G20 working group calls for third-party verification of finance transition plans

The G20’s Sustainable Finance Working Group has called on financial firms to use third-party verification for their energy transition plans.

The group, which was established in 2016 to identify barriers to green finance and formalised as a working group last year, has issued a series of recommendations to improve the credibility of climate commitments from financial institutions in its first annual report. The report follows the publication of a sustainable finance roadmap last year.

Among the recommendations, which include seeking third-party verification from a provider with a transparent methodology, are engaging with clients to align practices with appropriate pathways, applying commitments to all operations, and transparent reporting and collaboration.

For regulators and governments, the report recommends taking steps to encourage voluntary net-zero commitments as well as considering “measures to enhance the accountability and comparability of financial sector net-zero commitments”.

The working group also warns that challenges remain to the credibility of private sector commitments, including “pressures to relax pledges to maintain short-term profitability”. It notes that events such as a pandemic or geopolitical tensions may serve to incentivise both boards and investors to relax their long-term pledges.

A second key issue raised is the difficulty in managing the phase-out of high-emitting assets. The working group warns that increases to financed emissions or risk exposures caused by ownership of high-emitting assets could disincentivise the provision of transition financing. It calls for more work to be done “to determine how FIs with net-zero commitments can finance the managed phase-out of high-emitting assets in ways that are consistent with their commitments, and how those commitments are reported”.

The report also sets out a series of high-level principles for countries looking to formalise transition finance rules, including establishing their own transition taxonomies or principles, facilitating cross-border use and ensuring a Just Transition from financing.

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The working group identified a “gap” between the scope of climate work carried out by multilateral development banks and the scale and speed needed to achieve the objectives of the Paris Agreement. However, it said MDBs had reported working to scale up their work to meet this need.

Calls also came for MDBs to devote more resources and expertise to de-risking sustainable finance in developing countries, supporting blended finance projects and building up in-country expertise.

The concerns over MDBs come as a group of 10 countries – including the G7 – put forward a set of proposals for “a fundamental reform of the World Bank” to make it fit to address global challenges including climate action and biodiversity protection.

German development minister Svenja Schulze, who sits on the World Bank’s board of governors, said its current model “is no longer appropriate in this time of global crises”. Among the reforms that should be made, she said, are better terms for climate lending and targeted budget support for governments that seek to decarbonise their economies.