It also considers current market realities such as a shortage of high-emitting companies with robust transition plans, the lack of high-quality and consistent metrics available to assess such plans, and no clear definition of what transition finance activity entails.

“There is no universal approach to transition finance,” said Yingzhi Tang, one of the lead authors of the playbook and a senior research associate with the ISF.

“That is where our playbook comes into play, to lay out a range of approaches, allowing financial institutions to select the path that best suits their mandate and context.”

The playbook offers 14 tips and provides some practical examples from the Caisse de dépôt et placement du Québec, Ontario Municipal Employees Retirement System (OMERS) and the Co-operators Group. The three institutions helped develop the recommendations.

The list of tips starts with a recommendation to get “the top level” of a financial institution involved, Tang said, referring to senior executives. The playbook says securing support at the senior level can be done by presenting a business case about how transition finance can allow an institution to create value and manage risks.

Another tip is to leverage third-party taxonomies and frameworks to come up with an in-house definition for transition finance and clearly communicate which frameworks that definition is based on. For example, it notes that OMERS developed its in-house climate taxonomy by drawing on external frameworks such as the International Capital Markets Association’s Green Bond Principles and Climate Bonds Initiative Taxonomy.

Acknowledging that high-emitting companies are still in the early stages of decarbonizing, the playbook further recommends using a range of metrics to track their progress. This includes emissions intensity metrics, which measure the emissions produced for each unit of activity or output, and temperature scores, which estimate the global temperature rise associated with a company’s emissions or those of a portfolio.

Other recommendations include segmenting portfolios based on “transition maturity” to gauge which investments are further along in supporting a transition to a low-carbon economy and which require more progress, embedding decarbonization targets in underwriting strategies and collaborating with policymakers to drive further action.

“It is very much going step by step through the investment cycle,” Tang said.

The new playbook comes on the heels of the launch of Business Future Pathways, an initiative that seeks to encourage Canadian financial institutions and companies to develop credible climate transition plans. That initiative is also supported by the ISF.

Tang said the playbook and Business Future Pathways are intended to work hand in hand to propel Canada toward its target of achieving net zero by 2050. As it stands, it’s estimated that the country is short $115 billion a year in transition-aligned investments to achieve that target.

“Those activities make up the whole puzzle of deploying capital credibly to those assets with robust transition plans,” she said.

“It’s extremely important for Canadian financial institutions to manage climate-related financial risks and capture long-term value in the transition to net zero.”

IE was a media sponsor of the RIA Conference.

Former Rep. Billy Long (R-Mo.) is one step closer to taking over as IRS commissioner.

The Senate Finance Committee voted 14-13 along party lines to approve Long’s nomination to lead the tax-collecting agency. The former auctioneer is up for the job after the previous IRS commissioner, Danny Werfel, stepped down when it became clear the White House would oust him. A series of interim leaders have guided the IRS since then.

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Private credit is now so intertwined with big banks and insurers that it could become a “locus of contagion” in the next financial crisis, a group of economists, bankers and US officials has warned.

Researchers from Moody’s Analytics, the Securities and Exchange Commission and a former top adviser to the Treasury Department found private credit funds have become enmeshed with the banking system, creating “new linkages [that] introduce new modes of systemic stress”.

“Their opaqueness and role in making the financial network more densely interconnected mean they could disproportionately amplify a future [financial] crisis,” the group said on Tuesday in a study published by Moody’s Analytics.

Private credit has boomed in recent years as regulations put in place following the 2008 financial crisis prompted banks to tighten their lending standards. Funds, which generally lend to riskier companies with significant debt loads, are subject to looser oversight than banks — something that has prompted concern as the sector has grown.

The report, written by Mark Zandi at Moody’s Analytics, Samim Ghamami of the SEC, and former Treasury adviser Antonio Weiss, is one of the most comprehensive analyses to date on how private credit would affect the broader financial system during a period of market upheaval.

The researchers relied on financial reporting and the stock prices of publicly listed middle-market corporate lenders, known as business development companies, as their proxy for the otherwise opaque private credit industry. They found that during recent moments of market stress, business development companies had become more tightly correlated with the turmoil in other sectors than they were previously.

“Today’s network of interconnections in the financial system is more distributed, with a denser web of connections than it had pre-crisis, when the system operated more like a ‘hub and spoke’ model with banks at the centre of the network,” the report said, noting that private credit firms, other speciality financial groups and insurers have taken a greater role in lending.

Private credit firms maintain they are better at lending than banks because they rely on capital from institutional investors with longer time horizons and not subject to “runs” such as bank deposits, which can lead to broader contagion in moments of panic.

“Banks are increasingly involved in private credit and other non-bank financial institutions through partnerships, fund financing and structured risk transfers that allow them to maintain economic exposure to credit markets while shifting assets off balance sheet,” the Moody’s Analytics study said.

The Boston Federal Reserve last month had similarly warned that banks were exposing themselves to new channels of risk by lending to private credit funds and other similar groups.

Fitch Ratings this week said that private credit’s “evolving products and asset classes requires close monitoring, with many untested through market cycles”.

The Moody’s Analytics report said the private credit sector should be required to share more public data on its lending, and for financial regulators to emphasise private credit in their overall “systemic risk monitoring”.

“The objective is not to stifle the beneficial innovation that private credit provides but to shine a light on its risks and linkages so that a rapidly growing part of corporate finance, and potentially other sectors, does not become a blind spot.”