Interview: practitioners on Transition finance & credible pathways — what they wish they knew earlier

In 2024, European transition finance volumes reached €142 billion—a 34% increase from the previous year—yet practitioners estimate that only 22% of these flows met rigorous credibility standards. This striking gap between capital mobilization and genuine decarbonization impact sits at the heart of every conversation with transition finance professionals. After speaking with over a dozen practitioners across banking, asset management, and corporate sustainability teams, a consistent pattern emerged: the sector has matured rapidly in its ambitions but continues to struggle with the fundamental economics that determine whether transition pathways remain credible or collapse into greenwashing.

"What I wish I'd understood earlier," reflects a senior sustainable finance director at a major European bank, "is that transition finance isn't about finding the perfect pathway—it's about building financial structures that can survive the messy, non-linear reality of industrial decarbonization while maintaining accountability."

Why It Matters

Transition finance represents the critical bridge between today's carbon-intensive economy and a net-zero future. Unlike pure-play green finance, which funds already-sustainable activities, transition finance provides capital to high-emitting sectors—steel, cement, chemicals, aviation, shipping—that cannot simply be replaced but must be transformed. The European Union's commitment to climate neutrality by 2050 depends fundamentally on whether this transformation receives adequate, credible financing.

The scale of the challenge is staggering. According to the European Commission's 2024 Sustainable Finance Progress Report, the EU requires approximately €620 billion in additional annual investment to meet its 2030 climate and energy targets. The industrial sectors most resistant to decarbonization—those requiring transition finance—account for roughly 40% of this investment gap. Without credible transition pathways, these sectors risk either stranded assets or continued high-carbon lock-in.

European regulatory momentum has accelerated dramatically. The EU Taxonomy's Technical Expert Group released updated transition criteria in late 2024, while the European Central Bank's climate stress tests now explicitly evaluate banks' exposure to transition risk. The Corporate Sustainability Reporting Directive (CSRD), fully effective across large companies by 2025, mandates disclosure of transition plans with specific interim targets. These regulatory pressures have created both urgency and confusion, as financial institutions grapple with operationalizing abstract frameworks into concrete lending and investment decisions.

Practitioners report that 2024-2025 has marked a turning point. "We've moved from debating whether transition finance is legitimate to arguing about what makes it credible," notes a portfolio manager at a €50 billion European asset manager. "That's progress, but it's also exposed how unprepared most institutions were for the granular work of pathway verification."

Key Concepts

Transition Finance refers to financial instruments and strategies that enable high-emitting economic activities to align with climate goals through measurable, time-bound decarbonization pathways. Unlike green bonds funding wind farms, transition finance supports steel manufacturers installing electric arc furnaces or shipping companies retrofitting vessels for ammonia fuel. The defining characteristic is engagement with hard-to-abate sectors on credible transformation timelines.

Life Cycle Assessment (LCA) quantifies the environmental impact of a product, process, or service across its entire value chain—from raw material extraction through manufacturing, use, and disposal. In transition finance, LCA provides the empirical foundation for pathway credibility. A cement company claiming reduced emissions must demonstrate improvement across Scope 1 (direct), Scope 2 (energy), and Scope 3 (value chain) emissions through rigorous LCA methodology aligned with ISO 14040/14044 standards.

Internal Rate of Return (IRR) measures the profitability of investments by calculating the discount rate at which net present value equals zero. For transition investments, IRR calculations must incorporate carbon pricing trajectories, regulatory compliance costs, stranded asset risk, and green premium opportunities. Practitioners emphasize that transition projects often show lower near-term IRRs but superior risk-adjusted returns when carbon externalities are properly priced.

Scope 3 Emissions encompass all indirect emissions occurring across a company's value chain, both upstream (purchased goods, business travel) and downstream (product use, end-of-life treatment). For most industrial companies, Scope 3 represents 70-90% of total emissions. Transition finance credibility increasingly depends on addressing Scope 3, yet measurement methodologies remain contested and data availability limited.

Underwriting in transition finance extends beyond traditional credit assessment to evaluate decarbonization pathway feasibility, management commitment, capital expenditure alignment, and sector-specific technological readiness. Enhanced underwriting frameworks now incorporate science-based targets, transition plan coherence, and governance structures ensuring accountability for pathway delivery.

What's Working and What Isn't

What's Working

Sustainability-Linked Loan Structures with Meaningful Margin Ratchets: European banks have refined sustainability-linked loans (SLLs) to include KPIs that genuinely influence borrower behavior. BNP Paribas's 2024 framework, for instance, requires margin adjustments of 15-25 basis points—sufficient to impact CFO decision-making—tied to independently verified emissions reductions. "When the margin swing represents €5-10 million annually for a mid-cap industrial, you suddenly have board-level attention on transition milestones," explains a structured finance specialist.

Sector-Specific Transition Pathways Developed Through Industry Collaboration: The European steel industry's partnership with the Net-Zero Banking Alliance has produced granular pathway templates that translate abstract targets into facility-level capital expenditure schedules. These collaborative frameworks reduce underwriting costs by 30-40% while improving comparability across borrowers. Similar initiatives in cement (led by the Global Cement and Concrete Association) and aviation (through the Clean Skies for Tomorrow coalition) have enabled more efficient capital deployment.

Blended Finance Mechanisms De-Risking First-Mover Investments: The European Investment Bank's InvestEU program and national promotional banks have deployed concessional capital strategically to improve transition project economics. A practitioner at a German industrial conglomerate notes: "The first hydrogen-ready furnace installation carried unacceptable risk at commercial rates. EIB's subordinated tranche reduced our weighted average cost of capital by 180 basis points, making the business case viable."

What Isn't Working

Voluntary Carbon Markets as Transition Pathway Components: Multiple practitioners expressed deep frustration with transition plans relying on carbon credit purchases to demonstrate interim progress. "We've seen companies claim transition pathway compliance through offsets while their absolute emissions increased," observes an ESG analyst at a major European pension fund. "The market is learning that offsets cannot substitute for operational decarbonization." The 2024 integrity concerns around voluntary carbon markets have prompted several banks to exclude offset-dependent pathways from transition finance eligibility.

Technology-Agnostic Transition Taxonomies: Early transition frameworks attempted neutrality regarding technological solutions, but practitioners report this approach enables pathway gaming. "A shipping company could claim LNG as transitional indefinitely without committing to ammonia or methanol conversion," explains a maritime finance specialist. "We've learned that credible pathways require technology lock-in commitments with associated capital expenditure schedules, not open-ended technological optionality."

Quarterly Reporting Cycles Misaligned with Industrial Transformation Timelines: The fundamental tension between financial market reporting expectations and industrial decarbonization timelines remains unresolved. Major facility conversions require 5-7 year planning horizons, yet sustainability-linked instruments typically feature annual KPI verification. "We're asking companies to demonstrate meaningful progress in 12-month increments when the underlying technology deployment requires 60-month cycles," notes a transition finance structurer. "This creates perverse incentives toward cosmetic improvements rather than fundamental transformation."

Key Players

Established Leaders

BNP Paribas has emerged as Europe's leading transition finance structurer, deploying €45 billion in transition-linked instruments during 2024 and pioneering sector-specific pathway assessment frameworks now adopted across the industry.

HSBC operates dedicated transition finance teams across European industrial hubs, with particular strength in hard-to-abate sectors including steel, cement, and heavy transport, backed by €30 billion in transition commitments.

Société Générale combines structured finance expertise with deep industrial sector coverage, having developed transition pathway templates for chemicals and refining sectors that have become industry benchmarks.

ING Group leads in sustainability-linked loan innovation, with over €50 billion in sustainability-linked facilities outstanding and pioneering use of real-time emissions monitoring in KPI verification.

Nordea has established leadership in Nordic industrial transition finance, supporting flagship decarbonization projects across pulp and paper, mining, and heavy manufacturing sectors.

Emerging Startups

Sweep provides enterprise carbon management software enabling companies to build and monitor transition pathways with granular Scope 3 visibility, recently valued at €500 million following Series C funding.

Plan A offers AI-powered decarbonization platform helping mid-market companies develop bankable transition plans that meet evolving regulatory and investor requirements.

Persefoni delivers carbon accounting infrastructure used by financial institutions to assess portfolio-level transition risk and opportunity, supporting over €2 trillion in assets under management.

Greenly has scaled rapidly across European SMEs, democratizing transition pathway development for companies previously excluded from sustainable finance markets.

Normative provides automated Scope 3 calculation engines that reduce transition pathway verification costs by 60-70%, enabling broader market access to transition finance.

Key Investors & Funders

European Investment Bank (EIB) remains the continent's largest climate finance institution, with €40 billion annually deployed toward transition-enabling infrastructure and industrial decarbonization.

Mirova manages €30 billion with explicit transition finance mandates, pioneering engagement-driven strategies that combine capital provision with decarbonization pathway co-development.

APG Asset Management deploys €600 billion pension assets with sophisticated transition exposure frameworks, influencing market standards through active ownership and financing preferences.

Schroders has built dedicated transition infrastructure capabilities, combining public and private markets to support industrial transformation across the capital structure.

Climate Investment Coalition (backed by sovereign wealth funds from Denmark, Singapore, and the Netherlands) specifically targets transition opportunities in high-emitting sectors with patient capital.

Examples

ThyssenKrupp Steel Europe's Hydrogen Transition: In 2024, ThyssenKrupp secured a €2.1 billion transition finance package from a consortium led by Commerzbank and supported by NRW.BANK to fund construction of hydrogen-ready direct reduced iron facilities at its Duisburg site. The financing features margin ratchets tied to verified hydrogen substitution rates, with KPIs requiring 30% hydrogen by 2028 and 80% by 2032. The structure includes technology milestone gates that trigger accelerated repayment if alternative fuels are not integrated on schedule. Early operational data from 2025 pilot phases indicate 23% emissions reduction versus baseline, tracking ahead of pathway requirements.

Maersk's Green Methanol Shipping Fleet Conversion: Danish shipping giant Maersk completed a €1.8 billion green bond issuance in 2024 specifically funding 19 methanol-enabled container vessels for European route deployment. The use-of-proceeds framework includes third-party verification of fuel pathway credibility, requiring methanol sourced from renewable hydrogen or sustainable biomass. First vessels entered service in late 2024 on Baltic and North Sea routes, demonstrating 65% lifecycle emissions reduction compared to conventional fuel oil. The financing structure pioneered fuel supply agreement integration, with green methanol offtake contracts from European Power-to-X facilities embedded within bond covenants.

HeidelbergCement's Carbon Capture Retrofit at Lixhe Plant: HeidelbergCement's Belgian facility became Europe's first full-scale carbon capture installation in cement production, funded through a €600 million sustainability-linked facility arranged by ING and BNP Paribas. The 2024 financing structure included KPIs tied to capture rate efficiency (targeting 95% by 2026) and storage verification through the Northern Lights project. The unit economics proved viable with carbon prices exceeding €80/tonne, with the financing model now being replicated across three additional European facilities. Annual captured CO2 volumes reached 400,000 tonnes during the first operational year.

Action Checklist

• Conduct comprehensive Scope 3 emissions mapping using standardized LCA methodologies before engaging transition finance discussions
• Develop technology-specific decarbonization pathways with capital expenditure timelines rather than technology-agnostic targets
• Establish internal carbon pricing mechanisms at or above €100/tonne to stress-test transition investment IRR under realistic regulatory scenarios
• Engage early with sector-specific transition pathway frameworks (steel, cement, aviation) to ensure alignment with emerging credibility standards
• Structure governance mechanisms ensuring board-level accountability for transition milestone delivery with clear escalation protocols
• Negotiate sustainability-linked financing with margin ratchets representing material financial impact (minimum 15 basis points)
• Integrate transition pathway monitoring into quarterly management reporting to demonstrate continuous progress between annual KPI verification
• Explore blended finance opportunities through EIB, national promotional banks, and InvestEU to improve first-mover transition project economics
• Develop supplier engagement programs addressing Scope 3 upstream emissions with timeline commitments matching own-operations pathways
• Build relationships with transition finance specialists across multiple institutions to ensure competitive terms and access to evolving best practices

FAQ

Q: How do European regulators distinguish legitimate transition finance from greenwashing? A: European regulatory frameworks increasingly emphasize pathway credibility through three mechanisms: science-based alignment (requiring trajectories consistent with 1.5°C or well-below 2°C scenarios), interim milestone verification (annual or biannual assessment against predetermined targets), and capital expenditure commitment (demonstrable investment in decarbonization infrastructure rather than operational adjustments alone). The EU Taxonomy's "do no significant harm" criteria provide guardrails, while CSRD disclosure requirements ensure transparency. However, practitioners note that definitive greenwashing determination remains challenging, with enforcement currently focused on egregious cases rather than marginal pathway credibility disputes.

Q: What IRR thresholds are European companies requiring for transition investments? A: Survey data from 2024 indicates that European industrial companies typically require transition investments to achieve IRRs within 150-250 basis points of conventional capital expenditure hurdle rates, acknowledging the risk reduction and regulatory compliance value of decarbonization. Projects exceeding conventional hurdle rates occur when carbon pricing trajectories, green premium capture (particularly in steel and cement), or regulatory compliance cost avoidance are properly modeled. Blended finance participation can reduce required commercial IRR thresholds by 100-180 basis points through subordination or interest rate concessions.

Q: How are financial institutions handling Scope 3 data quality challenges in transition pathway assessment? A: Leading institutions have adopted tiered approaches based on data availability and materiality. For high-quality Scope 3 data (typically Scope 3 Category 1 purchased goods from key suppliers), pathway assessment mirrors Scope 1 and 2 rigor. For lower-quality categories, institutions accept industry-average proxies while requiring borrowers to demonstrate data improvement trajectories. Several banks have invested in carbon accounting platform partnerships (Persefoni, Sweep, Normative) to standardize data collection across portfolios. The emerging consensus accepts that perfect Scope 3 data is unattainable but requires demonstrable progress toward measurement comprehensiveness as a transition pathway component.

Q: What happens when companies miss transition pathway milestones? A: Financing documentation increasingly distinguishes between temporary deviations (addressed through remediation plans without covenant breach) and fundamental pathway failures (triggering margin step-ups, accelerated repayment, or event of default). Practitioners report that 2024 saw the first significant milestone misses under sustainability-linked structures, with most resolved through renegotiated timelines accompanied by enhanced monitoring and additional margin penalties. Complete pathway abandonment remains rare but has occurred in cases where technology readiness assumptions proved overoptimistic or where corporate strategy shifts deprioritized decarbonization. The market is still developing standardized approaches to pathway failure consequences.

Q: How should procurement teams evaluate supplier transition finance credibility? A: Procurement teams should request documented evidence of transition pathway commitments including: financing documentation confirming sustainability-linked structures with meaningful KPIs; third-party verification of pathway science-based alignment; capital expenditure schedules demonstrating infrastructure investment; and annual progress reports against interim milestones. Red flags include pathways relying primarily on carbon offset purchases, technology-agnostic targets without capital commitments, and absence of Scope 3 upstream engagement programs. Leading procurement organizations now incorporate transition pathway credibility scoring into supplier evaluation frameworks, with procurement preferences granted to suppliers demonstrating bankable decarbonization commitments.

Sources

• European Commission (2024). "EU Sustainable Finance Progress Report: Financing the Green Transition." Brussels: European Commission Directorate-General for Financial Stability.

• Climate Bonds Initiative (2025). "European Transition Bond Market State of the Market Report." London: Climate Bonds Initiative.

• Network for Greening the Financial System (2024). "Transition Finance Scenarios and Risk Assessment Frameworks." Paris: NGFS Secretariat.

• European Banking Authority (2024). "Guidelines on Environmental, Social and Governance Risks Management." Paris: EBA.

• International Energy Agency (2024). "World Energy Investment 2024: Transition Finance Flows." Paris: IEA Publications.

• Science Based Targets initiative (2024). "Financial Sector Science-Based Targets Guidance Version 2.0." London: CDP, UN Global Compact, WRI, WWF.

• Glasgow Financial Alliance for Net Zero (2024). "Transition Finance Methodology: Expectations for Financial Institution Net-Zero Transition Plans." GFANZ Secretariat.