Developing and implementing net-zero transition plans at financial institutions

Net-zero transition plans describe and communicate climate targets and measures to reduce greenhouse gas emissions that are geared towards a net-zero pathway. They are a tailor-made roadmap of financial institutions that translates their climate strategy into more concrete actions and thus makes it more tangible. They facilitate the steering of sustainability risks and help to increase credibility with external stakeholders such as investors, regulators, supervisors, business partners and civil society.

Background and purpose of transition plans

In order to reduce greenhouse gas emissions to limit global warming to 1.5°C compared to pre-industrial levels, increased decarbonization commitments are required. Companies and individuals must raise their efforts to achieve net-zero by 2050. With net-zero transition plans companies make their climate commitments transparent in the form of a roadmap. Especially financial institutions with their crucial role in the allocation of funds are the significant driver for emission reductions of the real economy.

The purpose of a transition plan is to outline how the financial institution will transform its existing operations, assets and business model towards the net-zero goal by 2050 and thereby limit global warming. In general, the desired decarbonization is based on three pillars which are the financial institution’s direct and indirect emissions from its own operations (Scope 1 and 2), its supply chain (Scope 3) and business model-specific emissions from financing (Scope 3 - financed emissions), asset management (Scope 3 - facilitated emissions) or insurance (Scope 3 - insurance-associated emissions). All in all the net-zero transition plan is a committed roadmap on how to achieve the climate strategy.

Regulatory requirements and frameworks for transition plans

Financial institutions that fall within the scope of the Corporate Sustainability Reporting Directive (CSRD) must disclose, among other things, their emission reduction targets, mitigating actions and their undertakings in a transition plan. Furthermore, the EBA has published a draft guideline on ESG risk management that is under consultation until the18th April 2024 and that relates to the transition plan. For voluntary guidance and recommendations, the Glasgow Financial Alliance for Net Zero (GFANZ) provides guidance for developing transition plans, while the Task Force on Climate-Related Financial Disclosure (TFCD) focuses on disclosure principles. Last but not least the Transition Plan Taskforce (TPT) has the goal to establish the gold standard for transition plans across sectors.

Practical guidance for implementing a net-zero transition plan

Our approach consists of six steps

1. Calculation of emissions as the baseline: calculate the current carbon footprint of the financial institution and the portfolios and subsequently the emission intensities
2. Target setting: align to a climate target in terms of a concrete number in °C and choose appropriate decarbonization pathways
3. Measurement setting: put targets into action by adjusting policies and engagement strategy. Take into account sector specifics and assess impact, risk and opportunities
4. Business strategy integration: integrate the transition plan into the business strategy , acknowledge potential interrelationships and also reflect on whether business strategy and financial strategy are genuine
5. Governance and performance steering: establish governance and performance management to ensure the reliability of the transition plan
6. Reporting: conduct regular and event-driven reporting and seek a high level of assurance by considering automation potential

As a starting point, it is essential to calculate the financial institution’s carbon footprint. A granular breakdown of GHG emissions by scope 1-3 per sector and asset class is needed to identify adequate reduction measures and develop a tailored transition plan. After the starting point is clear, define the desired targets and a system of metrics to be able to measure the achievement of near- and long-term targets along the way. Generally, those targets should be product and sector-related and in particular be relevant, clear and consistent over time.

Since the start and end of the transformation journey is determined and measurement settings are in place, it is time for the integration of the business strategy. There are three main considerations when integrating the business strategy. Firstly, the engagement with clients and portfolio companies. Secondly, the engagement within the own industry to exchange on transition expertise and thirdly the engagement with external stakeholders, especially with supervisors. Subsequently, proper roles and responsibilities should be defined to assign ownership and oversight on senior management levels regarding governance. For example, ESG-related performance remuneration can be an incentive for roles, where possible. In addition, ESG training and skill-development paths are beneficial to ensure sufficient knowledge of senior management and operational team members. Finally, the financial disclosure of the net-zero transition plan follows. It is important to leverage the existing reporting capabilities of other sustainability reporting disclosures and use out-of-the-box software solutions if necessary. 

Data sources primarily determine data quality

Data availability of emissions is crucial and ultimately determines the data quality score. For instance, the data quality score of financed emissions from the Partnership for Carbon Accounting Financials (PCAF) differentiates broadly three calculation options with decreasing data quality (from 1 – highest data quality to 5 – lowest data quality). External data sources and systemically collected emissions data from clients will help to improve data quality scores. However, this does not guarantee that the number of financed emissions goes down since this depends on the fact whether the institution’s portfolio is above or below the industry emission averages that were applied before the actual client emissions of the portfolio were used. In fact, this can have strong implications for the initial transition plan and mean that GHG reduction measures have to be adjusted.

The advantages of net-zero transition plans for financial institutions are:

• Risk management: identify material physical and transitional risk and describe mitigating activities given the respective risk appetite per portfolio
• Market opportunities: redefining the operating model might reveal new client segments and products that make sense from a business and climate perspective
• General reputation: committing and delivering on high targets can attract clients and employees and also enhance the firm’s profile and media coverage
• Alignment between climate and financial risks: aiming to combine the climate view with associated financial risks improve the firm’s steering by reducing false incentives and help to stabilize financial stability

Maturity assessment and continuous development of transition plans

Since a transition plan is part of the overarching climate strategy which itself is part of the overall business strategy, those plans should be reviewed at least every two years and updated if necessary. A periodic review ensures that the set climate targets are still relevant for the financial institution and its future planning. The necessity to review and update the transition plan might arise from new technologies and climate studies that influence underlying climate scenarios of transition plans.

Our offering for your transition plan

We are your partner of choice when it comes to the creation and assessment of net-zero transition plans. Not only do we have plenty of experience from ESG projects, but also from our strong network of partners regarding ESG data and ESG-related software solutions. At Capgemini Invent we understand the crucial differences between the exposures to different sectors and financial asset classes to develop your net-zero transition plan. Please reach out to our experts from the Sustainability@Banking team.