One of the largest gaps and opportunities in financing the decarbonisation of the economy relates to transition finance: how to finance greenhouse gas (GHG) emitting activities sustainably. Initial efforts have focused on the phase down of coal assets. Interesting financial mechanisms are at implementation phase in the US, Germany and Chile. Others, in the EU and South Africa, are in early stages.
A concept-piece published earlier this year by Meridian Economics summarises green phase-down finance. Phase-down finance provided to emitters is contingent on a well-defined decarbonisation commitment, with concession given to compensate for the lost financial return of retiring emitting assets early. Phase-down finance is aimed at developing structures to ensure the Paris-aligned retirement trajectory of assets in the context of sustainable development and a just transition.
In the energy sector, green and phase-down finance address various aspects of the same transition. Green finance is for green projects and green-enabling infrastructure. This type of financing mechanism is now commercial and creating international mandates.
Phase-down finance supports transition impacts, enabling access to capital for fossil fuel entities on condition of phase-down. This type of financing mechanism is new and will require adapted international and commercial finance mandates and new categories.
So far, only voluntary standards exist in the area for sustainable and responsible investment. At times, the guidance is broad and vague, leaving the door open to potential greenwashing. A recent whistleblower said publicly that the asset management business where she worked was “misleading clients with bold sustainability claims that do not stand up to scrutiny.” This has triggered investigations in Germany and the US.
In the UK, the government recently announced a UK Transition Plan Taskforce. This will help decarbonisation by ensuring financial institutions and companies prepare plans to achieve net zero, and support efforts against greenwashing.
The EU has begun, through its Green Deal agenda, an ambitious sustainability and climate regulatory programme. The Fit for 55 package, the EU Taxonomy, Sustainable Finance Disclosure Regulation, and the proposed Corporate Sustainability Reporting Directive are important early building blocks.
The EU is also considering a green bond framework, which could potentially impose civil penalties if issuers mislead investors over green claims.
In the UK, the government recently announced a UK Transition Plan Taskforce. This will help decarbonisation by ensuring financial institutions and companies prepare plans to achieve net zero, and support efforts against greenwashing.
Policy and regulatory interventions are needed to prevent misleading claims and accelerate the net zero transition. In key jurisdictions, stakeholders are building momentum for developing and establishing new norms and standards.
JP Douglas Henry, Managing Director of Sustainability and Resilience, DLA Piper
Natasha Luther-Jones, Global Co-Chair of Energy & Natural Resources and International Head of Sustainability & ESG, DLA Piper
DLA Piper advises clients around the world on the full range of sustainability and ESG issues, including sustainable finance, and is Legal Services Provider to COP26.
Catch up with DLA Piper's Bryony Widdup participating in a panel discussing net zero public policy at the Net Zero Delivery Summit