Bridging the gap from climate transition planning to implementation

While most climate transition plans focus on aligning the institution's portfolio with net zero targets, they often neglect other crucial factors such as turnover, profit, and risk profile – elements that are equally vital to ensure a comprehensive strategy. To develop effective and actionable climate transition plans, financial institutions need to adopt a comprehensive approach that includes considerations for risk, return, and climate impact. This holistic perspective is essential for creating balanced and sustainable strategies.  
 
‘Think of it as a three-legged stool’, says Ledderhof. ‘If you focus too much on return, you might underestimate your amount of risk. Focus too much on climate impact, you might lose on return. The three legs must be balanced, or you will fall over.’  
 
‘The integration of these targets is complex’, says De Vries. ‘Climate targets are long-term, whereas most financial targets tend to be short-term. In addition, some steps that are part of a transition plan are highly dependent on other parties – like the broader decarbonisation of the economy – and uncertainty remains on how these steps will be achieved.’  
 
‘This makes it difficult to establish a connection between classic KPIs and transition-related ones.’ However, it is essential to integrate these KPIs – both financial KPIs, Key Risk Indicators as well as Impact KPIs - to get the right balance in execution on these targets.  

Incorporating the climate transition plan into the organization’s governance framework requires careful attention. Ledderhof: ‘Firstly, it’s crucial to secure unwavering commitment from top management. This commitment is essential for prioritising climate goals within the organisation. Without the active support and commitment from leadership, efforts to integrate climate considerations into core business strategies may struggle to gain traction’.

‘Secondly’, Ledderhof adds, ‘the successful implementation of climate transition plans often hinges on collaboration across various departments, such as finance, business, and risk management. Effective communication and cooperation among these departments are vital’. He knows this can be challenging. 'Especially if there are existing silos or differing priorities. Overcoming these barriers requires fostering a culture of collaboration and ensuring that all departments are aligned with the overarching climate goals.’

Another significant challenge is the quality and availability of climate data, which complicates decision-making processes, as noted by De Vries. Not all relevant climate data is readily accessible, and even when it is available, its quality may not always meet the necessary standards. ‘Consequently, decision-making becomes less data-driven than preferred, leading to potential inaccuracies and uncertainties', Ledderhof adds.

Moreover, the financial sector traditionally relies on models built using historical data to inform decisions. However, the unique nature of climate change means that past trends cannot reliably predict future outcomes. ‘This requires a shift in approach’, De Vries emphasises. ‘Financial institutions must develop new models and methodologies that account for the unprecedented and dynamic nature of climate-related risks and opportunities.’