Background and rationale

Governments and private-sector firms globally have committed to achieving net zero to limit global warming to 1.5 degrees C. As of November 2022, 137 countries representing 91% of global GDP have made net-zero commitments. The latest IPCC assessment highlights that climate change has already caused widespread adverse impacts. To maintain a 50% chance of limiting warming to 1.5 degrees C, a 50% reduction in emissions is required by 2030. This necessitates an unprecedented increase in financing; investment in clean energy must reach approximately $4 trillion annually by 2030. Total global investment requirements to reach net zero by 2050 are estimated at between US$109 trillion and $275 trillion. GFANZ was established to mobilise the entire financial system to meet this scale of investment, representing more than 500 financial institutions and approximately 40% of global financial assets.

Defining transition finance

Financial institutions support the real-economy transition by facilitating capital allocation and providing services. GFANZ identifies four key financing strategies for transition finance. The first, climate solutions, involves financing entities that develop technologies or tools to eliminate or remove greenhouse gas (GHG) emissions. The second, aligned, supports entities already aligned with a 1.5 degrees C pathway. The third, aligning, focuses on entities committed to transitioning in line with science-based pathways. Finally, managed phaseout involves financing the accelerated retirement of high-emitting physical assets, such as fossil fuel power plants, before their expected end-of-life. This approach prioritises financing emissions reductions in the real economy rather than simply divesting from high-emitting assets, which may not decrease global emissions.

Net-zero transition plans

A net-zero transition plan is defined as a set of goals, actions, and accountability mechanisms intended to align an organisation’s business activities with a pathway to net-zero GHG emissions. For GFANZ members, these plans must be consistent with achieving net zero by 2050 at the latest, including interim targets for 2030. The plan serves as both a strategic tool and a practical action plan, signaling to stakeholders that the institution is managing transition risks and operationalising its climate pledges. These plans must cover Scope 1 and Scope 2 emissions for clients and portfolio companies, as well as Scope 3 emissions where they are material and data allows.

Theme: foundations

The foundation of a credible transition plan is the clear articulation of objectives and priorities. Institutions should define their net-zero objectives, state measurable interim and long-term targets, and identify which of the four key financing strategies they will prioritise. This includes defining the scope of activities covered, strategic timelines (immediate, short, and medium-term), and how the plan will be embedded within the wider corporate strategy. A formal statement from a senior executive, ideally endorsed by the Board, should explain the institution’s prioritisation and how the transition impacts its overall business model.

Theme: Implementation strategy

The implementation strategy focuses on integrating net-zero objectives into core business activities. Institutions should use existing and new products and services to support client transition efforts and scale climate solutions. Net-zero objectives must be embedded into core evaluation and decision-making processes, including transaction approvals, credit underwriting, and investment mandate allocations. Furthermore, institutions should establish and apply policies and conditions for priority high-emitting sectors, such as thermal coal, oil and gas, and deforestation, to define business boundaries consistent with their net-zero priorities.

Theme: Engagement strategy

Stewardship is a critical lever for driving real-economy change. The engagement strategy involves three main approaches: engaging with clients and portfolio companies to encourage net-zero alignment; collaborating with industry peers to exchange expertise and solve common challenges; and engaging with the public sector to support an orderly transition through direct and indirect lobbying. For clients that do not respond to engagement, institutions should maintain an escalation framework that includes stewardship actions like proxy voting or, as a last resort, divestment.

Theme: Metrics and targets

Institutions must establish a suite of metrics and targets to drive execution and monitor progress. These should include metrics for real-economy transition activities (aligned to the four financing strategies), plan execution KPIs, and financed emissions reductions. Targets should be consistent with 1.5 degrees C-aligned sectoral pathways. While absolute emissions metrics provide a direct link to carbon budgets, economic intensity metrics (e.g., emissions per unit of revenue) may allow for better comparability across sectors and growth in low-emissions entities.

Theme: governance

Effective governance structures are necessary to oversee progress. The Board and senior management must have clear ownership and responsibility for net-zero targets. Accountability for design and delivery should be specified, and remuneration incentives should be linked to the achievement of transition plan objectives. Additionally, institutions must ensure that teams have the sufficient skills and knowledge to perform their roles, requiring ongoing training and the possible integration of external climate experts.

The way forward

The widespread adoption of transition plans is essential for the financial sector to support the global climate goals. Realisation of this path requires increased availability of high-quality data from real-economy firms, harmonisation of reporting standards, and supportive public policy. As the transition progresses, financial flows should increasingly shift toward the four key financing strategies, eventually embedding net-zero considerations systemically across the financial sector.