Deep dive: Transition finance & credible pathways — what's working, what's not, and what's next

The global transition finance market reached $1.8 trillion in cumulative issuance by the end of 2024, yet less than 15% of that capital flowed to hard-to-abate sectors where emissions reductions are most urgently needed. In the United States alone, achieving net-zero by 2050 will require an estimated $275 billion in annual transition investments—roughly triple current deployment levels. This gap between capital availability and effective deployment represents one of the most consequential challenges in climate finance. Decision-makers navigating this landscape must understand not just where money is flowing, but why credible transition pathways remain elusive and what structural changes could unlock the next wave of decarbonization capital.

Why It Matters

Transition finance occupies a critical but contested space in the sustainable finance ecosystem. Unlike pure-play green finance, which funds already-clean technologies like solar and wind, transition finance targets the decarbonization of carbon-intensive industries—steel, cement, chemicals, aviation, and shipping—that collectively account for approximately 30% of global greenhouse gas emissions. These sectors cannot simply be replaced; they must be transformed in place, often over decades-long timelines that challenge conventional investment horizons.

The stakes for the US economy are substantial. Heavy industry and transportation sectors employ over 15 million Americans directly and support millions more through supply chains. According to BloombergNEF's 2024 Energy Transition Investment Trends report, US clean energy investment reached $303 billion in 2024, a 22% increase from the prior year, yet transition finance for industrial decarbonization represented less than 8% of that total. The Inflation Reduction Act's $369 billion in climate provisions has catalyzed significant activity, but most incentives favor deployment of mature technologies rather than transformation of legacy assets.

The credibility question looms large. A 2024 analysis by the Rocky Mountain Institute found that 60% of corporate transition plans lack quantified interim milestones, while only 23% include capital expenditure commitments aligned with stated decarbonization goals. Without credible pathways—science-based targets backed by operational changes and verifiable investments—transition finance risks becoming a sophisticated form of greenwashing, delaying meaningful emissions reductions while providing companies with sustainability credentials.

For US decision-makers, the regulatory environment adds complexity. The SEC's climate disclosure rules, finalized in March 2024, require large public companies to report Scope 1 and Scope 2 emissions along with climate-related risks, but stopped short of mandating Scope 3 disclosures or transition plan specifics. This creates a fragmented landscape where voluntary frameworks like the Transition Plan Taskforce guidelines compete with emerging state-level requirements and international standards that US multinationals must navigate.

Key Concepts

Transition Finance refers to financial instruments and investment strategies designed to support carbon-intensive companies and assets in achieving measurable emissions reductions over time. Unlike divestment approaches that simply shift ownership of high-emitting assets, transition finance aims to fund actual operational transformation. The critical distinction lies in intentionality: genuine transition finance requires binding commitments, capital allocation aligned with decarbonization, and transparent reporting on progress. The Climate Bonds Initiative estimates that transition-labeled bonds reached $23 billion in 2024 issuance, though definitional inconsistencies make precise measurement difficult.

Transition Plan is a time-bound strategy articulating how an organization will achieve alignment with a low-carbon economy. Credible transition plans typically include: a long-term net-zero commitment with a specified target year; interim emissions reduction milestones (often at 2030 and 2040); quantified capital expenditure commitments; specific actions for Scope 1, 2, and 3 emissions; governance mechanisms for accountability; and sensitivity analyses under different climate scenarios. The Glasgow Financial Alliance for Net Zero (GFANZ) published sector-specific guidance in 2024, establishing expectations for financial institutions assessing corporate transition plans.

Additionality measures whether financed activities produce emissions reductions that would not have occurred without the specific intervention. This concept, borrowed from carbon offset markets, has become central to transition finance credibility. A steel company refinancing existing debt with a sustainability-linked loan achieves limited additionality if no new decarbonization investments result. True additionality requires capital that enables projects, technologies, or operational changes that would otherwise be financially unviable. Measuring additionality remains methodologically challenging, particularly for large corporations with multiple financing sources.

Blended Finance combines concessional capital (from development finance institutions, philanthropies, or government programs) with commercial investment to improve risk-adjusted returns for private investors. In transition finance, blended structures often deploy catalytic first-loss capital or subordinated debt to de-risk investments in unproven decarbonization technologies. The Convergence database tracked $15.8 billion in blended finance transactions with climate objectives in 2024, though only a subset specifically targeted industrial transition. For US markets, the Department of Energy's Loan Programs Office has emerged as a significant source of catalytic capital, providing over $40 billion in conditional commitments since 2021.

Underwriting in transition finance context refers to the risk assessment process by which lenders and investors evaluate whether a company's transition pathway is sufficiently credible to justify financing. Traditional credit underwriting focuses on repayment capacity; transition-aware underwriting additionally considers stranded asset risk, carbon pricing exposure, regulatory trajectory, and technology adoption feasibility. Major banks including JPMorgan Chase, Bank of America, and Citi have developed proprietary transition assessment frameworks, though methodologies vary significantly and remain largely opaque to external stakeholders.

What's Working and What Isn't

What's Working

Sustainability-Linked Loans with Meaningful KPIs. The sustainability-linked loan (SLL) market has matured considerably, with 2024 US issuance exceeding $120 billion. The strongest examples tie margin adjustments to emissions reduction targets rather than softer metrics like ESG ratings. Duke Energy's $6 billion sustainability-linked credit facility, for instance, includes step-downs linked to absolute Scope 1 emissions reductions and renewable capacity additions, with third-party verification requirements. When structured with ambitious KPIs and material pricing consequences, SLLs create genuine incentives for operational change.

Sectoral Transition Pathways. Industry-specific guidance has improved dramatically. The Science Based Targets initiative (SBTi) now covers most hard-to-abate sectors with detailed decarbonization pathways. The US steel industry exemplifies progress: Nucor, the largest domestic producer, has committed to 35% emissions intensity reduction by 2030 from a 2018 baseline, supported by $3 billion in capital investments for electric arc furnace expansion and renewable energy procurement. Sector-specific benchmarks enable meaningful peer comparison and reduce information asymmetry for investors.

DOE Loan Programs Office Catalytic Role. The Department of Energy's Loan Programs Office has demonstrated that government-backed financing can accelerate deployment of pre-commercial technologies at scale. The $2.5 billion loan guarantee for Ultium Cells, a GM-LG joint venture for battery manufacturing, helped derisk a technology scaling at unprecedented pace. Similarly, conditional commitments for carbon capture projects, hydrogen hubs, and advanced nuclear designs are establishing financing templates that commercial lenders can follow once technology risks diminish.

Corporate Procurement Agreements. Long-term offtake agreements for low-carbon products have emerged as a powerful demand signal. The First Movers Coalition, launched at COP26 and expanded significantly in 2024, now includes commitments from over 100 companies representing $12 trillion in market value. Concrete purchase commitments for sustainable aviation fuel, green steel, and low-carbon shipping create the revenue certainty that project developers need to secure financing. Microsoft's 10-year agreement to purchase 315,000 tons of green steel from Nucor demonstrates how corporate procurement can anchor transition investments.

What Isn't Working

Transition Bond Market Fragmentation. Despite growing issuance volumes, the transition bond market suffers from definitional confusion that undermines credibility. Multiple competing frameworks—ICMA's Climate Transition Finance Handbook, the Climate Bonds Initiative's sector criteria, regional taxonomies, and issuer-specific approaches—create an inconsistent landscape. Investors struggle to distinguish genuine transition financing from relabeled conventional debt. A 2024 Moody's analysis found that 40% of transition-labeled bonds lacked specific use-of-proceeds restrictions tied to decarbonization investments.

Scope 3 Measurement and Management. For most carbon-intensive companies, Scope 3 emissions (from supply chains and product use) represent 70-90% of their carbon footprint. Yet credible pathways for addressing Scope 3 remain elusive. Financed emissions disclosures by banks illustrate the challenge: despite PCAF methodology adoption, comparability remains poor, and most financial institutions exclude significant asset classes from calculations. Without reliable Scope 3 accounting, transition plans cannot address the majority of emissions in value chains.

Stranded Asset Risk Pricing. Financial markets have not adequately priced transition risk into carbon-intensive assets. Research from Carbon Tracker Initiative suggests that under a 1.5°C scenario, over $1 trillion in US fossil fuel assets could become stranded by 2040, yet current valuations do not reflect this exposure. The disconnect between long-term transition risk and short-term financial incentives creates a structural barrier: companies and their financiers face limited immediate penalties for delayed action, even as cumulative systemic risk grows.

Small and Medium Enterprise Access. Transition finance flows disproportionately to large corporations with sophisticated sustainability teams and established capital market access. SMEs, which represent 99% of US businesses and approximately 45% of private sector emissions, struggle to access transition capital. Transaction costs for verification, reporting, and monitoring often exceed the benefits of sustainability-linked pricing for smaller borrowers. Without scalable approaches tailored to SME constraints, a significant portion of the economy remains financially unaddressed.

Key Players

Established Leaders

JPMorgan Chase committed $2.5 trillion to sustainable development financing through 2030, with dedicated transition finance products for energy, industrial, and transportation sectors. Their Center for Carbon Transition provides sector-specific research and client advisory services.

BlackRock manages the largest suite of transition-focused investment products, including the BlackRock Transition Capital strategy with over $50 billion in assets. Their Investment Stewardship team actively engages portfolio companies on transition plan credibility.

Bank of America has deployed over $500 billion toward its Environmental Business Initiative since 2021, with significant allocations for industrial decarbonization, clean transportation, and sustainable agriculture transition.

Citi launched the Citi Transition Finance framework in 2023, providing structured guidance for financing carbon-intensive sector transformation. Their energy transition advisory practice has led major transactions in steel, cement, and chemicals.

Goldman Sachs committed $750 billion in sustainable finance activity by 2030, with dedicated teams focusing on carbon capture, hydrogen, and industrial electrification—core transition sectors requiring specialized structuring expertise.

Emerging Startups

Persefoni provides AI-powered carbon accounting and transition planning software used by major corporations and financial institutions, with $200 million in venture funding to date. Their platform enables granular emissions tracking necessary for credible transition pathways.

Watershed offers enterprise sustainability platforms that integrate emissions measurement with decarbonization planning and supply chain engagement. Their recent expansion into financial services supports transition plan assessment at scale.

Enduring Planet focuses on climate fintech for SMEs, providing streamlined sustainability-linked financing products with simplified verification requirements—addressing the access gap for smaller businesses.

Crux Climate developed a marketplace and trading platform for clean energy tax credits under the Inflation Reduction Act, enabling efficient capital allocation to transition projects by connecting credit sellers with buyers.

Manifest Climate uses AI to analyze corporate transition plans against scientific benchmarks, helping investors distinguish credible commitments from insufficiently ambitious targets.

Key Investors & Funders

Department of Energy Loan Programs Office has extended over $50 billion in loans and loan guarantees for clean energy and advanced technology projects, serving as the primary source of catalytic government capital for US transition investments.

Brookfield Asset Management raised $15 billion for their Global Transition Fund, the largest private fund dedicated to accelerating net-zero transition across portfolio companies with demonstrated improvement potential.

TPG Rise Climate deployed $7.4 billion in climate-focused investments since 2021, with significant allocations to industrial decarbonization, grid infrastructure, and sustainable agriculture—sectors central to transition finance.

Bezos Earth Fund committed $10 billion to climate initiatives, including $1 billion specifically for transition and transformation of carbon-intensive sectors, with emphasis on catalytic funding that unlocks commercial capital.

Climate Investment Fund (multilateral) provides concessional capital for developing country transitions, but increasingly partners with US-based blended finance vehicles to scale industrial decarbonization globally.

Examples

US Steel Corporation Electric Arc Furnace Transition. US Steel committed $3 billion to construct Big River Steel 2, an advanced electric arc furnace (EAF) facility in Osceola, Arkansas. The project, completed in 2024, produces steel with approximately 75% lower carbon intensity than traditional blast furnace operations. Financing included sustainability-linked credit facilities with margin step-downs tied to verified emissions reductions, a $50 million tax increment financing package from Arkansas, and strategic investment from SoftBank. The facility demonstrates viable unit economics for low-carbon steel production at scale, with production costs competitive with integrated mills when carbon externalities are priced at $>50 per ton.

Delta Air Lines Sustainable Aviation Fuel Strategy. Delta committed $1 billion toward SAF production and offtake through 2030, anchoring several production facilities through long-term purchase agreements. Their partnership with Gevo for 75 million gallons annually starting 2026, structured as a fixed-price contract with sustainability premiums, demonstrates how corporate procurement can de-risk project financing. The SAF costs approximately 3-4x conventional jet fuel currently, but Delta's long-term commitments enable producers to secure construction financing. Delta's transition plan includes interim targets of 10% SAF blending by 2030, with governance mechanisms linking executive compensation to progress.

Heidelberg Materials North America Carbon Capture. Heidelberg Materials (formerly Lehigh Hanson) launched North America's first full-scale cement carbon capture project at their Mitchell, Indiana facility. The $600 million project, supported by a DOE grant of $170 million and tax credit eligibility under 45Q, will capture 2 million tons of CO2 annually—approximately 95% of facility emissions. Project financing combined senior secured debt, mezzanine financing, and development bank participation. Unit economics depend heavily on 45Q credits ($85/ton for geological storage), illustrating how policy support determines feasibility for industrial transition investments at current technology costs.

Action Checklist

• Assess your organization's transition plan against the Transition Plan Taskforce disclosure framework, identifying gaps in governance, targets, and capital allocation specificity
• Map your financing portfolio or balance sheet exposure to carbon-intensive sectors, quantifying emissions intensity and transition risk concentration
• Evaluate sustainability-linked financing options with KPIs tied to absolute emissions reductions rather than intensity metrics or third-party ratings
• Engage suppliers on Scope 3 emissions reduction pathways, establishing data-sharing protocols and considering supplier financing mechanisms
• Explore blended finance structures that layer concessional capital (DOE loans, state green banks, philanthropic program-related investments) with commercial debt
• Develop sector-specific transition assessment criteria for underwriting decisions, incorporating technology readiness levels and stranded asset scenarios
• Build internal capacity for carbon accounting and verification, investing in systems that can support granular emissions tracking across operations
• Participate in industry coalitions (First Movers Coalition, Sustainable Markets Initiative) that aggregate demand signals for low-carbon products
• Monitor regulatory developments across SEC disclosure requirements, EPA emissions standards, and state-level policies that affect transition economics
• Establish board-level governance for transition strategy, including regular reporting on progress against interim milestones and capital deployment

FAQ

Q: How do investors distinguish credible transition finance from greenwashing? A: Credibility assessment requires examining multiple dimensions: specificity of targets (absolute reductions vs. intensity), interim milestones (2030 targets, not just 2050 commitments), capital expenditure alignment (disclosed investments matching stated ambitions), governance mechanisms (board oversight, executive compensation linkage), and third-party verification. The most robust transition finance structures include binding covenants or material pricing consequences tied to verified emissions outcomes. Investors should also assess technology feasibility—a cement company's transition plan is more credible if it includes specific carbon capture investments than if it relies on unproven technologies. Frameworks from the Transition Plan Taskforce and GFANZ provide detailed assessment criteria, though significant judgment remains necessary.

Q: What role does the Inflation Reduction Act play in US transition finance? A: The IRA fundamentally improved unit economics for multiple transition pathways. The enhanced 45Q tax credit ($85/ton for geological carbon storage) makes carbon capture economically viable for cement, steel, and power generation at current technology costs. Clean hydrogen production credits ($3/kg for green hydrogen) could close the cost gap with gray hydrogen by 2030. Advanced manufacturing credits support domestic supply chain development for clean energy components. For transition finance practitioners, IRA provisions reduce technology risk, improve project returns, and create transferable credits that enhance financing flexibility. However, implementation complexity—particularly around prevailing wage, apprenticeship, and domestic content requirements—creates execution risks that affect underwriting.

Q: How should companies approach Scope 3 emissions in transition planning? A: Scope 3 represents the frontier challenge for credible transition pathways. Companies should prioritize materiality—identifying the 2-3 Scope 3 categories representing the largest emissions. For manufacturers, this typically means purchased goods and upstream transportation; for energy companies, it's use of sold products. Engagement strategies should distinguish between Scope 3 categories where the company has leverage (through procurement decisions and supplier requirements) versus those requiring industry-wide or policy solutions. Setting Scope 3 targets before establishing measurement infrastructure risks creating unverifiable commitments. The most credible approaches combine robust measurement investment, targeted supplier engagement programs, and honest acknowledgment of categories where influence is limited.

Q: What financing structures work best for industrial decarbonization projects? A: Industrial decarbonization often requires blended structures combining multiple capital sources. Project finance approaches work for discrete assets like carbon capture facilities, with senior debt, mezzanine financing, and equity tranches sized according to risk allocation preferences. Sustainability-linked corporate facilities suit companies undertaking portfolio-wide transitions, providing pricing incentives without restricting capital use. For first-of-a-kind technologies, concessional capital from development finance institutions or government loan programs typically provides essential credit enhancement. Equipment financing and leasing structures can accelerate adoption of proven technologies (electric vehicle fleets, heat pumps) without requiring large upfront capital commitments. The optimal structure depends on technology maturity, project scale, and borrower characteristics.

Q: What metrics should decision-makers track to assess transition finance effectiveness? A: Beyond issuance volumes, meaningful metrics include: emissions intensity reduction achieved per dollar deployed (measuring capital efficiency); additionality rate (percentage of financing enabling projects that wouldn't otherwise occur); target achievement rate (percentage of SLL borrowers meeting their KPIs); refinancing patterns (whether transition instruments are financing new investments or rolling over existing debt); and sector distribution (concentration in hard-to-abate sectors vs. already-decarbonizing industries). At portfolio level, financed emissions trajectories should decline consistent with sectoral pathways. Qualitative assessment of transition plan credibility—using frameworks like the Transition Plan Taskforce—provides essential context for quantitative metrics.

Sources

• BloombergNEF. "Energy Transition Investment Trends 2025." January 2025. Global and US clean energy investment analysis with sector breakdowns.

• Rocky Mountain Institute. "The State of Corporate Transition Plans." October 2024. Analysis of Fortune 500 transition plan quality and credibility indicators.

• Climate Bonds Initiative. "Transition Finance Market Brief." Q4 2024. Tracking of transition-labeled bond issuance and definitional frameworks.

• Science Based Targets initiative. "Sectoral Decarbonization Approach." 2024 Update. Methodology for sector-specific transition pathways across hard-to-abate industries.

• Department of Energy Loan Programs Office. "Portfolio Status Report." December 2024. Summary of loan and loan guarantee commitments for clean energy transition.

• Glasgow Financial Alliance for Net Zero. "Transition Finance Guidance." November 2024. Framework for financial institution assessment of corporate transition plans.

• Transition Plan Taskforce. "Disclosure Framework." Final Report, October 2023. UK-developed framework increasingly adopted as global standard for transition plan quality.

• Convergence. "State of Blended Finance 2024." Annual report on blended finance transaction volumes and structures for climate and development objectives.