While investors around the world have increasingly recognized the importance of helping the global economy reach net-zero greenhouse gas (GHG) emissions, they have historically lacked action steps and coordination across public and private sectors to achieve it. Now, with new guidelines from a Morgan Stanley-led working group, major market stakeholders may have a deeper understanding of how they can help fight climate change—and a clearer path forward for doing so.
The guidelines, issued in March by the Transition Finance Working Group of the Sustainable Markets Initiative (SMI) launched by Prince Charles at the 2020 World Economic Forum, offer specific ways market participants can help accelerate the decarbonization of the global economy. The recommendations include:
- establishing a way to evaluate companies’ climate-transition readiness;
- forming a supportive policy environment and committing to appropriate levels of blended finance (a mix of public or philanthropic capital with private investments); and
- de-risking investments in order to redirect greater capital from high-carbon to low-carbon solutions.
“The enormity of the challenge of transitioning to a net-zero and nature-positive economy requires multisector collaboration—leveraging blended finance, supportive policy and catalytic private-sector investment, to drive sustainable and impactful investments at scale,” says Audrey Choi, a Morgan Stanley senior adviser and CEO of the firm’s Institute for Sustainable Investing. “Morgan Stanley was honored to lead the Transition Finance Working Group in its collective effort to identify actionable recommendations for global markets to accelerate this transition.”
According to the working group, companies generally fall into one of three categories based on their capacity to reduce emissions and, over time, protect and restore nature. By defining this range, market participants can ensure an inclusive transition of the full economy toward net-zero:
- The first group are the most advanced; they have plotted a clear path to net-zero that is achievable by 2050 or sooner.
- In the second group are companies that emit a large amount of greenhouse gases and are actively working to reduce emissions, but without a viable transition plan.
- The last group includes businesses that are significantly reducing emissions intensity (per unit of output), but their overall emissions are still rising because of the high-growth sectors or economies in which they operate.
The working group also recommends what four key stakeholder groups can do to accelerate the speed and scale of climate-transition finance.
- Asset managers, sponsors and underwriters can develop and launch credible and scalable transition finance products. They should also heed growing opportunities to attract capital into these products, informed by existing market structures across varied risk-return profiles.
- Asset owners and allocators can document the business case for transition finance investment, as well as clear objectives for impact and returns, as part of their investment beliefs and policy statements. This will help create internal alignment across leadership and investment staff and embed the commitment within asset allocation decisions. They should also commit to supporting industry best practices for transition finance and communicating progress with stakeholders.
- Multilateral development banks and development finance institutions can gain more buy-in for transition projects by increasing and coordinating project preparation grants, increasing incentives to alleviate commercial and currency risk and publishing data on historical investments, including default rates by market sector and participants.
- Policymakers can be transparent about mechanisms such as subsidies or tax schemes that would encourage long-term investment and decision making that support a low-carbon economy. They also have a role to play in funding transition activities through measures including technical assistance, insurance or offtake agreements.
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