WHILE there is a growing need for transition finance to support the decarbonisation of high-emitting sectors, there are greenwashing and reputational risks associated with this nascent space of financing, said Tan Jenn-Hui, chief sustainability officer of Fidelity International.

The most severe form of greenwashing in transition finance is when it is used as a way to “extend traditional financing to heavy polluters without driving any real change in these underlying businesses”.

This is possibly one of the most challenging aspects of transition finance, said Tan at a Thursday (Feb 22) webinar, but the financial sector should be honest and acknowledge such risks upfront.

Scepticism over how transition finance is used also creates reputational concerns for investors and other financiers looking to wean off their portfolios from carbon-intensive companies.

The challenge is exacerbated when there is no universal definition of what constitutes transition finance.

However, there have been developments that could give investors more confidence that their funds are being channelled towards objectives that are aligned with the Paris Agreement to curb global warming under 1.5 deg C, even if these funds are being injected into a carbon-intensive company.

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Tan highlighted how regulators are trying to give guidance as to what constitutes transition finance by coming up with frameworks and principles in their respective national or supranational taxonomies, which refer to classification systems that define which economic activities qualify for sustainable financing.

For example, the European Union has included a definition of transition activities in its taxonomy, while Singapore’s taxonomy, which was finalised at the end of last year, provided a set of parameters.

Regulators are also beginning to standardise what credible transition plans should look like for companies. These regulatory developments would help drive more capital flows into transition finance, said Tan.

For Fidelity International, a credible transition plan should include how companies are responding to climate and nature-related risks and opportunities, identify appropriate targets and the actions needed to achieve them, as well as the impact on their workforce, supply chain and the wider community.

Fidelity utilises its own ratings system – which includes metrics such as greenhouse gas analysis, supply chain management, biodiversity, and their engagement with stakeholders – to assess a company’s transition credibility or readiness, said Tina Chang, associate director for sustainable investing at Fidelity International.

Beyond detailed disclosures, Chang, who was also speaking at the webinar, said that when Fidelity engages with its portfolio companies, it also requests for short-term targets to track their decarbonisation progress.

Identifying high-risk companies in their portfolio and engaging with them at a deeper level, and voting against company management are also other strategies that Fidelity utilises to nudge its portfolio companies to move forward on the transition journey.

“We do recognise that transition does not have to happen at a linear pace. And oftentimes, it actually doesn’t happen at a linear pace. But what’s really important is, and we share with the company, is that transparency, and how we are going to get there,” she added.