ClimLabels – Integrating “transition” more systematically into finance

September 1, 2022

What?

We need to increasingly finance economic activities in transition.

About the context

Reaching net zero targets by 2050 requires massive investments from the private and public sector, as well as a supporting financing framework. While there has been a surge in interest in investments that are currently sustainable (such as renewable energy investments), there is a need for stronger financial incentives in current emissions-intensive sectors to help them decarbonise (such as manufacturing or agriculture). Creating better financing conditions for economic activities becoming green lies at the heart of the frequently discussed term “transition finance”.

About the project

The joint research project “Transition Labels in Climate Finance” (ClimLabels) aims to integrate the forward-looking perspectives into financial products to incentivise investments into transitioning economic activities. Among others, it thus supports the development of (transition-related) financial products as well as labels. The project is jointly implemented with our partners from Ruhr-University Bochum (Prof. Andreas Löschel), University of Münster (Prof. Dertwinkel-Kalt) and the Leibniz Institute for Financial Research SAFE (Prof. Christine Laudenbach). The project is financed by the Federal Ministry of Education and Research and is part of a bigger funding programme “Sustainable Finance and Climate Protection” (with 14 funded projects).

About our advisory board

The project is supported by an advisory board to provide feedback and ensure alignment and consistency with other efforts. We would like to thank the following members: Mona Freundt (CDP), Jon Gallop (Hanse Merkur), Nicola Koch (2DII), Roland Kölsch (FNG Label) and Martin Viehöver (Positive Impact).

About our contribution

Our starting point is the following: surveys have shown a broad willingness among institutional investors to invest in transitioning ‘brown’ industries, provided that trust is built through clear KPIs and thresholds. This ‘trust’ is not too obvious, giving the ever-increasing number of companies with (non-credible) targets and transition plans. Therefore, we envision the following activities:

  • Learning from Ecolabels (done): Ecolabels for financial products are an existing illustration of how both mechanisms of investor impact (capital allocation and engagement) intertwine. We analyse existing ecolabels and the extent to which they have incorporated “transition” into their label design criteria (see publication below).
  • Reliability of “forward-looking” indicators (in progress): to select companies with credible transition plans, investors can rely on a range of indicators (e.g., setting of targets; governance indicators; past investments into green activities; among others). We thoroughly screen the existing literature and plan to conduct our own empirical investigation.
  • Recommendations for financial products: based on the above, we list specific recommendations for investors and label providers on how construct financial products with a “transition focus”. Some of the results will also be useful for regulators (e.g, to design disclosure requirements).

Timeline of events

  • January 2023 – Response to Consultation: Responding to UK’s proposed transition label as part of their consultation (see publication below)
  • February 2023 – Overview Report: “Investor Impact in Transition Finance: Learning from Ecolabels”. The report sheds light on the evolving landscape of transition finance, summarizes evidence on forward-looking metrics, and extracts lessons learnt from ecolabels for financial products.
  • July 6,  2023 – Policy Brief on the SFDR and its proposed amendments on GHG emission reduction targets. The policy brief elaborates on the proposed clarifications regarding GHG reduction targets at portfolio level (see report).
  • July 11, 2023 – Webinar: To present interim results and seek feedback from financial market participants, we hosted a webinar as part of the Science Meets Stakeholder event series (see link to event page).
  • October 19, 2023 – Round of exchange: Presenting interim results at the FNG label’s round of exchange on transition and exclusion criteria.
  • December 11, 2023-  Policy Brief: “Climate transition plans – State of play in EU legislation and policy recommendations“, jointly with Germany’s Sustainable Finance Research Platform (see link).
  • December 20, 2023 – SFDR Consultation: In line with many peers, we’ve actively contributed to the SFDR consultation (see link)
  • April, 2024 – Working paper on the evidence of forward-looking indicators: The Role of Sustainable Management Practices in the Transition of Corporates Towards Net-Zero (see link)
  • May, 2024 – Publication draft report: Transition Finance Products – Conceptual Clarity & Practical Implementation (forthcoming)