How transition finance will make or break a net-zero future


Growing awareness of climate change has made green technology and renewable energy projects a hot investment, especially for financial institutions that have their own environmental initiatives. But to actually cut emissions, steelmakers, airlines, power companies and other high-emissions companies will have to make major and costly changes. Enter “transition finance”. It is a burgeoning asset class with the potential to dwarf green investments and support cleaner economic growth in developing countries. There are currently no consistent criteria for what qualifies as transition funds. Skeptics argue they are particularly vulnerable to greenwashing, misleading consumers and investors about a company’s environmental impact.

1. What is Transition Finance?

Transition finance refers to investments (usually bonds or loans) designed to help companies in high emitting industries improve energy efficiency and reduce greenhouse gas emissions. So far, there are no common definitions or rules about what kinds of projects are eligible or not. Some early transition funds are raising money for natural gas power plants with hydrogen co-firing potential and fuel efficient aircraft.

2. How is it different from a green bond (or loan)?

One is that the “green” label for bonds and loans is relatively well regulated. Many issuers adhere to the Green Bond Principles endorsed by the International Capital Market Association about ten years ago. Funds raised through specially green means are supposed to be used only for low-carbon projects such as renewable power and energy efficient building development, but this is not always the case.

3. Why are transition funds important?

Banks and investors are growing concerned about the emissions of the businesses they finance. This makes it difficult for companies involved in polluting industries to tap into the capital markets, especially in emerging markets, where they hinder the desperately needed funding to adopt greener technologies. The company claims it does. Emerging markets will need $94.8 trillion in transition capital to reach the net-zero target by 2060, according to Standard Chartered’s 2022 study. China alone will need $35.1 trillion. Proponents argue that defining asset classes could encourage investment in developing countries and facilitate a “just transition”, emissions reductions that do not harm overall growth. there is

4. Who are the most enthusiastic drivers of transition funding?

Asia is leading the way. The Association of Southeast Asian Nations has produced guidance for the region, including investments in carbon capture and early retirement of coal-fired power plants. China, the world’s worst polluter, is creating a transitional taxonomy for sectors such as steel and agriculture. Corporate transition bonds are booming in Japan, with plans to issue 20 trillion yen ($154 billion) in government transition bonds over the next decade. But the benefits are not limited to Asian countries. Canada, whose largest source of emissions is oil and gas, is considering transitional financing labels for investments in these sectors.

5. What is the current market size?

Since 2019, around $18 billion in transition bonds have been issued worldwide, mainly led by China and Japan. Issuance across Asia more than doubled last year compared to 2021. Still, that total is paltry compared to the $2.2 trillion green bond market and represents a tiny percentage of total bond issuance.

6. What is holding back investors?

The lack of clear standards is a major stumbling block, along with general skepticism about the integrity of issuers. Some companies are issuing transition bonds to fund technologies such as carbon capture and storage that seek to address the damage caused by emissions but do not reduce them. These concerns are part of the opposition to transition finance in Europe, which has pioneered the development of green finance standards.

7. Is there an opportunity in transition finance?

There are many stakeholders who want success. The Just Energy Transition Partnership is a large, ongoing multilateral climate finance deal worth a total of $43 billion, relying on transition finance to reduce emissions in developing countries. there is More broadly, Asia’s push for transition financing will depend on clearly defined criteria for eligible projects, foreign investor willingness, reliable data collection and transparent reporting.

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