What is transition finance and why is it key to decarbonizing industry?

According to the World Economic Forum (WEF), the eight sectors that are hardest to decarbonize (steel, cement, aluminum, primary chemicals, oil and gas production, aviation, shipping, and trucking) account for around 40% of global emissions. In light of this figure, transition finance represents a significant opportunity for companies.

Green finance vs. transition finance: how they differ

Green finance encompasses instruments, investments, and financial activities aimed at promoting or refinancing projects and assets with clear environmental benefits, primarily focused on activities that are already considered environmentally sustainable under official taxonomies and market standards. These financial flows channel capital into sectors such as renewable energy, energy efficiency, clean mobility, sustainable water management, and ecosystem protection, and are typically governed by recognized frameworks—such as the EU Taxonomy, the Green Bond Principles, or similar standards—that set out technical screening criteria for determining which activities qualify as green.

Unlike green finance, transition finance emphasizes the process of change, funding the gradual and verifiable reduction of negative impacts rather than only the final outcome.

Transition finance makes it possible to channel resources into intermediate technologies and business models that may still partially rely on fossil fuels or on production processes that are difficult to decarbonize, but that deliver significant, measurable, and verifiable emissions reductions within a defined time horizon.

What opportunities does transition finance offer industry?

Transition finance is primarily—though not exclusively—targeted at so-called “hard-to-abate” sectors, which share four structural characteristics that explain why their decarbonization is particularly complex and why they require a specific financing approach:

• High emissions intensity. Sectors such as steel, cement, aviation, shipping, thermal power, and certain oil and gas activities account for a significant share of global greenhouse gas (GHG) emissions. These are not marginal sectors, but rather the core industrial and energy backbone of the economy. Any credible net-zero strategy must therefore address their transformation.
• Inherently emissions-intensive processes. In many cases, emissions do not arise solely from energy consumption but from the chemical or physical production process itself. The production of clinker in cement or the reduction of iron ore in blast furnaces are prime examples. This means decarbonization cannot be achieved simply by switching from fossil-based electricity to renewables; it requires redesigning entire production processes, adopting new technologies, or scaling up solutions that are still in early stages of industrial deployment.
• Long-lived assets. Thermal power plants, steel mills, refineries, shipping fleets, and airport infrastructure are designed to operate for several decades. Investment in these assets is capital-intensive and amortized over long periods. Premature closure can result in significant losses and stranded assets if there is no clear transition roadmap, introducing a critical financial dimension to managing change.
• Limited or costly technological alternatives. While progress is being made in emerging solutions such as green hydrogen, carbon capture and storage, sustainable aviation fuels (SAF), and the electrification of certain industrial processes, many of these technologies still involve a significant “green premium”—that is, higher costs, reliance on public incentives, or infrastructure challenges. The competitiveness gap with conventional technologies remains a major barrier in many cases. According to the International Energy Agency, 45% of the activities required to reach net-zero emissions carry such a cost premium. In many cases, decarbonization involves redesigning entire production processes and making large-scale investments. As a result, these sectors require structured, long-term financing.

In this context, and particularly for emissions-intensive sectors, the climate transition has initially been perceived as an accumulation of risks: assets that may become obsolete before the end of their useful life, increasing regulatory pressure, a gradual rise in the cost of capital, and potential valuation discounts by markets. In the most extreme cases, failure to adapt can lead to a structural deterioration of the business model.

However, this is precisely where transition finance acts as a transformative lever, turning a risk scenario into an opportunity for modernization by:

• Facilitating investment in new technologies 
• Enabling the adaptation of industrial processes 
• Improving operational efficiency 

For companies, this translates into several clear advantages: asset modernization, reduced exposure to future regulatory risks, improved risk perception among investors and lenders, and better access to capital on more competitive terms. In addition, early positioning in transition solutions can generate a competitive advantage in markets that will inevitably evolve toward more demanding standards.

Why is transition finance gaining relevance in financial markets?

Following a period of uncertainty about how to approach this type of financing, the market now has formal standards promoted by the International Capital Market Association (ICMA) and the Loan Market Association (LMA), which provide structure, consistency, and credibility to these instruments. These frameworks have been essential in bringing integrity and trust to an area that is more technically and reputationally complex than traditional green finance.

ICMA and LMA standards are, in essence, voluntary market frameworks. They do not constitute mandatory regulation and nor do they have direct legal force. However, precisely because of their voluntary nature and the broad support they have received from issuers, investors, and financial institutions globally, they have become de facto references for structuring sustainable and, more recently, transition finance transactions.

Their importance lies in several key aspects:

• Building investor confidence. Transition finance does not fund activities that are already green, but rather future transformation pathways. This requires credibility. Investors need a common framework to assess the ambition, consistency, and transparency of transactions. ICMA and LMA standards provide this shared language, establishing minimum requirements for transition strategies, metrics, targets, and reporting. This reduces information asymmetries, facilitates comparability, and strengthens market integrity.
• Regulatory foresight. Despite being voluntary, these standards have historically served as a basis for subsequent regulatory developments. In a context where transition-related regulation is still evolving, adopting these principles positions institutions in line with international best practices and reduces the risk of future adjustments. It also enables organizations to build internal capabilities before they become formally required.
• Legitimacy and technical discipline. In a field with greater technical complexity and reputational sensitivity than traditional green finance, these standards provide structure, rigor, and credibility. They not only help organize the market but also raise the level of internal discipline in structuring and monitoring transactions.

Ultimately, while voluntary in nature, these standards play a key structural role: they make transition finance credible, scalable, and sustainable over time.

What requirements must transition finance meet?

To finance the transition effectively, it is essential to:

• Have a company transition plan in place
• Use funds in line with defined key criteria

The transition plan is the central element. It is a strategic document that sets out how an organization will adapt its business model, operations, and governance to align with a low-carbon future and, where possible, net-zero objectives. This plan not only establishes emissions reduction targets across different time horizons, but also details the actions, intermediate milestones, financial resources, and institutional capabilities required to achieve them, integrating technical, financial, and risk management considerations.

The importance of a transition plan lies in the credibility, transparency, and accountability it provides to a company’s climate commitments, enabling investors, customers, and supervisors to understand and monitor progress. It also helps proactively manage the financial and operational risks associated with climate change and serves as a tool to realign strategy and prioritize investments in innovation and decarbonization. A robust plan is therefore a cornerstone for turning climate goals into concrete, financially viable actions, while strengthening the organization’s resilience and competitiveness in a rapidly evolving regulatory and market environment. Without a robust plan in place, there is no legitimate basis for structuring transition finance.