Transition finance

At COP26 in 2021, the UK government set up the Transition Plan Taskforce (TPT), co-chaired by Aviva CEO Amanda Blanc and the HM Treasury Lords Minister Baroness Joanna Penn. The TPT’s mission was to produce a gold-standard disclosure framework for corporate transition plans, which it launched in October 2023.⁵ The goal is to improve transparency, reduce greenwashing risk and help investors understand how their portfolios align to the transition.

This is not to encourage investors to divest from high-emitting companies, but rather to help them invest in the companies making real efforts to avoid the risks – and benefit from opportunities – arising from a transition.

Building on this, the TFMR refined the definition of transition finance, and tried to understand the barriers at play and what it means for companies to have and implement a credible transition plan, which the government has committed to require. Alignment will also have to be tracked and measured, which will inform investment decisions as well as demonstrating compliance.

Core recommendations

The Review seeks to clarify what can be counted as transition finance by proposing a classification system that includes activity and entity-level financing as well as guidelines for credible transition finance.

It recommends clear national policy to align the economy with the transition, including national transition planning and sectoral pathways. There is an emphasis on the need to change economic incentives, including through macro levers such as subsidies, incentives and carbon pricing.

The Review highlights the need for catalytic public finance to crowd in private investment. It recommends collaboration between the market and its regulators, and supporting stewardship, labelled debt products, and retail product development.

The Review also emphasises the importance of proactive engagement by all stakeholders, to improve knowledge and build confidence, as well as international collaboration and advocacy, to help scale transition finance globally.

And as I mentioned, the Review recommended the creation of a Transition Finance Council to support the implementation of its recommendations, which has now been done.

I welcome the recommendations, which align with those Aviva and Aviva Investors had made in previous years.^6,7,8

In my 2023 letter to the chairs of the largest companies we invest in, I had asked them to start working on transition plans and strategies. The UK government has now promised to make corporate transition planning mandatory, and a consultation is expected soon. This will affect the whole finance ecosystem, including asset owners and their advisers. There will be increasing pressure on investors, particularly institutional investors like pension funds and insurers, to show how they are setting targets in their transition plans to invest in transition finance.

It is therefore important to understand the TFMR recommendations, so transition – as well as green – finance can be integrated into plans.

Investors and asset managers must become used to conducting forward-looking assessments of companies’ transition strategies, understanding what a credible transition plan is and what risk and opportunity indicators to look for. It will be a critical evolution of the way we assess the prospects of investments.

We need to move from understanding transition at an activity or instrument level (for instance, green bonds) to an entity level. Clear guidance on what is credible transition activity and simple metrics will allow investment to become much more mainstream, lowering education barriers for asset owners who don’t wish to become detailed sustainability experts. With clarity on which entities are committed to – and able to implement – their transition plans, investors will benefit in two areas.  

Firstly, the risk of greenwashing must be recognised. Economic history tells us many incumbent businesses will not successfully transition. Different stakeholder groups may have competing interests, as some will want cash flows from the old business model and others will want to invest those cash flows into the transition. Identifying where companies are putting their capex and changing their business can give investors confidence when allocating long-term capital.

Secondly, transition finance is needed to provide general-purpose financing to small solutions companies; to fund the deployment of low-carbon activities and to businesses in priority sectors, from steel to agriculture; and to support the early retirement of high-emitting activities. Clarity (if based on enough depth and sophistication) could encourage investment in smaller corporates and harder to abate sectors.

While this shift will create investment opportunities into transition-focused and growth assets, it will also be complex. Credible transition pathways following the creation of a national transition plan may affect high-emitting investment-grade credit maturing in the next five years. And the interplay between transition finance and the FCA’s labelling regime will need to be considered as transition finance scales.

Given the complexity and interconnections, collaboration will be essential. The Transition Finance Council therefore involves representatives of government, the financial services industry and the real economy.

To meet the UK’s commitments to the Paris Agreement, Global Biodiversity Framework and Sustainable Development Goals in time, the government needs to understand how it will shift the country’s economic systems, sector by sector. The Review – which echoes our engagement with governments in the UK and around the world – recommends adopting a national transition plan to deliver this.

Having a top-level transition plan with detailed sectoral pathways can give the consistency needed to set out corporate plans. It will also give investors a framework to analyse corporate plans’ credibility – both in terms of whether they can be implemented and whether they are contributing a company’s fair share to the economic transition. That will only happen as transition plans are not only published but implemented and reported on, so it will take time.

We are hoping to see the creation of a positive feedback loop between companies’ transition plans, investor engagement on the credibility of those plans, and engagement with the government to communicate what is needed to allow and incentivise implementation.

Investors’ understanding of their own transition targets and plans will be critical in shaping their company engagement and policy advocacy. But I would urge everyone to participate in what is a huge opportunity, in terms of investments and for the UK economy.