REALIZING

CLIMATE FINANCE
OPPORTUNITIES
Ilya Khaykin
Edwin Anderson
Sayli Chitre
Daniel Holod
Coby Sippel
CONTENTS

Executive Summary 3

Introduction 5

Setting the overall commercial strategy 9

Implementing the commercial climate strategy 12

Products and services 12

Deal-level capabilities and enablers 20

Risk management and portfolio steering 26

Organizational enablers 30

Phased approach to enable climate and transition investment 34

Realizing Climate Finance Opportunities

EXECUTIVE SUMMARY
Financial institutions are launching strategies to capitalize on the opportunities stemming
from the low carbon economy transition. However, they still must navigate between the
enormous potential of the emerging climate and transition finance market while capitalizing
on more conventional lending, investment, and insurance deals that already fit their existing
investment philosophies involving such areas as risk appetite and tenor of investment.
Oliver Wyman and International Association of Credit Portfolio Managers (IACPM)
conducted interviews with 25 leading financial institutions alongside market research
to assess current market progress. In this context, our study has identified four concrete
areas where financial institutions have developed innovative ways to deliver against their
commercial strategy and climate and transition goals. These efforts fall into four categories:

• Products and services: Most business and risk teams are building on their existing
strengths, often through project and transition finance and capital markets activity.
Early innovators are developing new products and services, ranging from performance
guarantees from insurance providers, to transition bonds and funds from banks and
asset managers that support decarbonization efforts of high-emitting sectors.
• Deal-level capabilities and enablers: There are currently limited deal opportunities
in the climate and transition finance market that work with financial institutions’ risk
appetite and investment profiles, and those that do fit the criteria are often highly
competed. To navigate these challenges, financial institutions have been building
capabilities across the deal lifecycle. This has included engaging with potential clients
earlier in the investment lifecycle to enable increased deal origination and integrating
transition plans and emission projections into the underwriting process.
• Risk management and portfolio steering: Risk measurement tools and techniques are
at the center of financial institutions and climate strategy is no exception. To navigate
nuanced risks within the financial market, financial institutions have begun to create risk-
sharing partnerships to achieve greater investment scale, as well as re-develop financial
management practices to match their climate commercial objectives, such as preferred
fund pricing for greener investments.
• Organizational enablers: Business teams are finding that positioning themselves
for climate- and transition-related opportunities requires thinking about how their
organization provides services and how it interacts internally. For example, financial
institutions are starting to establish large low-carbon go-to market teams, ranging in size
from a few dozen to hundreds of employees. They are also developing internal centers
of excellence to provide expertise and hiring non-traditional skillsets like engineers for
technical advisory.

These commercialization efforts take up time and resources. As companies move forward
in their climate commercialization journey, business and risk teams can consider certain
strategies, depending on their ambition and the amount of effort they’re willing to invest.

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Exhibit: The three segments of financial institutions’ climate journey spectrum

1 2 3
Establishing ”no regret” moves Building a foundation Innovation and expansion

Meeting the needs of current Aligning organization Pushing boundaries of risk

customers and build on structure and risk management and commercial
existing strengths. management with climate strategies, developing
strategy, while exploring fundamentally new products
additional products and investment opportunities.
and clients.

Source: Oliver Wyman

Not every firm will want to be a leader in the climate and transition finance market, with
some financial institutions prioritizing their existing capabilities that are relevant to the
climate and transition financing market. Companies can continue forward in the spectrum by
building up capabilities via reassessing their risk appetite and investment profile. Innovators
will have to decide how to orient their organization’s climate commercialization through
existing and new actions at scale across the firm.

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INTRODUCTION
The record-breaking temperatures this summer are a continuing reminder of the global
climate crisis and the huge investment necessary to stop the advance of continued global
warming.1,2 The growing need to reduce emissions through innovation and new technologies
has created a monumental investment opportunity. There is a projected $50 trillion
investable market in the transition to a net zero economy by 2050, including the expansion
of annual clean energy investment from $1.3 trillion today to $5.2 trillion by 2030.3,4 These
investments will be tailored to both established low-carbon technologies, like wind and solar,
as well newer technologies that could become integral parts of future low carbon economy,
including hydrogen fuels, carbon capture and storage, and electric charging stations.

Recognizing both the need and the financial opportunity, governments have announced
incentive packages over the last few years designed to encourage investments in climate
and transition solutions. Among the most notable is the United States’ Inflation Reduction
Act (IRA), signed into law in 2022, which may create over $1 trillion in clean energy tax
and lending incentives over the next 10 years.5 Additionally, the EU adopted the Green Deal
Industrial Plan, which offers €250 billion ($268 billion) of funding to ensure Europe doesn’t fall
behind in the green tech race.6

Meanwhile, in Asia, China has led in global clean energy investment $546 billion in
energy transition investments, nearly half the global total in 2022. Japan has a plan to
issue an estimated ¥20 trillion ($153 billion) of “green transition” bonds to finance
net-zero investment.7,8

There has also been a push for equitable transition financing, such as the European
Commission’s Just Transition Mechanism which seeks to mobilize between €75 billion and
€85 billion ($83 billion to $93 billion) of transition investments to regions most affected by
the low-carbon transition, such as those heavily dependent on coal for energy and revenue.9

1 NASA, 2023. July 2023 as the hottest month on record ever since 1880.
2 Oliver Wyman, 2021. Financing the transition to a net zero future.
3 IEA, 2022. World Energy Outlook, 2022.
4 We acknowledge not all investments offer an attractive return.
5 Goldman Sachs, 2023. The US is poised for an energy revolution.
6 European Commission, 2023. The Green Deal Industrial Plan.
7 Bloomberg, 2023. Global low-carbon energy technology investment surges past $1trillion for the first time.
8 Nikkei, 2023. “Transition bonds” are new favorite for Japanese investors.
9 EU, 2021. Just Transition Mechanism: Role of the EIB.

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Corporates and financial institutions have also been committing resources to capitalize
on the opportunities stemming from the low-carbon transition. Global investment has
maintained a compound annual growth rate of 20% from 2005 to 2022. In 2022, there was
a record investment totaling $1.1 trillion and year over year growth of 31%.10

Exhibit 1: Global investment in the low carbon transition

$ billion
+20%

+31%
1,100

849

626

522
468 482
422
394
310
267
241
213 211
155 152
120
79
50

‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 ‘21 ‘22

Source: Bloomberg NEF

While the low carbon solutions market continues to grow, financial institutions are
encountering industry barriers limiting their ability to expand climate and transition
financing strategies and seize the commercial opportunities. These industry barriers
occur across the climate and transition solutions market, individual institutions’ financing
portfolios, and specific project risks.

10 Bloomberg, 2023. Global low-carbon energy technology investment surges past $1trillion for the first time.

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Exhibit 2: Key barriers financial institutions will have to work through

A MARKET LIFECYCLE RISKS

Introduction Growth Maturity Decline

High technology costs and Scaling challenges and Over-saturation of Risk of stranded assets
unproven business models limited pipeline market investments

Potential market trajectory

Introduction The market has uneconomical commercial models due to high technology costs; the solution doesn’t
become commercially viable

Growth The commercial and market deployment risks that come along with scaling market; A low number of
investable opportunities which leads to lower margins as investors “race to the bottom”

Maturity There are low margins due to an over-saturation of market investments

Decline The solution becomes redundant, and the assets become stranded

B PROJECT LEVEL RISKS

Preparation Design & construction Early operations Later operations

Construction/completion risk

Technology/perfomance risk

Business model risk

Construction/ Limited availability to offtake project development risks

completeness risk

Technology/ New technologies with limited track-records on profitability at scale

performance risk

Business model risk Business models are unestablished and management teams may not have a proven track record

C FINANCIAL INSTITUTIONS’ INVESTMENT CONSTRAINT

Tenor of investments Risk appetite Size of investments

Low carbon projects often face Risk of project investment unaligned Project size may be under institution’s
longer tenor than institution's with institution’s risk appetite investment size criteria
investment horizon

Tenor of investments • Early market investments include financing the whole project from construction with limited capital
market solutions
• Costs often decrease and capital market solutions increase as market matures

Risk appetite • Categories of market lifecyle and project level risks are outside of what firms traditional invest in
• FIs cannot be overly exposed to a particular market or technology

Size of investments • Ticket size of current investments too low for insurers and alternative investors; alternatively, ticket
size may be too large for climate-focused boutique investors

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BACKGROUND ON THIS REPORT

Despite the barriers, it has been important for financial institutions to make progress on the
climate and transition financing market because of the opportunities’ potential to maximize
value for shareholders and the risk being shut out of growth market.

The International Association of Credit Portfolio Managers (IACPM) and Oliver Wyman
sought to understand how business and risk teams are looking to overcome barriers
within the climate and transition finance market. To inform our assessment, the IACPM and
Oliver Wyman conducted interviews with 25 of the leading global banks, asset managers,
insurers, export credit agencies (ECAs), and multilateral development banks (MDBs) to learn
about their approaches to financing climate and transition solutions.

We investigate the newer financing needs for climate and transition finance, articulating
the practices, solutions, and approaches financial institutions are bringing to the growing
market. This includes engagements with traditional fossil fuel heavy industries, either
through shifting away from financing these industries or supporting their transition to
lower carbon alternatives.

This study assesses dimensions in which financial institutions have set both established and
emerging actions. We outline how financial institutions frame their commercial strategy
alongside their climate strategy and how their climate strategy shaped concrete actions
for realizing commercial opportunities in the climate and transition finance market. These
actions spanned the following categories: 1) products and services, 2) deal-level capabilities
and enablers, 3) risk management and portfolio steering, and 4) organizational enablers.

Under this framework, our study sought to understand how financial institutions are
pursuing commercial opportunities in climate-and transition-related investments, despite
the hurdles within the market. The study’s objective was to provide a primer for business
and risk teams at financial institutions on how to navigate current obstacles and support
commercial objectives and strategy.

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SETTING THE OVERALL

COMMERCIAL STRATEGY
Financial institutions have taken a range of approaches to integrating climate into their
overall commercial strategy. While some aim to lead the pack in proactively offering
climate-oriented products and services, others still consider the issue of climate to be a
distraction from their business strategy. We summarize the range of strategies observed
into five archetypes that are described below.11

Exhibit 3: Summary of typical climate strategy archetypes

Agnostic “Climate is not a competitive differentiator for us, and we will only comply with
minimum regulatory requirements.”
Follower “We do not want to lead on climate, but we should selectively enhance our climate
offerings and capabilities to ensure we remain competitive.”

Opportunist “We should anticipate our clients’ needs and proactively address them, particularly
with respect to launching new climate-focused products and services.”
Advocate “We engage with public stakeholders and our clients to promote our climate
position and strategy within our current business profile, and work with our clients
to help them become more involved in the latest climate solutions, to reduce their
emissions and climate risk exposure.”
Champion “We believe that climate change is a key competitive differentiator and want to work
with clients that share our position and ambition in order to push the economy
toward net zero and decarbonization, including divestment of poor performing
clients if necessary.”

Source: Oliver Wyman

In some cases, the climate strategy is a result of explicit and coordinated decisions from
senior management or external pressure. But in other cases, strategies result organically
and may differ across parts of the same organization as a function of the teams in those
areas and the commercial context. We observe four main drivers of the overall strategy.

Current business profile

• For some financial institutions, climate change and its impact may be a low priority for
their clients. For example, while some small business and commercial banking clients
may be considering decarbonization, it may come second to current economic pressure
for most.
• On the other hand, clients within energy, utilities and infrastructure sectors, transition
and physical risks are often critical topics.

11 Oliver Wyman, 2023. Defining a climate strategy for private market investors.

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• Large financial institutions with diverse businesses and client bases are often less likely
to be at either far end of the spectrum. They must meet the needs of their varied clients,
who are themselves placing different emphasis on the issue.

Economic, political, and regulatory context

• Financial institutions may face risks if they position themselves as opponents of policy
in the regions where they operate. They need policy to provide real-economy incentives
and help their lending and investment align with commercial realities. This topic becomes
complicated for financial institutions that span multiple geographies.
• Business and risk teams must also consider the needs of their clients, which include
issues such as energy affordability and security. This becomes the energy trilemma when
energy transition is thrown into the mix, with the magnitude of these issues varying
across countries. In some regions, this can result in a greater focus on increasing energy
production, ideally using more renewables.

Risk appetite

• Ambitious commercial climate strategies must be reconciled with the firm’s risk appetite.
While conventional wisdom suggests that financing for decarbonization can help reduce
climate risks in the future, there is nonetheless uncertainty about commercial viability
for many climate and transition solutions. In this context, financing in some areas is
commonly outside of the risk appetite of different pools of capital. Given their prudential
regulation, banks often find it difficult to invest in new technologies, limiting their ability
to pursue an ambitious commercial strategy on climate.
• Asset managers must manage investments in line with the risk appetite and objectives of
their clients, determining their range of maneuver.

Organizational culture

• While much of the strategy is a result of commercial- and risk-related considerations,

firmwide culture and individual views on the topic can also impact the overall strategy.

ARTICULATING THE STRATEGY

To drive action in the organization, climate strategy is being implemented across four
dimensions. This includes the range of products and services offered, the deal-level processes
and enablers, the financial management structure and tools and portfolio level capabilities,
as well as broader organizational capabilities and enablers. Through our interviews we have
observed that business and risk teams are making some now well-known enhancements and
adjustments to traditional approaches to pursue their climate strategy and overcome key
hurdles financing. In some cases, they are continuing to innovate with novel approaches.

• Products and services: Teams are both integrating climate and transition solutions
into existing offerings and developing new financial instruments to access climate- and
transition-related opportunities. This integration goes beyond standardized product
structures like loans, bonds, and funds with some financial institutions re-considering
how they provide services and incorporating climate into the broader value they can
provide to clients.

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• Deal-level capabilities and enablers: The climate commercial strategy must eventually
impact the deal level decisions made. There are important levers throughout a deal’s
lifecycle, ranging from enhanced client engagement models at origination to risk transfer
mechanisms at the distribution and mitigation stage.
• Risk measurement and portfolio steering: Risk measurement tools and techniques are at
the center of financial institutions and drive behavior across business and risk teams — the
climate strategy is no exception. Traditional tools used in risk measurement and portfolio
steering are being updated and employed in the interest of achieving the climate strategy.
• Organizational enablers: Business and risk teams are finding that positioning
themselves well for climate- and transition-related opportunities requires thinking about
the structure of the organization, how teams provide varying services and offerings, and
how teams interact internally. The knowledge and skillsets of the employee base also
need to evolve to support the firm’s ambitions.

Across each of these four dimensions, we observe that teams are taking a range of actions —
through established and emerging solutions. “Established” solutions include those in the
industry that we find more commonly and often represent a modest modification of the
ways of doing business. “Emerging” solutions include those that are newer actions that may
have less evidence of their effectiveness as of yet and may often imply greater structural
change. While advocates and champions are typically exploring these emerging solutions,
these two categories are not one-to-one.

The following chapter explores the key climate solutions identified within the four strategy
dimensions, differentiated across established and emerging solutions. The chapter identifies
how some business and risk teams are enabling climate and transition financing amidst
current business environments.

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IMPLEMENTING THE COMMERCIAL

CLIMATE STRATEGY

PRODUCTS AND SERVICES

Approach: Business teams are building climate and transition products and services, starting
with actions that align with their existing capabilities, client base, and expertise.

The primary form of innovation of financial sector products in relation to climate issues to-
date, has been combining traditional products with a set of climate-related characteristics and
a corresponding “label” that is an indicator of the characteristics. Examples of this span from
green bonds, green loans, and other climate-linked products. Emerging products may seek
to further capitalize on the green and transition finance market while also addressing current
market challenges.

Exhibit 4: Primary labeled products identified

Established Emerging
Capital Green bonds* with proceeds designated for Low carbon commodity hedges* for transition-
markets green activities. related commodities.
Transition bonds* for high-emitting companies’
investment into transitioning to lower emissions.
Tax credit transfers* for climate and transition projects
looking to transfer credits for additional capital.
Corporate Green loans with proceeds designated for Supply-chain, climate-linked lending* for clients to
lending green activities. enhance “greening“ of supply chains.
Project finance* for climate- and transition- Transition finance: Loans to support decarbonization
focused projects. efforts (often to traditionally high-emitting firms).
Asset Climate-focused funds* that invest in low-carbon Transition funds that invest in technologies and
managers climate technology. companies to support decarbonization.
and owners Green minus brown tilt funds that prioritize so-called “Carbon-improver” funds* and portfolios that invest
green investments over brown. in firms progressively reducing emission footprints.
Insurance Low-carbon insurance discounts* with expanded Weather-based derivatives* that allow clients to
coverage and better terms for insurance on low- hedge against weather shocks.
carbon investments. Performance guarantees* on the performance and
Extended warranty warranty claims on technical qualities of low-carbon technologiest.
green products. Repair-over-replace claims that offer better terms for
Carbon credit guarantees for the performance of repairing damaged assets.
carbon credit projects. Incentive-related premiums with discounts for
clients that achieve transition-related KPIs.
Retail Green mortgages and green home equity lines of Electric vehicle loans* with better rates and
lending credit* with better terms and incentives for climate- education platforms for potential EV purchasers.
friendly housing. Green credit rewards that offer higher cash back for
Green cards that are sustainably produced. climate- conscious purchases.
Climate-linked deposits earmarked for climate financing.

* Products detailed in the following pages

Source: Oliver Wyman
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Established labeled products

Capital markets — Green bonds

Green bonds, which finance “green” activities, have been a dominant fixture in climate-related
financing and were often an integral part of our interviewees’ climate product offerings.
These bonds are typically issued under frameworks like the Climate Bond Taxonomy or the
International Capital Market Association’s (ICMA) bond principles. Currently, green bonds
remain the primary climate product for financial institutions, with green bonds predominantly
focused on emissions-based impacts. Originating in 2008 with the World Bank Group’s first
issuance, the global green bond market reached $440 billion in 2022, up 540% from 2016.12

Today, most climate-related green bonds are being written on late-stage or at least relatively
mature companies, aligned with the standard risk appetite of most financial institutions.
Green bonds have had more limited ability to support low-carbon alternative technologies still
in the R&D stage, which are necessary to support the low carbon transition.

Corporate lending — Project finance

Given the long-term project development horizons and predictable sources of revenue
(post-construction) for most renewable energy projects, many banks have looked to leverage
project finance to capture the climate financing opportunity. Banks have increased the amount
of focus in direct project finance into established climate technologies such as solar and
wind power, with experts projecting 2023 renewable project financing to be about $21 billion
compared with $18 billion in 2022.13 These sources of funding focus specifically on capital
deployed for constructing and operating renewable energy projects via a special purpose
vehicle to avoid liability for the project developer.

Climate-related project finance has also begun to focus on financing newer and rapidly
growing climate technologies, such as battery storage and charging stations for electric
vehicles, buoyed by the market of these two products growing globally 175% and 55%
respectively in 2022.14,15

Further, banks are also beginning to expand into emerging markets to access more project
finance opportunities. For example, Citigroup is working to build up its blended finance
capabilities across development and low carbon infrastructure financing.16

Asset management — Climate-focused funds

Investment institutions have established climate-impact focused funds as part of their climate
strategy. January 2021 to November 2022 had $94 billion of assets under management in
newly announced climate investment funds, with 15 funds, each over $500 million, introduced
in 2022.17 Momentum has continued into 2023, including Goldman Sachs’ $1.6 billion Horizon

12 Climate Bond Initiative, 2023. State of the Market.

13 S&P Global, 2023. Renewable project financing to rebound in 2023.
14 IEA, 2023. Tracking clean energy progress.
15 IEA, 2023. Global EV outlook.
16 Economic Times, 2023. Citigroup hires former IFC exec von Friedeburg to boost development bank ties.
17 CTVC, 2022. New dry powder for a new climate.
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Environmental & Climate Solutions fund18 and Brookfield looking to fundraise for an additional
$20 billion climate fund alongside their $15 billion Transition fund.19 These funds have grown
apace disclosure regulation, including the EU’s Sustainable Finance Disclosure Regulation’s
Article 8 and 9 labels, which cover products that promote and or target sustainable
investments. Establishing funds as Article 8 and 9, both in sum totaling over $5 trillion in
2023, has allowed business teams to provide investors with vehicles that meet their desire
to invest in sustainability-focused assets, which include climate-focused assets. In turn,
these climate-focused funds help with capital deployment to climate solutions. Beyond the
investments themselves, receiving financing from reputable financial institutions may provide
the “stamp of approval” that climate solutions may require to continue to solicit debt financing.

Insurance — Low carbon insurance discounts

Insurance providers are offering insurance coverage with preferential pricing and broader
coverage for low carbon investments. Financial institutions specifically have focused on
providing insurance discounts, reduced rates, and greater coverage of products that support
decarbonization. For example, some insurance firms offer electric vehicle (EV) insurance
premium discounts alongside expanded insurance coverage for EV roadside breakdowns and
electrical surges. These insurance product offerings for low carbon investments also include
premium discounts on energy-efficient buildings and renovations as well as broadened terms
such as additional damage coverage and increased liability limits.

Retail lending — Green mortgages and HELOCs

Business teams, including some of our interviewees, have been offering discounts on
mortgages for purchasing energy-efficient houses as well as discounts on home-based solar
installations, both often labelled as “green mortgages.” Banks offering these types of home
financing have tried a variety of ways to enhance their green mortgage offerings, for example,
FirstRand sought partnerships with solar panel manufacturers to enable a strong pipeline of
panels to their customers.20 Retail lending has also expanded to home equity lines of credit
(HELOCs) that provide the financing to upgrade the energy efficiency of a property.

Some interviewees noted that, so far, the uptake of these retail products has been lower than
expected. In the face of negative pressures like supply chains bottlenecks, increased mortgage
rate rises, and policy implications, business teams have been seeking to address the lower
uptake through client engagement and education.21,22,23 For example, the Commonwealth
Bank of Australia partnered with a fintech provider for personalized household emissions
footprints and with Harvard University on developing opportunities for customers
to understand and act on their climate impacts. 24 Building client engagement has
also supported financial institutions’ data gathering and financed emissions tracking.

18 GSAM, 2023. GSAM completes final close of Horizon Environment & Climate Solutions fund.
19 Bloomberg, 2023. Brookfield seeks $20 billion for next Energy Transition Fund.
20 Reuters, 2023. SouthRand to double green energy home loans.
21 Marsh, 2023. Assessing the bottlenecks facing renewable energy developers.
22 Mortgage introducer, 2023. Green mortgage market — why is it struggling to attract interest?.
23 Consumer Financial Production Bureau, 2023. CFPB Proposes New Consumer Protections for Homeowners.
24 CommBank, 2023. 2022 Climate Report.

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For example, Scotiabank has partnered with LightSpark, an energy efficiency software firm,
to help customers understand and improve the energy efficiency of their houses as well as
create more accurate representative emissions data for the real estate sector. 25

Emerging labeled products

Capital markets — Transition bonds

Over the past few years, a new category of bonds has emerged: transition bonds. Although
green bonds have channeled capital to environmentally sustainable corporate companies,
this newer category of bonds serves a necessary role of helping fund other, high emission,
companies’ transition to a low carbon economy. These transition bonds have the promise of
expanding the investible universe of climate-responsible investing by pushing the horizon
beyond just “climate-friendly” companies to ones that are looking to transition towards a
lower emission future, going from “brown” to “less brown” to “green” companies. Transition
bonds have had little take-up since the market’s origination in 2017, often attributed to
limited precedence and agreed-upon taxonomies, as one interviewee noted. Many large
issuers have not offered transition bonds out of similar fear of criticism for how they
understand transition and what projects can be included. However, the market may begin
to scale shortly, given the growing focus of transitioning companies 26 and the growing
financing from governments, especially in Japan. 27 Transition bonds are the only sustainable
bond to demonstrate (modest) growth from 2021 to 2022 — up 5%. 28

Exhibit 5: Global investment in transition bond market

$ billion
4.0

3.0

2.0

1.0

0
2018 2019 2020 2021 2022

Source: Climate Bond Initiative

Capital markets — Commodity hedging

Some banks are exploring opportunities to build upon their commodity trading capabilities
and help clients hedge against climate-related risks. Certain commodities are particularly
important to the climate transition. They can be used to hedge both more traditional loans,
like construction risks, and newer categories. For one interviewee, this included looking into

25 Scotiabank, 2023. Helping homeowners find their own path to lower emissions.
26 Environmental Finance, 2023. Transition bonds: Could 2023 be the year we see them take off?.
27 Nikkei Asia, 2023. Transition bonds are new favorite for Japanese investors.
28 Climate Bond Initiative, 2023. State of the Market.

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providing new hedge-able categories like sustainable aviation fuels and biofuels, as well as
new asset classes linked to materials like cobalt and lithium derivatives. All of this is in addition
to the more widely recognized carbon market derivatives.

CASE STUDY 1
TAX CREDIT TRANSFER BETWEEN INVENERGY AND BANK OF AMERICA
Market opportunity
The Inflation Reduction Act (IRA) creates incentives for renewable energy, including in the
form of tax credits. Financial Institutions are looking at how they can support clients in
realizing the opportunities stemming from these incentives.

Tax credit transfers are tax breaks from the IRA that are allowed to be sold to other
companies. This allows project developers that may not have high taxes to sell their credits
to other companies. For the project developer, credit transfers allow them to raise additional
capital more easily into climate and transition project development. For the investor, the
transfers open up low carbon project financing beyond the traditional tax equity structures
that only large banks could manage. Further, these investments support investors in achieving
their clean energy goals. Leading financial institutions are exploring other areas for tax credit
transfers from IRA tax incentives, including battery storage and carbon capture.

Bank of America executed the first public tax credit transfer utilizing IRA incentives,
purchasing $580 million of tax credits from IRG Acquisition Holdings (IRGAH) a partnership
between Invenergy Renewables, CDPQ, and Blackstone Infrastructure Partners. The
purchase allowed IRGAH to invest in an additional $1.5 billion in renewable projects from
American Electric Power, totaling an additional 1,265 MW of renewable capacity.

Tax credit transfers are becoming an increasing option given the IRA, and banks are looking to
expand to transition technologies including battery storage and carbon capture.

Source: Invenergy, 2023. Purchase of American Electric Power.

Corporate lending — Supply chain-linked financing

As part of scaling climate and transition financing, there is increased focus on enabling the
greening of client supply chains. Lending programs are reflecting this increased focus on
supply chains that aims to help clients reduce emissions at current suppliers or find new
suppliers with smaller carbon footprints. The supply-chain lending products are attracting
more interest as newer governmental regulations and disclosure guidance are increasingly
mandating disclosure of Scope 3 emissions from upstream and downstream supply chains,

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including the International Sustainability Standards Board (ISSB) Scope 3 requirements.29

To support supply chain product offerings, banks are frequently working directly with key
clients to provide preferential terms to suppliers based on their emission levels and transition
plans. For example, HSBC partnered with Walmart to offer a sustainable supply chain finance
program in which suppliers can qualify for financing if the suppliers meet established
sustainability criteria, as part of Walmart’s Scope 3-driven Project Gigaton.30 Similarly, DBS
provides sustainable supply chain financing products for its clients, offering to develop
sustainability-linked KPIs, in which suppliers get preferred pricing if the KPIs are met.31 In
addition to building out their clients’ supply chain climate resiliency, these financing activities
enable the scaling of financial institutions’ climate and transition finance ambitions.

Asset management — “Carbon improver” funds

Like with the growth of transition bonds, investors are beginning to build funds that prioritize
companies focused on reducing their emissions, seeking to be a “carbon improver.” Rather
than build out funds of companies that already have low emissions, such as software
companies with low operational footprints, these carbon improver funds seek to tackle
emission reductions in high emitting sectors, which account for the bulk of global private
sector emissions. These “carbon improver” funds can include reference to the new MSCI’s
Climate Action Index, which estimates future reductions in emissions, as well as Bloomberg’s
Climate-Transition Index which incorporates clients’ decarbonization trajectory and
stated emission reduction targets. 32

Insurance — Weather-based derivatives and performance guarantees

Insurance agencies are utilizing their increased climate and weather data management
capabilities to provide weather-linked derivatives. Here the insurance provider bears the risk
of weather-related impacts for a premium. Weather-based derivatives began prior to 2000
but have become more relevant with the increase in climate change-driven extreme weather
events.33 Insurance firms have also utilized their data and technology capabilities to provide
performance guarantees for climate and transition technologies.

29 ISSB, 2022. IFRS — ISSB announces guidance and reliefs to support Scope 3 GHG emission disclosures.
30 HSBC, 2023. Walmart and HSBC establish a sustainable supply chain program.
31 DBS. Green and sustainable trade financing.
32 Financial Times, 2023. New generation of funds signals evolution of ESG.
33 IPCC, 2022. IPCC 6th assessment report. Chapter 11: Weather and climate extreme events in a changing climate.

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Realizing Climate Finance Opportunities

CASE STUDY 2
MUNICH RE GREEN SOLUTIONS BUSINESS PERFORMANCE GUARANTEES HELP
ENABLE INVESTMENTS IN LOW CARBON TECHNOLOGIES
Market opportunity
Insurance agencies are using their technical know-how to help project emerging climate tech
performance, improve investor insight, and support low carbon solutions.

• Munich Re offers a range of performance guarantees tailored for low carbon technologies,
assuring the long-term performance and quality, and absorbing potential technical risks of
emerging “green” technology solutions.
• These performance guarantees may result in more attractive financing terms and improve
bankability of climate- and transition- technology solutions.

Munich Re offers performance guarantees for low carbon technology manufacturers and project
developers. While initially offering only solar performance guarantees, the insurance company has
since scaled up its offerings to encompass such emerging low carbon technology as green hydrogen
and energy storage. Its performance guarantees, offered primarily for manufacturers and developers,
provide revenue and production output assurances alongside equipment coverage including against
both supply and weather shocks. Munich Re has been able to offer these guarantees by pooling its
expert technology resources and know-how in the field of low-carbon technologies, risk management,
and underwriting capabilities.

One key hurdle for lenders have faced has been their lack of experience with new technology risks,
and Munich Re’s product seeks to help identify, guarantee, and optimize against these risks. Its
performance guarantee products may provide a risk mitigation option that can better align with
financial institutions risk appetites, as the assurance changes the risk of net cash flow projections.

Exhibit: Munich Re’s performance guarantee product

Photovoltaic Green
energy hydrogen

Energy
E-mobility
storage

Wind Low carbon Circular

energy technology economy
solutions

Source: Munich RE’s Renewable Energy and Energy Efficiency platform page

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Retail products — EV loans and green deposit and credit incentives

A growing number of banks are beginning to offer green deposit and credit products
for retail clients to expand on their climate offerings. Like green mortgages, banks are
offering beneficial terms and information programs for electric vehicle (EV) car loans.
Royal Bank of Canada (RBC), for example, offers specialized rates and alternative payment
options for retail clients looking to purchase EVs. Complementing their preferential rates,
RBC has an online platform that provides EV purchasing locations, auto partners, and
information on how to utilize government incentives. 34

Some retail banks are offering cash rewards, debit offerings, and loyalty programs
to incentivize green spending. These incentives include higher cash-back options
on purchases labeled sustainable and donating a percentage of transaction fees to
environmental non-profits, in addition to deposit guarantees for sustainable financing.
Standard Chartered launched a sustainable time deposit offering in Singapore and Taiwan.
Funds in these deposits are earmarked to be spent against sustainable loans and projects
such as green financing and sustainable infrastructure projects. 35

Business services

Outside of these labeled products, innovation is also occurring in the broader business
service offerings from financial institutions. As the needs of their clients evolve because
of the low-carbon transition, business teams are evolving as well. In some cases, financial
institutions are becoming advisors on the climate strategies and pathways of their clients.
Financial institutions are utilizing these advising engagements to plug gaps in the markets
created by the low carbon transition.

Exhibit 6: Primary business services identified

Established Emerging
Services • Carbon calculators* provide • Partnership-based offerings* with third-
emission inventorying for clients in party organizations to enable investment
addition to high-level guidance on and engagement initiatives related to
decarbonization levers. climate and transition investments.
• Client engagement and education • M&A advisory that helps clients identify
efforts allow client engagement on and acquire assets that lower their
climate change via webinars, conferences, carbon footprint.
focus groups, or one-on-one. • Cross-portfolio services that connect
• Carbon-credit access programs that portfolio companies and corporate clients
provide clients guidance on carbon to help enable additional climate and
credits and helps them purchase transition solutions.
credits and offsets to reduce their
emissions footprint.

* Services detailed in the following pages

Source: Oliver Wyman

34 RBC, 2023. Electric vehicle car loans.

35 Standard Chartered, Sustainable time deposits.
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Realizing Climate Finance Opportunities

Established business initiatives — Carbon calculators

Financial institutions have built up extensive ESG and climate-focused capabilities. This
has led to business teams utilizing their climate expertise as an advisory offering to their
clients. For example, many asset managers offer carbon inventorying services to their
portfolio companies, which both enable asset managers to calculate and track their financed
emissions while also identifying key areas to decarbonize for portfolio companies. In the
retail space, Mastercard developed a carbon calculator which informs clients on their
“carbon footprint” based on their purchases. 36 These calculators often provide less-climate-
focused clients a first step in their decarbonization journey and enable them to identify low
hanging fruit to reduce emissions.

Emerging business initiatives — Partnership-based offerings

Financial institutions have also developed third-party partnerships that enable them to
expand their climate platform offerings. Examples of such offerings include ESG advisory
and data-driven assessments to help inform clients on their decarbonization journeys. Some
business teams help portfolio companies and corporate clients pursue low carbon activities
by offering emission forecasting and detailed decarbonization lever analyses, often through
third party partnerships.

DEAL-LEVEL CAPABILITIES AND ENABLERS

Approach: Business and risk teams have established deal-level capabilities and enablers
through action-oriented partnerships as well as fostering team innovation.

Beyond establishing clear climate- and transition-linked products and business initiatives,
business and risk teams are also establishing deal enabling capabilities across the entire
deal lifecycle — from origination and underwriting to distribution, risk mitigation, and
management. Like with product and business initiatives, some deal enablers have become
established climate strategies, while some climate-ambitious teams are deploying additional
emerging deal enablers.

36 Mastercard, Carbon Calculator.

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Realizing Climate Finance Opportunities

Exhibit 7: Primary deal level capabilities and enablers identified

Established Emerging
Origination • Staff upskilling that provides • Enhanced customer engagement
training on available offerings to models* that support new and existing
relationship managers. clients to decarbonize.
• Third-party data* that’s used to
assess customer emissions and
transition plans.
• Blended finance* that matches
public and private capital to
scale the investable universe for
private investors.
Underwriting • Climate-related assessments* of • Extended timelines that match low-
emissions data and transition plans carbon infrastructure time horizons.
incorporated within the credit memo. • Risk defeasance* utilized to
de-risk climate- and transition-
related solutions.
• Risk modeling and analysis* that
incorporate physical and transition
risks into underwriting.
• In-house emissions projection
tools that show impacts of financed
emissions on targets.
Distribution • Climate risk monitoring that • Transition plan assessments*
and mitigation provides climate-related performance of clients’ transition plans to
and hold assessments of portfolio holdings. ensure alignment with financial
• Loan sales and participations* institution’s expectations.
that enhance diversification and • Emerging risk mitigation solutions*
risk reduction. that transfer risk of climate and
• Originate to distribute models that transition financings and/or portfolios.
allows higher risk lending or longer- • MDB capital markets distribution that
term time horizons. expands usage of capital markets by
MDBs to support distribution of risk.
* Capabilities and enablers detailed below
Source: Oliver Wyman

Established deal enablers

Deal origination — Third-party data

Business teams are utilizing third-party data to assess potential customers’ emissions and
transition plan alignment. This increased push has been, to a large extent, in response to
disclosure regulation such as EU’s Sustainable Finance Disclosure Regulation (SFDR), pending
required climate disclosure from the SEC, and the Corporate Sustainable Reporting Directive
(CSRD). 37,38,39 However, this data is also the necessary foundation to assess deal risks and
opportunities in a low carbon transitioning economy. Many deal teams, especially within
private markets, are conducting climate-related due diligence efforts that include manual
data collection and assessment. However, front office teams, including one interviewee with
exposure to listed equities, are seeking to improve automated capabilities for diligence,
alongside utilizing data providers with suites of climate-related company-level data.

37 European Union, 2019. Regulation on sustainability-related disclosures in the financial services sector (Article 4).
38 SEC, 2023. Climate-related disclosures and ESG investing.
39 European Union, 2022. Regulation as regards to corporate sustainability reporting.
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Further, teams are utilizing third-party expertise to help inform their risk management
and navigating risks of emerging climate technology, especially related to initial negative
cashflows and unproven technologies at scale.

Deal origination — Blended finance

Blended finance is another established practice to increase climate and transition financing,
especially within emerging markets. For example, Goldman Sachs partnered with Bloomberg
Philanthropies to launch a Climate Innovation and Development Fund alongside the Asian
Development Bank to increase sources of funding in South and Southeast Asia for climate
and transition solutions.40 However, one bank highlighted challenges in blended finance
engagements referencing risk mismatches alongside blended finance participants as a
driver in the “race-to-the-bottom” of financing renewables. Given these challenges and
the continued need for opportunities to mitigate risk, some interviewees noted they were
seeking to prioritize blended finance engagements for early-stage low carbon solutions
that require concessional funds such as through export credit agencies and multilateral
development banks.

Underwriting — Climate-related assessments

Financial institutions have been developing ESG tools to utilize across their business teams
as part of the underwriting process. These tools can include elements like emissions data
and an assessment of transition plans. For example, one interviewee had established an
ESG-embedded pricing tool which includes emissions and energy diligence. This tool acts
as a control to ensure ESG analysis, as their bankers cannot get a price for a loan without
the ESG assessment. Depending on the ESG risk level identified, the deal may be escalated
for review.

Distribution, risk mitigation, and management — Loan sales and participations

As project finance in climate and transition solutions scale, banks are employing traditional
approaches to distributing the credit risk. Two measures employed are through the selling
of the complete loans or selling some fraction of the loan’s risk, either by only selling a
portion of the loan or by a loan participation. Selling of loans and participations both require
their buyer to have nearly the same level of climate knowledge and ambition as the bank.
This transfer then allows the banks to continue to scale their climate-focused loans while
diversifying their credit risk.

Emerging deal enablers

Deal origination — Enhanced engagement models

Business teams are beginning to develop customer engagement strategies that consider
the sector and company-specific technology needs and financing options. Building these
strategies allows teams to move beyond ad hoc engagements and build climate solutions
for clients within a pragmatic structure, often engaging with clients earlier than before

40 Goldman Sachs, 2021. Bloomberg and GS deploy $25 million to advance clean energy solutions.

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within the deal lifecycle. These relationship engagement strategies differ for carbon-
intensive sectors like oil and gas (O&G), where in-house climate expertise more often
already exists, versus other corporates that may benefit from more foundational support
on climate activities. For example, one bank interviewed segmented their client landscape
into archetypes to help inform the bank’s engagement timeline, service lines, and products
offered to clients. With clients in hard to abate sectors, they focused on supporting their
client’s decarbonization and transition roadmap and facilitating financing of emerging
technologies. Their engagements included M&A services for investments related to client’s
decarbonization commitments, as well as guidance on divestiture of legacy high-emitting
assets. On the other end of the spectrum, they segment businesses where carbon is not a
core part of the business model. Engagement in this segment focused on training the clients
on approaches to reduce their operational emissions and Scope 3 upstream emissions.

With increased engagements, business teams have had to ensure they interject the right
knowledge into the deal teams. As new climate and transition technologies cut across
traditional industry segments, such as hydrogen which involves both the energy sector
and industrial sectors, the expertise cannot sit in just one group. Some of the interviewees
addressed this by building centralized expertise on these emerging technologies, and
providing that service to various vertical segment teams, including having those experts
participate in client discussions.

Banks are beginning to engage earlier with emerging low carbon and transition solution
companies that may not be big enough for traditional large scale commercial debt. Banks
have gone beyond supporting these smaller clients’ deposit services to providing climate
advisory services including M&A. As the clients grow, they will get larger and need lending,
which can in time provide commercial opportunities for the banks, thus scaling the investible
universe of financing demand for banks.

Underwriting — Risk defeasance

Business and risk teams are looking into opportunities to utilize risk defeasance to de-risk
climate and transition solutions where commercial equity and debt may otherwise not
be possible. Business teams often leverage other financial institutions with deep climate
expertise, such as insurance firms, export credit agencies, and MDBs, to offtake their
financing risks. Additionally, business teams are working alongside project developers to
arrange offtake agreements that ensure that there is sufficient demand for the products
and that some or all the price risk has been mitigated. These offtake arrangements provide
financiers with assurances that products will garner a set price or volume, which can reduce
risk and make funding the project financially viable. The most common offtake are the
guaranteed sales of power purchase agreements (PPAs) where established cashflows can
be used to hedge financial risks. One interviewee noted an increase in purchasing of these
products from oil and gas clients. The interviewee remarked that for green hydrogen loans,
O&G majors and chemical companies were familiar with the specific financing structures
and were often the most willing to participate in the guaranteed sale offtake agreements.
Some teams are beginning to look beyond offtake agreements to develop new pricing tools
to hedge against revenue risks. Climate-focused investors, such as Newmarket Capital’s

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Realizing Climate Finance Opportunities

International Infrastructure Finance Company (IFFC), seek to structure financing alongside

banks to enable additional credit creation for green solutions while generating favorable
risk-adjusted returns for banks.41

Underwriting — Risk modeling and analysis

Some risk teams are utilizing climate models for scenario analysis of climate risk in
addition to projecting emission forecasts, such as through temperature alignment
scores. The outputs of these climate-related underwriting mechanisms may not force
a specific outcome at a defined threshold but can be used as additional information in
the underwriting process. For example, one investor developed detailed climate risk
scenario analyses on individual deals, assessing the climate impacts on projected financial
performance. Subsequently, the business teams integrated these models into their due
diligence for company valuation assessments, and in turn, attracted like-minded co-
investors because of their scenario analysis capabilities.

Credit teams are also developing climate risk scores, considering both physical and transition
risks into a framework that provides a summary assessment. These scores are increasingly
integrated into underwriting and credit processes. Tools looking at climate risk, transition
plans, climate scenario analysis, and implications of individual deals on portfolio emissions
targets are developing into potential constraints on financing of industries and companies in
transition to lower carbon operating and business models. Ideally climate risk tools predict
shifts in traditional measures like probability or default, but even relative measures can be
of some value. If transition finance is going to help companies finance their decarbonization
efforts, then these tools must be used to gauge the viability of that transition plan.

Distribution, risk mitigation, and management — Transition plan assessments

Business and sustainability teams have begun to both establish their own transition plan
framework as well as to assess their clients’ decarbonization transition plans. Over the last
few years, there have been several frameworks from leading institutions on guiding financial
institutions in their transition plan assessments, from the Institutional Investors Group on
Climate Change’s (IIGCC) guidance on assessing clients’ transition plans, to the UN’s Global
Financial Alliance for Net Zero (GFANZ) which provides guidance on client transition plans
alongside financial institutions’ transition plans.42,43,44 Financial institutions have utilized
these frameworks to begin to focus more on forward-looking metrics to track transition
progress, in addition to backward-looking emissions inventorying. The exhibit on the next
page shows the metrics financial institutions can utilize to monitor their clients’ transition
plans, from GFANZ’s Expectations for Real-Economy Transition Plans.

Beyond ensuring alignment with the financial institution’s ambitions, having a robust
understanding of clients’ transition plans can lead to more informed fundraising and exit
strategies, potentially raising the valuation of the financing and attracting more capital.

41 Newmarket Capital, 2022. IIFC impact analysis.

42 IIGCC, 2023. Investor expectations of corporate transition plans.
43 GFANZ and Oliver Wyman, 2022. Expectations for real economy transition plans.
44 GFANZ and Oliver Wyman, 2022. Financial institution net-zero transition plans.

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Exhibit 8: GFANZ metrics and targets for measuring clients’ transition progress

Metric Approach Examples

GHG emission Quantify company’s level of ambition Emission reduction targets dates,
metrics through interim GHG reduction targets. scopes, and metrics utilized alongside
baseline year.
Sectoral Clarify company’s level of ambition Sectoral pathway disclosed and
pathways in terms of alignment with alignment of company target and
recognized pathways. current progress.
Carbon Disclosure of carbon credits to Disclosure of carbon credits including
credits understand if and how companies are quality indicators and third-
adhering to their own commitments. party verification.
Business, Translate climate targets into tangible Percent of capital expenditures utilized
operational, and key performance indicators for for the transition plan.
financial metrics the company. Percent procurement from low-
carbon suppliers.
Financing Categorize financing into the four Financing provided in each strategy as
strategies GFANZ financing strategies: Climate USD financed ($) or split of portfolio (%)​.
solutions (products that contribute to Number of clients newly engaged on
net zero), managed phase-out (early the net zero transition.​
phase out of high-emitting assets),
aligned (Entities aligned to a 1.5 C Number of clients with new net zero-
pathway), aligning (Entities committed aligned transition plans.
to aligning to a 1.5 C pathway).
Expected Benchmark via a business-as-usual Absolute emissions reduced relative to
emissions pathway, project an entity’s forward- business as usual.​
reduction* looking emissions profile, calculate Physical intensity at target date relative
difference across temporal and risk- to BAU intensity.
weighting features.

*GFANZ, 2023. Consultation of Defining Transition Finance and Considerations for Decarbonization
Contribution Methodologies
Source: GFANZ and Oliver Wyman, 2022. Financial Institution Net-zero Transition Plans

Distribution, risk mitigation, and management — Emerging risk mitigation

Banks often finance low carbon solutions through project finance, partially in response
to navigating risk profiles different than what they are accustomed to dealing with. These
financial institutions are looking to identify ways to reduce capital requirements and credit
risk and stay within existing risk appetite. Some business and risk teams have utilized
synthetic securitization on renewable products, thereby sharing their financing risks across
a variety of investors, often those with like-minded climate ambitions. Two such investors
include PGGM and Alecta, who invested €500 million in a synthetic securitization of BBVA’s
project finance loan book, with one third of the synthetic portfolio consisting of renewable
energy-related projects. The securitization then allowed BBVA to recycle regulatory capital
and reduce risk-weighted assets.45 PGGM has been investing in synthetic securitizations
since 2006, and beyond securitization increasing diversification of PGGM’s portfolio,
they also recognize securitizations’ role in supporting the low carbon transition through
unlocking banks’ additional capacity to lend.46

45 PGGM, 2022. PGGM, Alecta invest in BBVA’s inaugural project finance risk sharing transaction.
46 PGGM, 2023. Green securitization, it’s all about the data.

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RISK MANAGEMENT AND PORTFOLIO STEERING

Approach: Financial institutions’ willingness to innovate and seek partnerships is supporting
business and risk teams in developing risk management and steering solutions.

Business and risk teams are also utilizing internal risk and steering measures to integrate
climate into their financing decisions. These measures help to better capture climate risks as
well as align portfolios with the firm’s climate strategy.

Exhibit 9: Primary risk management and portfolio steering approaches identified

Risk management Portfolio steering

Established Qualitative climate risk assessments that Green taxonomies* on
use climate risk and opportunity heatmaps to what is “green” to guide
categorize key climate risks across portfolios. financing strategy.
Quantitative climate risk assessments*
that support scenario analysis models at the
portfolio level.
Emerging Integrated climate risk assessments* that Financing steering
aggregate and integrate climate risk into portfolio- mechanisms* that incentivize
level risk metrics or external metrics to inform financial solutions and/or
portfolio steering. disincentivizes financing
Risk sharing partnerships* that strategically high-emitting clients such
engage with climate-focused investors to enable as through carbon prices
risk-sharing opportunities related to climate and and climate-related fund
transition solutions. transfer pricing.

* Approaches detailed below

Source: Oliver Wyman

Established risk measurement and portfolio management approaches

Risk measurement and sharing — Quantitative climate risk assessments

Some firms’ business and risk teams have utilized quantitative scenario analysis across their
portfolio to check the viability of their portfolio in line with the firm’s commercial climate
strategy. These climate risk assessments can serve as a constraint on transition financing of
high emitting companies and climate-focused portfolios — as the analysis should show how
these companies will survive/transition.

Portfolio management — Green taxonomies

Many business teams with climate action ambitions have developed green taxonomies to help
categorize and steer financing decisions, alongside policy guidance, such as the EU Taxonomy
for sustainable activities.47 For example, Deutsche Bank’s green financing framework includes
investment categories, linked to the Green Bond Principles and UN’s Sustainable Development
Goals, alongside an exclusion list which incorporates oil and gas exploration and production

47 EU Taxonomy for sustainable activities.

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Realizing Climate Finance Opportunities

and deforestation. Their framework also includes their evaluation criteria alongside their
process for managing “green” proceeds and reporting commitments.48

Emerging finance and portfolio risk measurement approaches

Risk measurement and sharing — Climate risk integration

Risk teams are beginning to translate their deal level climate risk assessments to the
portfolio level to help steer their climate- and transition- focused portfolios. These portfolio-
level climate risk measurements identify the potential constraints and implications of key
sectors and company characteristics that impact portfolio emission targets. The risk scores
integrated into risk management, either through adjusting their existing risk measurements
or through external adjustments and guidance via climate risk scores, to sense-check the
viability of their clients and portfolios to ensure alignment with their climate- and transition-
commercial strategies. For example, NatWest is building out their climate risk scorecards to
incorporate their customer transition plan assessments (CTPA). Their risk scorecards assess
the transition and physical risks of their financing activities, in addition to their clients’ ability
to mitigate identified transition risks and their ability to decarbonize. The outputs from the
tool help inform NatWest on their portfolios’ climate-related risks and how NatWest can help
best address the identified risks in relation to their climate strategy.49

Evaluating risk appetite in light of climate and transition finance

market opportunities
Risk appetite remains an important constraint and protection mechanism for financial
institutions. Many financing deals fall outside of firms’ risk appetite either because the
risks are too high or because the organization is unfamiliar with certain risks.
Especially within the climate and transition finance market space, there can be a
grey zone where a certain climate- or transition-related solution may not have been
traditionally within a firm’s risk appetite but do not necessarily violate the risk appetite.
The risks may stem from a lack of knowledge and experience with the product
or technology.
Some financial institutions have developed a structured approach for evaluating the
appetite of newer climate- and transition- related markets in a controlled manner, such
as through increased research, updated risk appetite memos, and smaller, sandbox
investments to pilot. In the case of new technologies and risk types, approaches for
evaluation of these risks are also being examined to determine if different capabilities
are needed in the context of risks with limited historical experience or data.
Many financial institutions have not taken additional steps and left the potential
financing opportunity as too risky, choosing to eschew the potential revenue but
remaining conservative on their risk profile.

48 Deutsche Bank, 2022. Green Financing Framework.

49 NatWest, 2023. 2022 Climate-related disclosures report.

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Risk measurement and sharing — Risk sharing partnerships

Business and risk teams are beginning to solicit partnerships to share risk in climate and
transition financing. These partnerships can be established at the deal level, but some teams
are seeking to create or engage with broader, portfolio-wide partnerships with climate-
focused investors, with the potential to establish a pipeline of engagements to enable risk
sharing for the financial institution. This has ranged from working with insurers earlier in
the investment lifecycle for technical advisory and risk management guidance, to engaging
in private-public partnerships for innovative blended finance mechanisms with financial
institutions, governments, and corporate clients.

CASE STUDY 3
THE ASIAN DEVELOPMENT BANK’S ENERGY TRANSITION MECHANISM TO
ENABLE PRIVATE SECTOR CAPITAL AND SHARE FINANCING RISK
Market opportunity
Many multilateral development banks (MDBs) are integrating climate as a core component
of their mandate and strategy. This has led to MDBs scaling their partnerships and
engagement with private financial institutions to achieve the desired impact in the
economies they invest in. Aligning the risk profile of low carbon investments with the risk
appetite of private financial institutions helps in crowding in the private sector.

Key Features

• The Energy Transition Mechanism (ETM) is being developed by the Asian Development
Bank (ADB) in partnership with developing member countries (DMCs) to leverage public
and private capital for accelerating the transition from fossil fuels to clean energy. It is
being piloted in Southeast Asia, namely Indonesia and the Philippines.
• The ETM accelerates early closure of the coal-fired power plants and their replacement
with sustainable and renewable energy. It helps participating countries to reach
more ambitious emissions targets than under their current commitments while also
demonstrating that early retirement of coal power plants, previously deemed unfeasible,
is now possible through crowding in investment.
• The Mechanisms provides a scalable model that could be replicated to reduce
global emissions.

Funding
The Energy Transition Mechanism Partnership Trust Fund (ETMPTF) was established in 2022 as
a multi-partner trust fund under the Clean Energy Financing Partnership Facility50 to mobilize
resources for the ETM. The Government of Japan was the first supporter, followed by Germany,
both providing ~$26 million in funding. The ETM also benefits from the $2 billion pledged by
the United States, United Kingdom, Germany, and Canada to the Climate Investment Funds.
These funding sources compliment ADB’s own pledge of $12 billion to support private sector
financing for the low carbon transition, alongside its broader climate financing target of
$100 billion to member countries from 2019 to 2030.51

50 Clean Energy Financing Partnership Facility

51 ADB Raises 2019-2030 Climate Finance Ambition to $100 Billion
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CASE STUDY 3 (CONTINUED)

The ETM plans to use both concessional and market-based funding through 1) a carbon
reduction fund set up to retire coal-fired power plants early; and 2) a clean energy
fund set up to finance clean energy projects. In addition, the ETM provides regulatory
support, technical analyses, and guidance on carbon finance to address the intersectional
implications of transition finance across stakeholders. At scale, the ETM targets to retire up
to 50% of coal generation in Indonesia, the Philippines, and Viet Nam over the next 10 to
15 years. Furthermore, the ADB envisions the ETM as a model that can be replicated across
other MDBs and regions.

Exhibit: ADB’S ETM

Governments/Philanthropies Development institutions Private investors lenders

Grants/Concessional funds Guarantees/Equity/Debt Equity/Debt

Southeast Asia ETM ETM Fund Vehicle

(ADB managed) Concession
products
Steering Carbon reduction fund Clean energy fund
committee Oversight

Oversight for Technical

climate credentials Support
Funding for early retirement Investment
Just transition
support
Coal-fired power plants Renewable/Clean energy assets

Source: ADB DG Ramesh Subramaniam’s Insights on Financing Coal to Clean Transition (Nov. 2022).

Portfolio management — Financing steering and fund transfer pricing

Some business teams are assessing the impact of investments and corporate clients’
emissions and transition plans on the firm’s financed emissions, transition plan
commitments, and decarbonization targets. These assessments, in the context of the
financial institution’s commitments, inform portfolio steering, require teams to think
about which potential clients could positively or negatively impact their broader climate
strategy, and highlight which current clients need further engagement and support in their
transition activities.

In some institutions, risk teams are integrating climate into their fund transfer pricing
(FTP) and other forms of internal carbon pricing to incentivize capital flows in a manner
consistent with their climate strategy. Carbon pricing is more common for operational
emissions but is also sometimes considered for the lending portfolio. Some firms also
seek to pass on funding benefits from green financing activities back to the performance

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measurement on those sources of funding. For example, FirstRand has incorporated

climate considerations into their pricing adjustments for low carbon solutions,
as their pricing seeks to reflect the different nature of green assets and to adjust
prices to match deal’s marginal cost of funding.52

ORGANIZATIONAL ENABLERS
Approach: Financial institutions are breaking down internal siloes to enhance and build
on existing organizational capabilities, while also bringing in new experts to ensure their
business and risk teams can capitalize on climate and transition financing.

Financial institutions are working to ensure their business and risk teams have the capacity
and skills to deliver on the product and business initiatives, deal enablers, and finance and
portfolio risk measurement approaches. This includes identifying the skills needed across
the firm’s technology and data capabilities, governance, compensation, training, and culture
building to enable climate offerings.

Exhibit 10: Primary organizational enablers identified

Established Emerging
Organizational Climate centers of excellence* that drive Cross-sectional coverage teams:*
enablers firm uniformity and expand capacity of • Hiring of engineers to inform sectoral-
climate-capable employees. level expertise on climate and
Upskilling and education of staff that’s transition solutions.
conducted regularly across financial • Teams integrated to work outside of
institutions on both climate strategy and silos, including building out balance
products, as well as key emerging trends sheet-lite advisory engagements across
within climate action. first line teams.
Board-level engagement on climate that • Teams developed for specific
includes climate-focused managers on sectors and climate and transition
business committees. technologies, incorporating knowledge
Climate leadership and “tone from the transfer across business lines.
top” that establishes a firmwide stance Compensation and performance:
on climate action. Climate targets and variable
sustainability KPIs tied to executives’
year-end compensations.

* Enablers detailed in the following pages

Source: Oliver Wyman

52 FirstRand, 2023. 2022 Climate-related financial disclosures.

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Established organizational enablers — Centers of excellence and governance

Many financial institutions have sought to curate their climate skillset by building centers
of climate excellence, which provide the required internal expertise to navigate the climate
and transition finance market. While building these centers, firms are working to maintain
and enhance relevant capabilities that already exist within business lines. Employees
focused on climate issues can use these centers of excellence as resources. Boutique
investment managers have utilized their centers of climate excellence to drive desired
consistency across elements of their investment management firms’ climate strategies,
which may be on varying parts of their climate strategy journey. Further, these centers also
engage in external advisory conversations with clients, enhancing clients’ climate strategy
development and subsequently driving along the firm’s climate strategy.

There has also been an increasing emergence of financial institutions having board-level
engagement on climate, including through a dedicated climate committee as well as
ensuring there are climate-focused sustainability individuals on business committees. For
example, Allied Irish Bank’s group board has a sustainable business advisory committee
alongside an executive sub-committee on group sustainability, both of which incorporate
climate into their strategy considerations. 53

Emerging organizational enablers — Cross-sectional coverage teams

Financial institutions have built out cross-sectional coverage teams through 1) hiring of
technical staff, 2) breaking down silos across business lines, and 3) incorporating knowledge
transfers across the institution.

1. Hiring of technical staff. Financial institutions have increased direct hiring for new
technical expertise across their business and risk teams, including environmental
engineers, policy and development experts, and climate scientists. Deep subject matter
experts within climate can move across sectors as well as provide nuanced perspectives
on technologies that are just emerging as investable products, such as implications of
transition minerals and metals within battery supply chains. This has been especially
applicable in the project finance space, where technical teams can provide support for
balance sheet-lite activities including advisory and structuring to help enable potential
climate and transition financing.
Interviewees noted a significant challenge with emerging climate and transition
technologies, as deal teams may not have strong comfort with newer low carbon
technologies, and as such, the relevant financing opportunities are often marked as high
risk. However, the increase in new technical expertise can help financial institutions to
inform deal and risk teams in understanding previously unknown risks and opportunities
of emerging climate products. This in turn improves the risk mitigation opportunities and
capacities for deal teams to engage with low carbon financing.
2. Breaking down silos across business lines. Financial institutions have also begun to
move their centralized climate knowledge and capabilities out of siloes and disseminate the
capabilities over time throughout the firm’s business lines and asset classes. Some financial
institutions have updated their operating model to see how they can better offer client
solutions and maximize engagement impact.

53 Allied Irish Bank, 2023. 2022 Sustainability Report.

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Realizing Climate Finance Opportunities

For example, Macquarie has sought to promote and advance cross-Group collaborate and
knowledge sharing on climate capabilities through the creation of the Climate Solutions
Taskforce (CST). The CST has representatives from all operating and support groups
and is working to support Macquarie’s expansion into new climate aligned technologies
such as hydrogen and CCUS as well as Macquarie’s ambition to strengthen the support it
provides to carbon intensive industries and clients, like the oil/gas sector.54
3. Incorporating knowledge transfer across the institution. Organizational enhancements
have also included building knowledge transfer opportunities. For example, one
interviewee provided incentives to collaborate and rotate within the organization from
climate center of excellences to first line deal teams. This in turn enhanced the capabilities
of first line deal teams to then extend their typical financing roles to climate advisory,
supporting the company’s broader climate commercialization ambitions.

54 Macquarie Group, 2022. Net zero climate risk report.

CASE STUDY 3
BNP PARIBAS’ LOW CARBON TRANSITION GROUP (“LCTG”) SUPPORTS
CLIENTS’ CLIMATE TRANSITION
Market opportunity
Financial institutions are looking to leverage their existing organizational capabilities and
solutions, while bringing on sector and technical expertise to accelerate their commercial
climate strategies.

• BNP Paribas’ LCTG is a global, integrated, and growing platform of 200+ sector specialists
developing strategic dialogue with corporate and institutional clients in their low-carbon
transition, leveraging the full breadth of capabilities of BNP Paribas Group to provide
clients with the relevant solutions across business lines.
• Where specific technical expertise is required, BNP Paribas can bring in-house experts,
developing deep technical content on the low-carbon technologies, further strengthening
the thought leadership of the Bank in the low-carbon transition.
• Beyond the LCTG, BNP Paribas has also sought to develop the climate-relevant capabilities
for all staff, notably client-facing teams to ensure the bank’s broader commercial climate
strategies and products can be scaled to support clients.

BNP Paribas Low Carbon Transition Group (“LCTG”):

• BNP Paribas launched the LCTG, their in-house setup, in 2021 to accompany corporate
and institutional clients in their transition to a low-carbon and more sustainable economy.
The team provides clients with the continuum of solutions that are relevant to their
transition needs, focusing on investment banking and financing solutions, and leveraging
on the relevant capabilities across the Bank’s integrated model (risk management, asset
management, insurance, leasing solutions, mobility solutions, etc.).

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Realizing Climate Finance Opportunities

CASE STUDY 3 (CONTINUED)

• The LCTG helps connect established transitioning corporates, with climate tech
companies and investors, to support the development of low-carbon projects and
ventures. It provides clients with the relevant solutions at all stages of their low carbon
transition journey. The bank’s climate strategy recognizes the circular nature of financing:
to attract equity investors, new climate ventures must also demonstrate the ability to
raise debt.
• The LCTG also seeks to ensure that there is senior technical engineering expertise
within their team to ensure the bank provides the right industry know-how to clients
and to the broader BNP Paribas ecosystem. For example, in-house engineers bring the
technical expertise to help assess carbon capture and storage value chains, or battery
manufacturing supply chains.
• To support knowledge transfer throughout BNP Paribas, the LCTG trains broader
teams on decarbonization technologies, to ensure that carbon transition engagement
with clients is a key aspect of relationships for all teams. More broadly, the Bank has
developed a “Sustainability Academy”, to upskill all staff, including senior management,
client facing teams, on the ESG transition thematics.
• Building on BNP Paribas’ firmwide strategy, the LCTG aims to contribute to the Bank’s net
zero ambitions, which were strengthened early 2023.55

55 BNPP’s Low Carbon Transition Group.

As both new and existing staff are being to capitalize on the climate and transition financing
market, financial institutions have faced challenges with defining roles and responsibilities
across their climate, risk, legal, marketing, and financing teams. To address these
challenges, some interviewees’ have engaged in developing target operating models across
relevant teams. These models ensure clarity on the responsibility to inform on relevant risks
and opportunities. The next step is to establish how these outputs get integrated into the
final decision-making at the deal and portfolio level.

We observed among the interviewees that a critical component in utilizing organizational

enablers, especially when incorporating new technical expertise into risk management and
investment strategy, is ensuring a culture that supports innovation. Scaling climate-related
dimensions across an organization’s business and risk teams requires leveraging both
existing and new employees and capabilities, and to support financial institutions’ growth
in addressing commercial opportunities, interviewees noted the firmwide push needed to
encourage and build out refined and improved capabilities.

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Realizing Climate Finance Opportunities

PHASED APPROACH TO
ENABLE CLIMATE AND
TRANSITION INVESTMENTS
Throughout this paper, we’ve observed five main themes that financial institutions have
taken to push forward in commercializing on the low carbon transition.

• Playing to their strengths: Financial institutions have expressed early success by

commercializing on climate action through their existing capabilities, building off their
product expertise, the demands of their existing client base, and their sectoral priorities.
• Breaking down silos to enable knowledge transfer: Financial institutions have been
taking stock of where their relevant knowledge bases and skillsets are located and
subsequently bringing the identified experts together across business lines, focusing on
how they can better offer client solutions and maximize engagement impact related to
climate and transition financing.
• Bringing in new talent to deal with new market risks and support business
development: When recruiting new staff, the search has shifted to non-traditional
sources to the financial institution help mitigate risks of the unknown from climate and
transition solutions. The hiring has primarily focused on engineering, climate technology,
and low carbon investment-related expertise.
• Demonstrating the willingness to innovate and experiment: Capitalizing on the
climate and transition financing market may require significant changes in operational
management and a new look at risk appetite. As such, leading financial institutions have
prioritized innovation and the openness to experiment new products and actions, that
may not be part of their standard practices.
• Enabling investment-oriented partnerships: Financial institutions have begun to focus
on developing partnerships so that investments in climate and transition financing can
increase through them.

To capture the financial opportunity via these approaches, as well as address key climate
concerns and overcome the existing climate and transition investment challenges, we think
that business and risk teams should consider the following steps:

1. Establishing “no regret” moves: Not every team will want to be a leader in the climate
and transition finance market. “No regret” moves include building on existing client
relationships and current strengths to address the emerging needs and demands.
2. Building a foundation: As most teams continue their journey, they can ensure their
organization and risk management teams are set-up to enable climate and transition
finance opportunities over the medium term. Financial institutions can begin to explore
additional products and new clients.
3. Innovating and expanding: Champions in the climate and transition finance market
push the boundaries of their organizational structure and risk management. These teams
are exploring new technologies and radically different and or new products and services
to their existing business capabilities.

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Realizing Climate Finance Opportunities

In the exhibit below, we outline possible steps available across dimensions within
financial institutions’ climate journey spectrum. Each institution will need to decide what
is appropriate for them across each dimension, balancing what actions they think they
should take today versus preparing to take in the future.

Exhibit 11: Illustrative steps business and risk teams can take across the four climate strategy dimensions

1 2 3
Establishing ”no regret” moves Building a foundation Innovation and expansion

Meeting the needs of current Aligning organization structure and Pushing boundaries of risk
customers and build on existing risk management with climate management and commercial
strengths. strategy, while exploring additional strategies, developing fundamentally
products and clients. new products and investment
opportunities.

Products and services

Deal-level capabilities and enablers

Risk measurement and portfolio steering

Organizational enablers

Suggested next steps

Source: Oliver Wyman

© Oliver Wyman 35
Realizing Climate Finance Opportunities

IACPM and Oliver Wyman would like to thank and acknowledge the contributions of the
following firms, who contributed their insights to this paper both through interviews and
working groups. This paper is not a reflection of the positions, policies or approaches of any
single contributor but rather identifies trends related to commercial opportunities in climate
and transition finance.

• Asian Development Bank

• BBVA
• BNP Paribas
• DBS
• European Investment Bank
• FirstRand Ltd.
• Goldman Sachs
• International Finance Corporation
• Lloyd Banking Group
• Macquarie Group
• Munich Reinsurance
• NatWest Group Plc
• Newmarket Capital
• PGGM
• Royal Bank of Canada
• Standard Chartered
• UK Export Finance
• US Bank
• Wells Fargo & Company

© Oliver Wyman 36
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AUTHORS AUTHORS

Ilya Khaykin Daniel Holod

Partner Associate
[email protected] [email protected]

Edwin Anderson Coby Sippel

Partner Associate
[email protected] [email protected]

Sayli Chitre
Principal
[email protected]

About the IACPM

The IACPM is an industry association established to further the practice of credit exposure management by
providing an active forum for its member institutions to exchange ideas on topics of common interest. The
Association represents its members before regulatory and administrative bodies in the US and internationally,
holds bi-annual conferences and regional meetings, conducts research on the credit portfolio management field,
and works with other organizations on issues of mutual interest relating to the measurement and management
of portfolio risk. Currently, there are over 130 financial institutions based in 30 countries that are members of the
IACPM. More information is available at: www.iacpm.org

IACPM CONTACTS

Som-lok Leung Marcia Banks Juliane Saary-Littman

Executive Director Deputy Director Senior Director, Research
[email protected] [email protected] [email protected]

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