Approach to Transition Financing (1)

by CHINENYE AJAYI Chinenye Ajayi

Case Study: CAISSE DE DéP?T ET PLACEMENT DU QUéBEC (CDPQ’s Approach to Transition Financing.?

CDPQ is a Canadian global investment group that has been actively supporting companies in high-emitting sectors to decarbonize their operations. Its strategy focuses on making targeted investment in key sectors such as agriculture, electricity production, transportation, which are critical to the economy but require urgent decarbonization.

A major strategy was the creation of what is called “Transition Envelope”, a CAD 10 Billion financial pool dedicated to supporting the decarbonization of the highest-emitting sectors.

The Transition Envelope operates as a structured approach to help companies transition from carbon-intensive operations to cleaner, more sustainable business models without immediately divesting from them.

Here is how the Transition Envelope works:

i.?????????????? Instead of withdrawing capital from industries like?energy, agriculture, transport, and manufacturing, CDPQ providetrategic financing?to help them transition to lower-carbon alternatives.

ii.???????????? Companies receiving funding must have a?credible plan?for reducing their carbon footprint, including?renewable energy adoption, cleaner production processes, and emissions reduction targets.

iii.??????????? Unlike short-term financing as is prevalent with commercial banking in Africa, the Transition Envelope provides?long-term capital?to support gradual but sustainable transformation. More so, beneficiary companies are monitored to ensure they achieve their stipulated decarbonization milestones.

iv.??????????? The envelope uses various blended financial tools, including; equity investments?in companies with transition potential, green and sustainability-linked loans?with performance-based incentives and debt instruments?with preferential terms for transition projects.

Some Transition Financing Initiatives of CPDQ include:

1. Investment in Gunn Agri Partners (GAP): Partnered with Australia's Clean Energy Finance Corporation to invest in sustainable and regenerative farming practices.
2. Support for AGL Energy: Helped an Australian energy company accelerate its transition from coal to renewables, moving its target date for phase-out up much closer.
3. AES Indiana: Invested in AES Indiana (a U.S. utility) to transition its power generation from coal to renewables and natural gas with the following impact:.Reduced coal-based electricity from 80% (2014) to 35% (2023), with full coal phase-out by 2026.Invested in a 250MW solar project and a 45MW battery storage initiative.Plans to add 1,300MW of renewable energy capacity by 2027.

What can Africa learn from CDPQ’s Transition Financing Strategy

1. Long-term partnerships are essential and strategic alignment with ?benefiary companies lies at the heart of sustained impact and effective decarbonization. More specifically, it is critical to ensure alignment of internal teams, investment strategies, and sustainability goals to enhance credibility.
2. There was a clear and ambitious decarbonization plans with a structured phase-out roadmap that benefits investors, businesses, and communities where the beneficiaries operate.
3. Innovative Financial Tools to Facilitate Transition: The?Transition Envelope?enabled CDPQ to invest in high-carbon sectors without undermining its net-zero commitments. African financial institutions should set up?dedicated transition funds?that provide capital to industries like mining, agriculture, and energy to decarbonize operations while maintaining economic stability.
4. Sector specific decarbonization should be emphasized. Financial institutions should identify?high-impact sectors, such as cement, steel, and transportation, and offer?customized financial solutions?to facilitate low-carbon transition while remaining profitable.
5. There should be long term capital for sustainable transformation. Instead of short-term loans,?long-term financing instruments?(such as green bonds, sustainability-linked loans, and blended finance structures) can be developed to support gradual but effective decarbonization.
6. To avoid greenwashing, it is important to align investment to clear decarbonization goals. Financial institutions should?set clear criteria?for companies receiving transition funding, ensuring they have?credible sustainability roadmaps.They should also implement?ESG (Environmental, Social, and Governance) compliance checks?before approving funding.
7. Africa must Leverage Public-Private Partnerships (PPPs). For instance, CDPQ partnered with entities like?Australia’s Clean Energy Finance Corporation?to mobilize capital for agricultural sustainability. African banks and development finance institutions can collaborate with?international climate funds, development banks, and multilateral institutions?to access blended financing for sustainable projects.
8. African governments should?incentivize transition financing?through initiatives like tax breaks?for financial institutions investing in transition projects. Carbon pricing mechanisms?can encourage companies to decarbonize, thereby increasing demand for transition financing.
9. Adoption of innovative financial tools for risk mitigation is essential. CDPQ’s transition financing included?risk-sharing mechanisms?to make investments in the high-emitting sectors more viable. Africa can make effort to develop?de-risking financial mechanisms, such as?credit guarantees, concessional loans, and carbon pricing strategies, to encourage businesses to invest in clean energy solutions

Conclusion

African financial institutions must take a?proactive approach?to transition financing by establishing?dedicated funds, supporting decarbonization in key industries, and leveraging global capital partnerships. CDPQ’s model proves that?well-structured transition finance can drive economic growth while ensuring sustainability, and Africa can replicate this approach to accelerate its green transition.

The Transition Envelope model? would enable financial institutions to drive?climate-conscious growth?without destabilizing key industries. By?financing decarbonization?instead of divesting, Africa can?achieve a just energy transition that suits our context, ensuring economic resilience while meeting global climate goals.

Reference: Case Studies on Transition Finance and Decarbonization Contribution Methodologies (Glasgow Financial Alliance for Net zero)