Transition Finance

The transition to low-carbon energy sources will require significant investment, including from the private sector, that speaks to the unique context and needs of each country.

2030 Goals

Agree upon a definition of transition finance that is flexible enough to account for local transition needs, while stringent enough to result in additional emission reductions.
Channel significant public and private transition finance toward heavy industry, transport, and energy systems, ensuring credible pathways to decarbonization while avoiding carbon lock-in.

Status
No progress

Transition finance is emerging as a value proposition concept for supporting the climate transition, especially in the Global South. Although the concept doesn’t have a universal definition, transition finance reflects a financial mechanism which can promote investment in projects, sectors, and industries which cannot yet be considered low carbon, but are either on or working towards a credible net zero pathway and require significant early-stage support for net zero emissions viability.
Some taxonomies - ASEAN-2, European taxonomy - take transition finance into consideration, but a universal definition or consensus has not yet been adopted. Definitions by GFANZ, ADB, CBI, and others provide broader guidance on the topic, but their definitions do not extend to either the sectoral or activity level. While transition finance is being spoken about, the mobilization of finance is limited, and its tracking comes with significant challenges.
Products like transition bonds are seeing muted issuances compared to other labeled instruments and also the quantum of finance required. Carbon credits from transition activities (example - Coal-to-Clean Credit Initiative/ CCCI) have been launched and are being pursued. The Monetary Authority of Singapore (MAS) has proposed the creation of a new asset class of carbon credits, known as transition credits, which can be generated when coal-fired power plants are retired early and replaced with cleaner energy sources.
IEA, and BNEF are providing definitions of transition finance for the power sector that are used to track investment flows. The definitions embed both clean energy finance, and fossil fuel low carbon technologies. Country-specific pathways should, ideally, be taken into account when defining transition finance at a regional or country level, but these are not always reflected in methodologies.

Leading Actors

Public FIs

KfW (Germany), Monetary Authority of Singapore (MAS), Hong Kong Monetary Authority (HKMA), Japan Bank for International Cooperation

Multilateral Development Banks

Asian Development Bank (ADB), World Bank, African Development Bank (AfDB), Asian Infrastructure Investment Bank (AIIB), Council of Europe Development Bank, European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), Inter-American Development Bank (IDB), Islamic Development Bank (IsDB), New Development Bank (NDB - BRICS Bank)

International Organizations

OECD, World Economic Forum (WEF), United Nations Development Programme

Leading Countries

Central Banks, Financial regulators, Ministries of Finance, United Kingdom

Alliances

G20, European Union, Glasgow Financial Alliance for Net Zero (GFANZ)

Supportive Stakeholders

ICMA, CBI, Rockefeller Foundation, Transition Credit Coalition (TRACTION), Powering Past Coal Alliance (PPCA)