Explainer: Transition finance & credible pathways — what it is, why it matters, and how to evaluate options

Global energy transition investment reached a record $2.3 trillion in 2025—up 8% from the previous year—yet only 40% of high-emitting industries have published credible net-zero plans, according to a 2024 Masdar survey. This gap between capital flows and decarbonization credibility defines the central challenge of transition finance: how to fund the brown-to-green transformation of hard-to-abate sectors without enabling greenwashing or locking in emissions for decades. Understanding transition finance and credible pathways isn't optional for procurement teams, sustainability officers, or financial institutions—it's the difference between genuine climate progress and expensive measurement theater.

Why It Matters

The sustainable finance market has grown exponentially, with cumulative labeled sustainable bonds exceeding $6.2 trillion by December 2024. Yet the market remains concentrated in "pure green" activities—renewable energy, electric vehicles, clean technology—while the sectors responsible for the bulk of emissions remain underfunded for their transitions.

Consider the scale mismatch: green bonds reached $487 billion in issuance by 2022, while transition bonds accounted for just $3.5 billion that same year, according to the Institute for Sustainable Finance. This disparity exists because green finance follows the path of least resistance—it's easier to fund a solar farm with clear environmental credentials than a steel plant upgrading from blast furnaces to hydrogen-based direct reduction.

The International Energy Agency defines transition finance as "financial activities contributing to emissions reductions in hard-to-abate sectors and emerging markets where green finance is insufficient." This distinction matters because without dedicated transition finance, companies in steel, cement, chemicals, and heavy industry face a financing gap precisely when they need capital to decarbonize. The result: delayed transitions, prolonged emissions, and stranded asset risks that compound over time.

For procurement professionals, this creates due diligence complexity. When a supplier claims to be "transitioning," how do you verify their pathway is credible? When a lender offers a sustainability-linked loan, what performance targets constitute genuine ambition versus business-as-usual with a green label? The OECD, GFANZ, Climate Bonds Initiative, and multiple standard-setters have developed frameworks to answer these questions—but navigating them requires understanding what credibility actually means.

Key Concepts

Transition Finance vs. Green Finance

Green finance funds activities already considered environmentally sustainable—solar panels, wind turbines, electric vehicles. Transition finance supports the journey from high-carbon to low-carbon operations for entities that cannot immediately achieve "green" status. A coal power plant cannot be financed with green bonds, but financing its replacement with natural gas as a bridge to renewables might qualify as transition finance under certain frameworks.

The Four GFANZ Transition Financing Strategies

The Glasgow Financial Alliance for Net Zero (GFANZ), representing over 675 financial institutions with approximately $130 trillion in assets, identifies four distinct transition financing strategies:

Climate Solutions: Financing sustainable or enabling technologies (often overlaps with green finance)
Aligned: Supporting entities already on credible net-zero pathways
Aligning: Financing entities actively transitioning toward net-zero alignment
Managed Phaseout: Structured retirement of high-emitting assets with clear timelines

This taxonomy matters because lumping all transition activities together obscures risk profiles. Managed phaseout of a coal plant has different risk characteristics than financing an aligned renewable energy company.

Credible Pathway Criteria

Multiple frameworks converge on similar credibility criteria, synthesized from the Climate Bonds Initiative, ICMA Principles, OECD Guidance, and the UK Transition Finance Market Review (October 2024):

Element	Description
1.5°C Alignment	Goals match Paris Agreement pathways; net-zero by 2050, emissions halved by 2030
Science-Based Targets	Benchmarked to recognized frameworks (SBTi, sectoral pathways), not just corporate pledges
No Carbon Lock-In	Avoids long-lived high-emitting assets; assesses stranded asset risk
Scope 3 Inclusion	Upstream and downstream emissions counted; offsets limited or excluded
Transition Plan Disclosure	Formal plan with CapEx allocation, governance, and timelines
DNSH Safeguards	"Do No Significant Harm" to other environmental and social objectives
Transparent Reporting	Track and report impacts; third-party verification recommended

Key Instruments

Transition Bonds: Use-of-proceeds instruments funding specific transition projects. Japan's sovereign transition bond program drove issuance to $18.8 billion in 2024—a 500% increase year-over-year—though Japan accounted for 93.3% of global volume.

Sustainability-Linked Loans (SLLs): Performance-based instruments where loan terms (typically interest rates) adjust based on achieving pre-set sustainability targets. The global SLL market reached €650 billion in 2024, representing 72% of sustainable loans. However, penetration rates vary significantly by region: Asia-Pacific rose to 19% of syndicated loans while North America declined to just 5%.

Sustainability-Linked Bonds (SLBs): Similar to SLLs but in bond format. Approximately $130 billion has been raised through SLBs in high-emitting sectors as of early 2023, according to CFA Institute analysis.

What's Working

Japan's Sovereign Transition Bond Program

Japan's government issued $15.1 billion in transition bonds across four deals in six months during 2024, targeting ¥20 trillion for green transition across 22 designated investment areas. This sovereign backing provides the scale and credibility that fragmented corporate issuance cannot achieve. The program demonstrates that transition finance can move from niche to mainstream when governments provide clear taxonomies and commit public capital.

Sustainability-Linked Loan Principles Evolution

The Loan Market Association's updated Transition Loan Guidance (2024) provides harmonized criteria for both use-of-proceeds and sustainability-linked structures. The framework accommodates entity-level credibility assessment and offers flexibility for SMEs and emerging market borrowers—addressing previous criticisms that transition finance was only accessible to large multinationals.

Private Market Growth

Sustainable private debt funds raised $39 billion in 2024, up from $15 billion in 2023. Infrastructure debt funds show 37% sustainability penetration, indicating that private markets are increasingly incorporating transition considerations into credit decisions.

What Isn't Working

Greenwashing and Transition-Washing Concerns

Increased scrutiny has revealed problematic practices. ArcelorMittal, Europe's largest industrial CO2 emitter, dropped ESG terms from a $5.5 billion revolving credit facility refinanced in May 2024, even while receiving over €3 billion in EU government subsidies for decarbonization. When major emitters can claim transition status while weakening financing commitments, the entire framework's credibility suffers.

Declining SLL Penetration in Key Markets

Despite growth in absolute volume, SLL penetration as a percentage of syndicated loans fell from 12% to 10% globally in 2024. EMEA penetration dropped from 21% to 19%, while North America's already-low 7% fell to 5%. Lenders cite several challenges: documentation complexity, verification costs that exceed pricing benefits, and reputational risks from borrowers potentially missing targets.

Major Bank Exits from Climate Alliances

In late 2024 and early 2025, JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, Goldman Sachs, and Wells Fargo all exited the Net Zero Banking Alliance (NZBA). While these institutions claim to maintain individual net-zero goals, the departures raise questions about voluntary alliance credibility and the durability of transition finance commitments under political pressure.

Missing Transition Taxonomies

Outside the EU, most jurisdictions lack formal transition taxonomies. Without regulatory clarity on what qualifies as "transition" versus "brown" financing, the door remains open to inconsistent classifications and greenwashing. The UK Transition Finance Market Review (October 2024) represents progress but relies on voluntary principles rather than mandatory standards.

Key Players

Established Leaders

Climate Bonds Initiative: Develops sector-specific transition criteria for steel, aviation, cement, and other hard-to-abate industries with rigorous science-based standards
GFANZ (Glasgow Financial Alliance for Net Zero): Convenes 675+ financial institutions representing ~$130 trillion in assets; publishes transition planning frameworks and case studies
ICMA (International Capital Market Association): Sets principles for sustainability-linked bonds and transition bond disclosure requirements
Loan Market Association (LMA): Issued harmonized Transition Loan Guidance in 2024 covering both use-of-proceeds and SLL structures

Emerging Startups

Persefoni: AI-powered carbon accounting platform; raised $50 million Series C1 in 2023; strong in financial services with PCAF-aligned financed emissions measurement
Watershed: Carbon management software; raised $100 million Series C in 2024; backed by Sequoia Capital; highest valuation in carbon accounting space
Plan A: Automated sustainability reporting and analytics; raised €27 million Series A in 2023; partners with Visa for corporate carbon footprinting
Normative: AI-powered emissions calculation automation; specializes in supply chain carbon accounting

Key Investors and Funders

TPG Rise: Impact investing arm of TPG; led Persefoni's Series C1; manages climate-focused investments across transition sectors
Altérra (UAE): $30 billion fund launched at COP28 with BlackRock, TPG, and Brookfield; includes $5 billion "Transformation Fund" for emerging market transition finance
Brookfield Asset Management: Operates $15 billion+ Transition Funds I & II investing in CCUS, green hydrogen, and managed phaseout opportunities
Sequoia Capital: Lead investor in Watershed; active in climate tech software backing

Examples

Thyssenkrupp Steel's €3.5 Billion Direct Reduction Plant: The German steel giant secured €2 billion in government subsidies (€1.3 billion federal, €700 million state) for a hydrogen-powered direct reduction plant at Duisburg. The project will avoid 3.5 million tonnes of CO2 annually when complete. Despite October 2024 concerns about costs and a potential sale to India's Jindal Steel, the company reaffirmed its commitment to the green steel project by June 2025. This case illustrates both the scale of financing required for industrial transition and the ongoing uncertainty around project execution.

Japan Sovereign Transition Bonds: Japan's Ministry of Finance issued the world's first sovereign transition bonds in 2024, channeling $15.1 billion toward 22 designated investment areas including clean transport, energy efficiency, and industrial decarbonization. The program's success—accounting for 93.3% of global transition bond volume—demonstrates how sovereign backing can catalyze market development. Other governments are studying the model for potential replication.

ArcelorMittal's Delayed HDRI Investments: In November 2024, ArcelorMittal postponed final investment decisions on approximately €2.5 billion in hydrogen-based Direct Reduced Iron (HDRI) projects across Europe, citing unfavorable policy environment, weak Carbon Border Adjustment Mechanism implementation, and customer unwillingness to pay premiums for low-carbon steel. The delay highlights the gap between transition finance availability and the market conditions required for project viability—subsidies alone are insufficient without demand-side policies.

Action Checklist

Assess counterparty transition plans against GFANZ/OECD credibility criteria before entering financing or procurement agreements
Require Scope 3 emissions disclosure and verify targets are benchmarked to science-based pathways, not just historical improvements
Evaluate carbon lock-in risk by reviewing asset lifetimes and technology roadmaps for stranded asset exposure
Demand third-party verification of emissions data and transition progress rather than relying on self-reported metrics
Structure performance targets with annual milestones exceeding business-as-usual trajectories, not distant 2050 goals alone
Monitor regulatory developments in transition taxonomies (EU, UK, Japan) that may affect classification and disclosure requirements
Distinguish managed phaseout from stranded assets by requiring clear timelines and alternative capacity plans

FAQ

Q: How do I distinguish genuine transition finance from greenwashing? A: Apply the credibility criteria systematically: verify 1.5°C pathway alignment using science-based frameworks, confirm Scope 3 emissions are included, check for carbon lock-in risks, and require third-party verification. Red flags include distant targets without near-term milestones, exclusion of material emission sources, and lack of CapEx allocation toward low-carbon activities. The UK Transition Finance Guidelines recommend assessing entity-level credibility rather than project-level claims alone.

Q: What's the difference between transition bonds and sustainability-linked bonds? A: Transition bonds are use-of-proceeds instruments—funds must be applied to specific transition projects (like a steel plant conversion). Sustainability-linked bonds are performance-based—general corporate funds with interest rates tied to achieving sustainability KPIs. Transition bonds provide more certainty about fund application; SLBs offer more flexibility but face greater scrutiny on target ambition. Japan's sovereign transition bond program (use-of-proceeds) and typical corporate SLBs illustrate the distinction.

Q: Why are major banks leaving climate finance alliances like NZBA? A: Multiple factors contributed: political backlash against ESG in the U.S., antitrust concerns about collective commitments, tensions between alliance requirements and continued fossil fuel financing, and frustration with alliance governance. Banks departing claim to maintain individual net-zero goals. However, the exits raise credibility questions about voluntary commitments and may reduce pressure for harmonized disclosure and target-setting.

Q: How should procurement teams evaluate supplier transition claims? A: Request formal transition plans with CapEx allocation data, not just emissions reduction targets. Verify targets against sector-specific pathways (e.g., Science Based Targets initiative for relevant industry). Check whether Scope 3 emissions are included. Ask for third-party assurance of baseline emissions and progress tracking. Be skeptical of suppliers who claim transition status but cannot demonstrate governance structures, technology roadmaps, or timeline commitments. The CFA Institute's transition finance action list provides detailed due diligence frameworks.

Q: What financing instruments work best for different transition stages? A: Early-stage transitions with uncertain technology pathways often suit sustainability-linked instruments that provide flexibility. Mature transition projects with defined capital requirements are better matched to use-of-proceeds transition bonds or loans. Managed phaseout of high-emitting assets requires specialized structures with clear retirement timelines and social transition provisions. Most large transitions blend instruments: government subsidies for risk reduction, transition bonds for project finance, and SLLs for working capital with performance incentives.

Sources

BloombergNEF, "Energy Transition Investment Trends," January 2026
Climate Bonds Initiative, "Transition Finance Criteria," 2024
CFA Institute, "Navigating Transition Finance: An Action List," 2024
GFANZ, "Case Studies on Transition Finance & Decarbonization Contribution Methodologies," September 2024
OECD, "Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans," 2022
UK HM Treasury, "Transition Finance Market Review," October 2024
Loan Market Association, "Guide to Transition Loans," 2024
Institute for Sustainable Finance, Queen's University, "Primer on Transition Finance," 2024
RMI, "Defining Transition Finance: Exploring Its Purpose, Scope, and Credibility," 2024
ICE, "Sustainable Bond Analysis 2024," 2024