Transition planning in turbulent times: how financial institutions can adapt and lead

Navigating the transition to a low-carbon economy has always been complex for financial institutions, but today’s landscape presents unprecedented challenges. The early 2020s were marked by optimism—confidence that good intentions, collective goals, and technology would enable us to bend the curve toward a sustainable future. However, we are witnessing a ‘disorderly transition,’ where market volatility, policy uncertainty, and technological shifts reshape the landscape for financial institutions, bringing both risks and opportunities.

As markets react to these shifts, financial institutions must adapt their strategies to maximise business value and minimise risk. Transition planning is a strategic business planning process that enables firms to navigate a transitioning economy to address key challenges, safeguard resilience, and capitalise on emerging opportunities.

Three critical challenges facing financial institutions

As financial institutions develop their transition plans, we see three key challenges that will shape their ability to navigate the transition:

1. Conflicting views

There is a growing divide in climate and sustainability policies across regions; high-profile exits from collaborative climate bodies—driven by political and legal pressures—have signalled a shift in approach. This has emboldened the voices within organisations questioning the business case for sustainability. At the same time, firms must navigate an increasingly complex and divergent regulatory and political landscape, adding uncertainty to long-term transition planning. So how should financial institutions respond? 

• Strengthen internal alignment and focus on value-driving levers: Clearly articulate the business case for the transition, positioning it as an economic reality and a driver of long-term value creation. Firms should set metrics and align incentives with their strategy, reflecting both commercial and decarbonisation objectives.
• Monitor and critically analyse market signals: Recognise that policy shifts can create constraints as well as new investment opportunities, and document the underlying assumptions embedded in transition planning to ensure they remain robust and adaptive to changing market dynamics.
• Take a geographical approach to strategy and planning: Given the divide, firms should plan locally, understand regional variances, and capitalise on local opportunities.

2. The future of 1.5°C

Between 2022 and 2030, global emissions needed to decline by 4.2% annually to stay aligned with a 1.5°C pathway. Instead, emissions have increased, and we estimate a current trajectory leading to warming of 2.5°C.¹ While 1.5°C remains an important global ambition, its feasibility is now uncertain, and multiple potential climate pathways, including overshoot scenarios, should be considered. What does this mean for transition planning? 

• Understand the likely scenarios: Firms should develop an in-house view of current and potential pathways to provide a consistent organisational perspective on where they are. This creates greater certainty about whether targets are achievable and, if not, what needs to change—both within the company and to address real-world dependencies.
• Assess clients’ progress and engage: To assess the extent to which the organisation’s house view is aligned to their client portfolio, firms should continue to invest in client assessment frameworks. This will enable a clear view of the extent to which the portfolio is transitioning in line with ambitions, while enabling more targeted engagement.
• Embed resilience thinking: Firms should stress-test portfolios against multiple temperature outcomes, ensuring they are prepared for a range of possible climate scenarios and developing transition plans that are adaptable to these varying scenarios.

3. The challenge of reaching escape velocity

Despite setbacks, some technologies have grown significantly since 2010 and now sit at or close to Net Zero expectations—solar (50x),² wind (7.5x),³ and electric vehicles (28,000x).⁴ In China, where the growth of electric vehicles has been particularly strong, we may have already passed peak oil demand years ahead of projections. These technologies have benefited from supportive policy measures and associated unit cost reductions, with the Levelised Cost of Electricity for Solar and Wind dropping between 60-90% since 2010.⁵  

However, the investment landscape for low-carbon technologies is increasingly uneven. While capital has poured into mature, scalable solutions such as wind, solar, and electrified transport, the same is not true in hard-to-abate sectors, where emerging technologies—such as hydrogen, carbon capture and storage (CCUS), and sustainable aviation fuel (SAF)—have struggled to attract similar levels of investment. Firms that position themselves as early enablers in carefully selected sectors stand to gain, but only if they have a robust assessment of when and how these technologies can scale. So how can financial institutions catalyse the acceleration of new technologies? 

• Assess commercial viability under multiple scenarios: Consider the commercial viability of different technologies under various climate scenarios, incorporating both current market conditions and potential policy shifts.
• Prioritise financing for transition-enabling technologies: Firms should assess how to accelerate capital deployment to catalyse hard-to-abate sectors and technologies.
• Support policy advocacy: The financial sector can be a powerful advocate for the market frameworks necessary to scale hard-to-abate solutions.
• Engage with investee companies or counterparties: Active engagement can help accelerate technology adoption and ensure that firms are aligned with the transition.

Defining the organisation’s role in the transition

A well-executed transition planning process is essential to navigating current decarbonisation challenges. A firm must define its role in the transition and how it intends to create impact as part of transition planning. There are three key actions required to deliver a successful transition planning:

• Set a clear ambition and define your role in transition: Articulating a role that is authentic to your firm is critical, ensuring it stands the test of time. Firms should determine the extent to which they see their role as enabling the incubation and scaling of transition technologies, driving broader systemic change, all while reallocating capital.
• Consider a range of scenarios, with geographic and sector specifics: Firms should factor in political and economic contexts while maintaining an appropriate level of ambition. Targets and policies should be feasible even in a world that is not on track for 1.5°C.
• Engage internal stakeholders early: Ensuring that business teams are brought along in the transition planning process is key to securing their support for implementation.

Financial institutions cannot afford to be passive observers and climate leaders have an important role in driving their own institutions. The transition is unfolding in real time, and institutions must determine where they stand—both supporting the development of new technologies and shaping the financial flows that will drive the future economy.

Taking a proactive yet proportionate approach can protect business value while positioning firms as leaders in financing the transition; contact us to discuss more.

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Baringa (2024), Q4 Base Case

IRENA (2024), Global Solar Council

IRENA (2024), Worldwide Wind Association

IEA (2023 stock), Rho Motion (2024 sales)

IRENA (2024), Levelised cost of energy for renewables by country