New York Climate Week: TFMR event explores perspectives on accelerating decarbonization

This event was situated at the start of a critical period of heightened focus on transition finance, which will be a top priority of the upcoming United Nations Climate Change conference (COP29) in Baku, Azerbaijan.

The event was opened by the Rt Hon Ed Miliband MP, Secretary of State for Energy Security and Net Zero, and featured keynote speeches from Vanessa Havard-Williams, Chair of the TFMR and a representative from a U.K. regulator. The event also featured two panel sessions providing international perspectives and industry views on transition finance. The first comprised speakers from financial regulators, international financial institutions and intergovernmental organizations, while the second featured representatives from market infrastructure providers, utilities, private capital and financial services.

This event foreshadowed the publication of the TFMR’s recommendations for scaling transition finance. The TFMR is an independent market review commissioned by U.K. Government, to explore how the U.K. can support the scaling of a high-integrity transition finance market in support of global net zero ambition. 

We are delighted to have served as legal advisor to the TFMR’s secretariat on a pro bono basis and we are committed to using our legal expertise to accelerate an economy-wide transition.

Here, we summarize the key takeaways from the event.

The broad reach of transition finance

Three key observations stood out:

• Transition finance is needed across the whole economy, to bring about a safe and orderly attainment of net zero goals, without placing financial stability and just transition considerations at risk.  
• It must touch every sector of the economy (including high-emitting sectors) and must not bypass intermediary industries and industries in emerging markets and developing economies (EMDEs), including those which have a key role in global supply chains.
• Growth in transition finance at entity-level, not just activity-level, is needed to accelerate decarbonization in line with national, regional and global net zero targets. 

The U.K.’s ambition on transition finance

The U.K. has an ambition to become a global hub for transition finance. In that context, HM Treasury and the Department for Energy Security and Net Zero commissioned the TFMR to look at how to grow transition finance in the U.K. and support companies in the U.K. and abroad to access the necessary finance to deliver on net zero ambitions.[1]

The findings and recommendations of the TFMR are centered around the barriers to scaling transition finance and several priority areas that need addressing to unlock transition finance. Key issues that the TFMR examined include the definition and credibility of transition finance, areas for stronger dialogue and collaboration between the public and private sectors, and recommended areas of structural reform. Further details will be available in the TFMR’s report, which is due to be published on October 17, 2024.

Whilst the TFMR’s work is specific to the U.K., other markets will be watching for transferable insights that they can take forward within their jurisdictional contexts.

Perspectives on key principles of transition finance internationally

Key takeaways:

• Transition finance initiatives internationally are beginning to converge on key principles. It is critical to engender global policy coordination on approaches to scaling transition finance to avoid market fragmentation.
• Sustainable finance frameworks will continue to play a critical role in establishing accountability mechanisms in transition finance markets. They can provide guardrails for credibility in transition finance, which is extremely important in light of the real-world consequences of capital misallocation that arise from greenwashing and inadequate disclosures (among other factors). 
• Key components of sustainable finance frameworks include taxonomies, disclosures and transition plans. These can spur transformation in real economies, signal to financial markets where best to allocate funds, and help companies access cheaper capital for the transition. 
• To ensure commercial viability of investing in particular transition technologies, solutions need to be explored in the realms of structural reforms, real economy and sectoral policy developments, and blended finance in crowding in private investment. While blended finance structures should be customized to each country’s context, there continue to be calls for dialogue and development of an international blended finance ecosystem.
• Clear policy signals and guidance are also needed from governments and regulators for private actors to make long-term decisions that price in the risks and opportunities of the transition. For example, financial institutions and EMDEs would benefit from guidance on how to finance a transition away from high-emitting industries (e.g. coal) to clean energy.

Perspectives on industry approaches to driving real-world impact through transition finance

Key takeaways:

• Net zero transition plans have become a key focus of discussions between entities and their investors. In that context, discussions are often company-specific and forward-looking in nature. They typically involve engagement on the design, credibility assessment, embedding and operationalization of transition plans. 
• Financial institutions are adjusting product and service offerings, and adapting available tools, to mobilize transition finance towards nascent technologies. To structure bankable propositions, a tailored approach is often necessary to address particular risks and opportunities.
• Efforts by private equity owners to influence corporate behavior have their place pre-acquisition (e.g. ESG due diligence) and post-ownership (e.g. a program of ongoing engagement). Key to value creation is the operationalization of systems and processes to measure the additionality of capital and the reduction of emissions.
• A clearer correlation is emerging between transition performance and market performance, with capital being attracted to entities and activities that can demonstrate decarbonization impact.

Closing thoughts:

As the world grapples with the urgent need to address climate change, transition finance will play a pivotal role in driving necessary real-world decarbonization and economic transformation.

Transition finance is an existential imperative and an economic and business growth opportunity. Public and private sector actors must step up on meaningful collaboration, both within and across those sectors, to surmount the challenges that stymie the growth of credible transition finance.

We are proud to have provided market-leading expertise and legal support to the secretariat of the U.K. Transition Finance Market Review, a role that utilizes our wealth of market experience gained advising clients through an era of unprecedented global regulatory change. We were also proud to sponsor the City & Financial Global conference on October 10, 2024 on ‘Making the U.K. a global hub for transition finance’. 

For more market-leading insights into transition finance, please get in touch with your usual A&O Shearman contact or the key contacts below. 

Footnotes

[1] https://www.gov.uk/government/publications/transition-finance-market-review and https://www.theglobalcity.uk/tfmr