Transition Finance

Green finance has traditionally focused on activities that are already environmentally friendly, such as renewable energy. But reaching climate goals also requires heavily polluting sectors, such as steel, cement, chemicals, aviation, shipping and power generation, to change how they operate. Transition finance aims to fund this change.

For example, a steelmaker might receive transition finance to replace coal-fired blast furnaces with electric arc furnaces or hydrogen-based technology, significantly cutting its emissions.

Transition finance can take the form of loans, bonds, equity or blended finance. Several organisations have published guidance, including the International Capital Market Association’s Climate Transition Finance Handbook, the Glasgow Financial Alliance for Net Zero and national frameworks in countries such as Japan, which has issued government climate transition bonds.

The main challenge is credibility. Investors want evidence that companies have science-based plans, interim targets and real investment rather than plans to delay action. Critics worry that transition finance could be used to extend the life of polluting assets. Clear standards and transparent reporting are seen as essential.