Assessing businesses and their activities through this detailed lens will help FIs understand which sectors and companies will need more support in establishing their pathways to transition, which activities will need to be phased out and where opportunities for investment in transition-enabling projects and technologies may lie.
Lenders, insurers and asset managers who move at pace to develop detailed sector-by-sector knowledge will be able to capitalize on the opportunities early and identify growth areas.
There will, of course, be great variety between sectors and businesses across geographies as different countries around the world have determined their own transition timelines. There will be variation in the transition-readiness of businesses between emerging markets and more developed countries as well — particularly as many EMs have so far lacked the capital needed to pursue the transition. This differentiation will have an impact for FIs analyzing transition financing opportunities, in addition to sectoral concerns.
Similarly, emerging changes in societal behavior, from buying local and transport sharing, to reducing shipping demands and working from home, will have a material effect on the transition timelines of different sectors and businesses. These changing societal norms, which may bring about a more circular economy and disruption to traditional supply chains should be factored into analysis of pathways in all economies.
Some emerging economies are more vulnerable to climate-related risks such as desertification and extreme weather — many nations are already experiencing these effects. There is a real and urgent need to accelerate the transition to net zero to mitigate these risks, but the transition should also be framed as an opportunity. Increasing the supply of renewable energy will provide EMs with a reliable and cheap power supply. Some nations also stand to benefit considerably from the demand for the raw materials needed to manufacture new technology and components for renewables (e.g., lithium, nickel, cobalt).
The transition will be paced differently across sectors and markets and FIs will need to develop their understanding of these dynamics if they are to successfully navigate these changes.
To begin implementing confident, successful transition financing plans, FIs will need to develop sub-sector transition pathway knowledge. In this regard, there are numerous practical points for FIs to reflect upon.
Leading FIs have four key areas to consider, covered in the following chapters: