Finding Signals in Noise: Transition-Relevant Data and Metrics

The commitment to achieving net zero has gone from an emerging trend to a mainstream goal of the global financial sector. But setting targets and making commitments is only the first step in the long journey ahead for financial institutions to fulfill their role in the transition to a decarbonized economy. To facilitate this journey, financial institutions will need to grapple with the data and metrics required to better align financial decision-making and client engagement with the net-zero transition.

Data and metrics are often cited as one of the first and most persistent challenges facing financial institutions as they work to implement their climate targets. Yet today, much of the decision-making on climate alignment made by financial institutions is driven by business-as-usual incentives and backward-looking data and models. In order to support the transition of high-emitting sectors and accelerate the financing of climate solutions, financial institutions need better, more targeted data solutions that are relevant to front-office bankers and other financial professionals.

In response, over the past several months, the Center for Climate-Aligned Finance has worked with 15 leading financial institutions from across North America and Europe to explore and define transition-relevant data and metrics. The Center’s new Insight Brief summarizes our findings and serves as a starting point for discussions on “transition relevance” in the context of climate finance’s “data problem.”

What Are Transition-Relevant Data and Metrics?

The above definition seeks to distinguish the concept of transition-relevant data and metrics from a broader set of climate-related data and metrics, such as those that describe exposure to the physical risks and impacts of climate change. Instead, transition-relevant data and metrics focus on forward-looking, real-economy decarbonization outcomes. They can supplement a financed emissions approach, which has been gaining traction in climate finance in recent years but which has limitations.

This definition is purposefully broad in order to accommodate differences between what counts as transition relevant across different counterparties, sectors, or portfolios. As a result of these user-specific differences, transition relevance is unlikely to be simplified to a fixed set of data points or metrics. However, key characteristics of transition-relevant data highlighted by the Center’s financial institution partners during an in-person workshop on the topic are found in the word cloud below.

Furthermore, through our work, we have identified three distinct challenges facing financial professionals in the deployment of transition-relevant data and metrics today:

• Identification of the most critical, decision-useful, transition-relevant data and metrics that adequately enable financial institutions to meet their needs of assessing transition and prioritizing actions as well as disclosing progress
• Access to data, generally done either directly or through a third party, in a way that is efficient, cost-effective, and avoids placing an unnecessary burden on bilateral client relationships
• Use of the data across the organization’s financial decision-making, client engagement, and operational processes to effectively drive real-economy decarbonization and transition.

In the Insight Brief we explore these concepts in more detail, including identifying specific barriers and signs of progress in each area, as well as highlighting relevant additional resources from across the public and private sector.

Why Does Transition-Relevant Data Matter?

Although the transition will look different for every financial institution, the conceptual framework of transition-relevant data and metrics is designed to help financial decision makers simultaneously address business opportunities, climate considerations, and client transition needs. The increasing availability and refinement of climate-related data and metrics, such as through mandatory climate-related disclosures and the continued growth of voluntary reporting initiatives, has been encouraging, yet most of the climate-related information available today remains noncomprehensive, unstandardized, and reliant on varying methodologies and sources. Importantly, most climate data and metrics available today will not necessarily help financial institutions assess both the feasibility and the credibility of a counterparty’s role in the net-zero transition.

Although various sources, methods, and approaches necessary to fulfill these needs are still evolving, it is important to emphasize that financial institutions cannot wait for “perfect” data to begin integrating transition-relevant data and metrics into financial decision-making. Accordingly, in our brief we highlight some of the approaches taken by financial institutions today to overcome uncertainty, alongside additional resources and initiatives working to address the challenges of identifying, accessing, and using transition-relevant data and metrics.

Next Steps

We encourage you to read our new Insight Brief that dives into greater detail on the key characteristics of transition-relevant data and metrics, offers a case study and deeper insights around how financial institutions are using transition-relevant data today, and offers suggestions on key steps different stakeholders can take to advance transition-relevant data and metrics. This topic is still nascent, but we believe it will prove instrumental to the successful implementation of net-zero commitments by financial institutions globally. As such, the Center will continue to contribute to, and collaborate on, further work in this area. If you or your organization are interested in discussing any of these topics more, please contact us via climatealignment.org.