Given that climate change is the biggest economic upheaval of our age, what can risk professionals do? What, exactly, is meant by a “net-zero transition,” and why does each organization need a transition plan to reach it? How should risk professionals get started?
On May 23, 2023, the membership of the Global Association of Risk Professionals (GARP) was invited to a one-hour webinar titled “Net-Zero Transition Plans” that promised to answer these questions and more.
Tony Rooke, Executive Director and Head of Transition Finance at the Glasgow Financial Alliance for Net Zero (GFANZ), delivered the webinar. GFANZ is a global coalition of 500+ leading financial institutions committed to accelerating the decarbonization of the economy. It was formed in 2021 during the COP26 climate conference in Glasgow.
Rooke began with a big-picture view. “GFANZ aims to broaden the number of firms with net-zero commitments within the financial sector,” he said. “We want to raise the ambition by encouraging firms to have robust targets and transition plans.”
“We promote best practices and develop other voluntary approaches across the alliance to support the economy-wide transition needed to achieve net-zero emissions,” he said.
Climate change is starting to affect human life expectancy. Rooke showed the increasingly high risk for overheating that will be experienced by future generations, based on the 2023 report issued by the Intergovernmental Panel on Climate Change (IPCC).
“The World Economic Forum advises that the risk profile of the next ten years is likely to be dominated by environmental risks, directly linked to the climate crisis,” he noted.
He quoted from the most recent Intergovernmental Panel on Climate Change (IPCC) report: Failure to adapt and mitigate soon bears the risk of “cost escalation, lock-in of infrastructure, stranded assets, and reduced feasibility and effectiveness of adaptation and mitigation options.”
On a quadrant chart of Strength of response vs Transition pathway, the current policies (circled in red in the chart below) are orderly, but the climate targets are unmet, therefore suggesting high risks.
What is Net Zero?
Rooke defined net-zero emissions to be “the state where anthropogenic emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals.” The carbon dioxide emissions per person are shown below according to country. The total emissions are highest for China (greatest population) and the U.S. (third highest per capita usage, after Saudi Arabia and Australia).
Plan for Transition
Having explained net zero and its significance to health and the economy, Rooke addressed the question, “What does a credible transition plan look like?”
It appears that in the short term, fossil fuel must be there, but in a diminishing amount. Achieving net-zero emissions must be done through a “combination of emission reductions and neutralization of remaining emissions, such as through carbon offset credits.” Pointing to the 2015 Paris Agreement on climate, Rooke said, “Finance can take its cue for international and national agreement from the 195 nations that signed on.”
“Transition plans take us beyond risk disclosure,” he noted. “Net-zero transition planning is in response to the identification and assessment of transition risk as a systemic risk.”
The momentum of climate-related financial disclosures is growing. The TCFD (Taskforce on Climate-Related Financial Disclosures) has developed recommendations for the disclosure of climate risks that have now been adopted by 4,000 organizations across the globe. The chart showed growth of 445 percent from 2018 to 2022 for adoption.
“The IPCC’s most recent synthesis report estimates that a 3- to 6-fold increase of climate financing is required, with developing countries, in particular, needing additional funds to adapt successfully.”
“A recent Bloomberg NEF analysis shows that the ratio of low-carbon to fossil energy supply investment should average roughly 4 to 1 this decade in order to meet net-zero targets and be aligned with limiting global warming to no more than 1.5 degrees C.”
Transition Finance
Transition finance refers to products and services of investment, financing, and insurance that are necessary to support an orderly, real-economy transition to a net-zero economy. He described four key financing strategies:
1) Climate solutions: entities and activities that develop and scale climate solutions;
2) Aligned: entities that are already aligned to a 1.5 degrees C pathway;
3) Aligning: entities committed to transitioning in line with 1.5 degrees C-aligned pathways;
4) Managed Phaseout: the accelerated managed phaseout of high-emitting physical assets.
Getting Started
“I recommend the meerkat way of doing strategy,” Rooke said, referring to the animal’s behavior of running, stopping to raise their heads and check direction, then running again. He said very few organizations will have a complete net-zero plan at the beginning of the journey and, furthermore, there are areas of planning that are still being developed. So the key is to “start early and learn by doing” while checking progress on a regular basis.
To start transition planning, he said, “First, understand the motivation for developing a transition plan.” For example, it might be “meeting a net-zero commitment, or risk mitigation.”
“Organizations will undergo a process to implement all elements of a transition plan over time,” he noted. “The adoption of such plans is expected to increase progressively as data and methodologies for net-zero transition plans mature.”
Risk professionals play a critical role. He said, “We need risk professionals, now more than ever, to identify risks and to run scenarios to assess the actions to mitigate these risks.” The professionals can suggest mitigation and management of climate risk as well. They are adept at building risk scenarios and they will run stress testing and sensitivity analyses to inform transition strategies. They are well-versed in measurement and monitoring. They already have cross-functional relationships within their organizations.
However, they need training. “GFANZ will be releasing further workshops for professionals to train themselves and to help colleagues,” he said. In closing, he outlined the training materials that GFANZ will be developing.
“We’re seeing leading organizations are digging into it,” he said. “They have set sector-specific targets to start with, and then will be broadening these to other areas.” ♠️
Most of the illustrations in this post are from Tony Rooke’s GFANZ presentation to GARP. Permission pending.
Click here to visit the GFANZ site, where you can find the presentation made by Tony Rooke.
The greenhouse gas emissions chart is from Greenhouse gas emissions. (2023, May 26). In Wikipedia. https://en.wikipedia.org/wiki/Greenhouse_gas_emissions by R Craig.
The meerkat image is from BBC Earth.