appropriate weightings should be determined in conjunction with analysis of a real portfolio, to best test the implications of different
weightings, per the next step of this project.
36. Weighting by emissions share is to be used where the corporate has an emissions inventory across all of its material emissions (scope 1, 2 and 3). However, weighting by revenue is permissible where the corporate
does not have a baseline estimate of all its material emissions.
37. For example, its emissions reduction targets are required to align with a credible benchmark within an appropriate timeframe (Indicator B3) and the corporate is monitored to ensure it is delivering on those targets (Indicator E2).

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

16

Corporates may be reclassified
downwards through thecategories
As a consequence of the requirement that allindicators for a category need to be met in orderfor the corporate to be allocated to that category,
it is possible for a corporate’s transition status toreverse if indicators that were formerly met arefound not to be met after subsequent assessment.
As discussed above, a corporate without atransition plan that was previously categorisedas ‘4. Aligned’ on the basis of its actual emissions
performance may be recategorised down to ’2.
Committed’ if it does not develop and implementa transition plan for its ‘last mile’ emissions
within the specified timeframe.

Other cases where a corporate may bereclassified down the categories are:• Where delivery actions (including interim
milestones) or financial metrics or emissions
targets arising are not met. In this case, thecorporate would be recategorised from
‘3. Aligning’ to ‘2. Committed’;

The only exception to this would be wherecompensatory action has been taken to ensure
any underperformance is quickly redresseded.
However, this would need to be judged on acase-by-case basis.

• Where actual emissions previously alignedwith the selected science-based benchmark,but on latest assessment have been found tono longer meet the benchmark. In this case,the corporate would be recategorised from
‘4. Aligned’ to ‘3. Aligning’ (presuming all
indicators for ‘3. Aligning’ continue to be met.

Prepared by the Climate Bonds Initiative

Author: Anna CreedClimate Bonds contributors: Bridget Boulle, Sabine Laurent,
Rachel Hemingway, Mireille Martini
Editorial support: Stephanie Edghill

Design: Godfrey Design, Joel Milsted© Published by Climate Bonds Initiative, May 2024 www.climatebonds.net
Disclaimer: The information contained in this communication does not constitute investment advice in any form and the Climate Bonds Initiative is not an investment adviser. Any reference
to a financial organisation or debt instrument or investment product is for information purposes only. Links to external websites are for information purposes only. The Climate Bonds Initiative
accepts no responsibility for content on external websites. The Climate Bonds Initiative is not endorsing, recommending or advising on the financial merits or otherwise of any debt instrument
or investment product and no information within this communication should be taken as such, nor should any information in this communication be relied upon in making any investment
decision. Certification under the Climate Bond Standard only reflects the climate attributes of the use of proceeds of a designated debt instrument. It does not reflect the credit worthiness of thedesignated debt instrument, nor its compliance with national or international laws. A decision to invest in anything is solely yours. The Climate Bonds Initiative accepts no liability of any kind, for
any investment an individual or organisation makes, nor for any investment made by third parties on behalf of an individual or organisation, based in whole or in part on any information contained
within this, or any other Climate Bonds Initiative public communication.

Navigating corporate transitions: a tool for financial institutions Climate Bonds Initiative

17