Step 3: Translate strategy into action

5.3 step 3: translate strategy into action

The table below outlines some of the sources and frameworks available to guide firms in translating strategy into action. Most are focused on net zero, with limited guidance on the just transition. This paper addresses some of this gap by providing guidance as to key principles to apply in translating just transition strategy into action. Further guidance is provided for each sector within the Guernsey finance industry in chapter 6.

A: Translate strategy into action

A range of actions will be required to integrate just transition objectives into a business and steer towards climate goals. Some are common to most firms, whilst others will vary based on the firm’s strategy, structure and business model.

Whilst limited guidance exists on just transition or implementation of net zero strategies, some sector-based frameworks can be helpful

Just transition: PRI has provided some high level guidance for investors and the NZIA for insurers.44

For investment funds and managers: NZIF – Net Zero Investment Framework – investment industry-led initiative, includes guidance on both target-setting and implementation, across key themes such as governance, portfolio management and asset allocation, and engagement

For asset owners: NZAOA Target Setting Protocol – UN-Led initiative, like the NZIF, this includes broad guidance on targets and some aspects of implementation

For insurers – CISL – Insurers in a Paris-aligned Climate Transition – provides overview of available tools for net zero underwriting and examples of best practice for insurers B: Disclose progress

Transparent disclosure of progress towards climate and net zero goals is critical to ensuring accountability, and to driving improved consistency and comparability across the industry.

Most larger firms and corporates are now subject to one or more of the following disclosure regimes, each of which provides a framework for the sustainability disclosures required – either as a standalone report, or via a firm’s annual reports and accounts:

TCFD – Task force for Climate related Financial Disclosures – voluntary framework, moving into mandatory disclosure regulation in the UK and G7

IFRS & ISSB – International Sustainability Standards Board – developing a consolidated international standard for sustainability reporting, building on the TCFD foundations

CDP – Carbon Disclosure Project; covers a range of sustainability and environmental disclosures

UN Global Compact, PRI – reporting and disclosing via external initiatives can help to hold you to account

ESG Ratings and benchmarks – although there are known inconsistencies in the data and methodologies used, monitoring and disclosing ESG ratings and scores can still help to drive accountability to ESG factors

44 PRI, Climate change and the just transition: A guide for investor action, 2018, download (unpri.org), and NZIA, Insuring the net-zero transition: Evolving thinking and practices, April 2022, Insuring-the-net-zero-transition.pdf (unepfi.org)

There are some common levers available to financial services firms to steer towards their sustainability goals, however some will be more relevant than others depending on the goal itself, as well as the specialism, structure and business model of the firm. These tools are:

Client Engagement

Policy Engagement Engagement means more than simply raising awareness. It means becoming trusted partners, helping clients to develop their transition plans, and build confidence in their plans. This creates stronger, longer-lasting relationships, whilst enabling firms to make more informed financing decisions

Raise awareness amongst governments and regulators around the regulatory frameworks, enablers and tools required to support you in transitioning – for example clarity and consistency in sustainability disclosures and taxonomies

This includes development of new products, entering new markets, and using pricing incentives to encourage and facilitate just transition objectives, linked to clear, measurable KPIs

Identify, measure and integrate ESG risks into both risk management and, where necessary and aligned to transition strategy, into pricing. Whilst negative pricing can be contentious, it may be necessary to ensure financial stability as we transition

Work with new partners to identify wider systemic opportunities to collaborate, innovate, and spread risk of transition across the industry, for example through blended finance

Products and Pricing

Risk Management and Pricing

Partnerships

The following principles can help firms as they consider which of these tools to apply in translating a just transition strategy into action:

Transparency: Make clear, credible and transparent disclosure of ESG impacts to counter and protect against potential greenwashing accusations

Balanced decisions: Consider the social and environmental impact of key decisions. A siloed approach will fail to identify wider E, S and G factors. Develop mitigation strategies where ESG objectives are not perfectly aligned. For example, balancing fossil fuel displacement with investment in job creation opportunities in the same area

Incentives: Develop a meaningful package of incentives and ensure this is driven throughout the firm, and is tied to clear, near-term milestones and indicators

Engagement over divestment: A just transition enables companies with the opportunity to transition in an orderly fashion, retaining their workforce and preserving their economic value. Divestment should only occur when an entity has been engaged and consistently failed to produce a credible transition plan or positive ESG outcomes

Holistic approach to metrics: Measure and monitor a range of environmental and social metrics, where material to the asset/sector/geography. Although sound ESG data is difficult to source and ESG ratings are far from perfect, continue to deploy a pragmatic approach whilst encouraging providers and companies to improve their reporting

Cautious Offsetting: Avoidance is always better than offsetting; focus on reducing emissions directly through engagement to encourage wider change and emissions reduction in the real world. Offsetting should only be used where residual emissions remain that cannot be addressed by technologically or commercially viable options (SBTi). Whilst investing in carbon removal and natural capital should absolutely be part of a holistic just transition strategy, this should be additive and not replace emissions reduction; if using offsets then best to align to industry accepted frameworks e.g. Oxford principles

Regular Refresh: To ensure targets/goals/objectives/approach evolves as science evolves, as data improves and the macroenvironment changes to ensure this remains in line with just objectives