In the financial sector, 2050 climate targets are par for the course. Financial institutions have used these climate commitments to tell the world where they want to go. But how will they get there? And how can stakeholders be sure that any reported progress is really on track, or that it’s supporting decarbonization in the real economy?
Translating long-term, high-level climate targets into actionable strategy can feel like gearing up to move mountains. The challenge is evidenced by the rarity, or perhaps nonexistence, of climate reports robustly connecting long-term climate targets to climate-aligned actions today. Instead, climate reports tend toward a grab bag of miscellaneous climate-related products, services and initiatives that offer a fuzzy picture of a firm’s overall climate strategy or climate alignment progress.
But what would better reporting entail? Better yet, what could it enable?
In this article, we lay out the case for a climate report of the future that looks very different from today’s. Reporting is an important tool for transparency and accountability, and as financial institutions adapt their operations and investments to accelerate the net-zero transition, climate-related reporting must also evolve to ensure that new approaches can be accurately reported and assessed.
Flying Blind: Transition planning for uncertain horizons
In 2022, calls are piling up swiftly for transition plans that outline how financial institutions will reach climate targets over time. The US Securities and Exchange Commission (SEC) included transition plans in its climate disclosure proposal; the UK Treasury launched its Transition Plan Taskforce (TPT) for climate transition plan disclosure; and, just this month, the Glasgow Financial Alliance for Net Zero launched a public consultation on its draft guidelines on transition plans for financial institutions. Shareholder resolutions at financial institutions are also asking for more detailed action plans. There’s good reason transition plans are garnering attention — they offer a tool for firms to steer internal climate strategies and goals, and outline actions and accountability mechanisms that lead to implementation. We can expect transition plans will be core to the future of climate reporting.
Methods and tools for assessing climate risk and climate alignment are increasingly common in the financial industry, but climate impact reporting remains rare.
Envisioning what a climate-aligned financial institution of the future looks like can be a starting point for both developing a robust transition plan and exploring what a climate report of the future might entail. "Future-gazing" can help firms work backward from this desired state to ensure that transition plans designed today are fit-for-purpose to achieve future climate goals. This future-gazing involves envisioning what a firm’s 2030 products, services, governance and operations would look like if they were on track to align portfolios, positively impact decarbonization outcomes in the real economy, and effectively manage climate risk.
Climate reporting needs some AIR
Climate reports today tend to focus on climate risks, often highlighting portfolio carbon emissions to identify climate risk hot spots and climate-related products and initiatives that aim to reduce associated risks. Climate risk reporting is necessary, but it doesn’t tell a firm’s complete climate story.
As the landscape for reporting and demands for demonstrating action continue to evolve, we expect that firms will need to better account for climate-related alignment, impact, and risk (AIR). AIR focuses on how financial institutions are meeting their climate goals meaningfully. These three elements of a firm’s climate approach are related but distinct:
- Alignment reporting tracks whether a firm’s financed emissions are reducing over time toward climate targets, relative to a baseline pathway. While alignment can be measured at the portfolio or company level, it is particularly useful at the sector level.
- Impact reporting demonstrates how financial institutions are influencing climate outcomes in the real economy. The Center’s IMPACT+ Principles and the Finance Sector Expert Group’s recent discussion paper outline the need for such reporting to ensure financial and nonfinancial activities do not just lead to portfolio changes without contributing to decarbonization and transition in the real economy. We see this becoming a more prominent focal point in the years to come.
- Risk reporting shows how physical and transition risks impact financial portfolios, informing stakeholders of firms’ exposures and risk management practices that are in place to reduce and/or mitigate risks.
Moving forward, firms will need to simultaneously consider and incorporate all three aspects when building credible transition plans and reporting structures.
Methods and tools for assessing climate risk and climate alignment are increasingly common in the financial industry, but climate impact reporting remains rare. The Center for Climate-Aligned Finance’s Climate AIR Toolbox, an online platform that collates and standardizes information about available tools for AIR assessment and reporting, has catalogued more than 30 climate-related tools and frameworks to date. Only five of those relate to climate impact, and none offer a framework for reporting impact. As such, the future of reporting — if it is to integrate these climate approaches and outcomes — will require collaboration and innovation around new solutions.
Where do we go from here?
Financial institutions with net-zero climate goals need to start connecting the dots between 2050 and today. 2030 — a key milestone in many interim climate targets — is only eight years away, and there remains a vast gap between stated ambition and current practices. To help financial institutions visualize and address this gap, the Center is sketching out what a more robust net-zero report of the future might entail — with a forthcoming publication anticipated later this year. Our initial aim is to uncover where financial institutions do and do not have sufficient tools and capacity today to meet evolving stakeholder expectations for reporting on climate alignment, impact and risk. From there, we will work collaboratively across the financial sector to develop standards and solutions that can facilitate robust, ambitious, transparent net-zero reporting.