Myth-busting Transition finance & credible pathways: 10 misconceptions holding teams back

In 2024, global transition finance flows reached $1.3 trillion—yet over 40% of corporate transition plans failed third-party credibility assessments, according to the Climate Bonds Initiative. This disconnect reveals a troubling pattern: organizations are mobilizing capital at unprecedented scale while operating under fundamental misconceptions about what constitutes credible transition pathways. For procurement teams in emerging markets navigating supplier decarbonization, these myths create real barriers to effective climate action and capital deployment.

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 that funds already-clean assets, transition finance supports hard-to-abate sectors—steel, cement, chemicals, aviation, and shipping—that collectively represent approximately 30% of global emissions (International Energy Agency, 2024). For procurement professionals, understanding transition finance is essential because supplier emissions (Scope 3) typically constitute 65-90% of an organization's total carbon footprint.

The stakes are particularly high in emerging markets, where 70% of future emissions growth is projected to occur (BloombergNEF, 2025). These regions face a dual challenge: financing continued development while aligning with Paris Agreement pathways. According to the Glasgow Financial Alliance for Net Zero (GFANZ), emerging markets require $2 trillion annually in transition investment by 2030—five times current levels.

However, misconceptions about transition finance credibility undermine progress. When teams misunderstand MRV (Monitoring, Reporting, and Verification) requirements, scenario analysis methodologies, or additionality criteria, they risk funding "transition-washing" projects that fail to deliver real emissions reductions. The result is wasted capital, reputational damage, and delayed climate action.

Key Concepts

Transition Finance Fundamentals

Transition finance encompasses financial instruments and mechanisms that support high-emitting entities in their journey toward net-zero alignment. This includes:

• Sustainability-linked loans (SLLs): Credit facilities with pricing tied to achievement of predetermined sustainability KPIs
• Transition bonds: Debt instruments funding capex for emissions reduction projects in carbon-intensive sectors
• Blended finance structures: Public-private partnerships de-risking transition investments in emerging markets

Credibility Frameworks

Multiple frameworks have emerged to assess transition pathway credibility:

Framework	Focus Area	Key Criteria
Science Based Targets initiative (SBTi)	Corporate targets	1.5°C alignment, Scope 3 coverage
Climate Transition Finance Handbook (ICMA)	Bond issuance	Strategy, materiality, disclosure
Transition Pathway Initiative (TPI)	Sectoral benchmarks	Carbon intensity trajectories
ACT (Assessing low-Carbon Transition)	Holistic assessment	20+ indicators across 5 modules

The MRV Triangle

Effective transition finance requires robust MRV systems addressing three dimensions:

1. Monitoring: Continuous data collection on emissions, energy consumption, and operational parameters
2. Reporting: Standardized disclosure following TCFD, ISSB, or regional frameworks
3. Verification: Third-party assurance providing confidence in reported data

What's Working

Sector-Specific Transition Pathways

The development of granular, sector-specific guidance has significantly improved transition credibility. The Mission Possible Partnership's work on steel, shipping, aviation, and trucking provides actionable technology roadmaps with clear milestones. ArcelorMittal's transition plan, validated against these pathways, demonstrates how steel producers can achieve 25% emissions intensity reduction by 2030 through direct reduced iron (DRI) technology paired with green hydrogen.

Digital MRV Infrastructure

Emerging digital solutions are solving the data quality challenge. Pachama and NCX use satellite imagery and machine learning to verify forest carbon projects with 95%+ accuracy. In industrial settings, Persefoni and Watershed provide automated Scope 3 emissions calculation integrating supplier data. HSBC's partnership with Trafigura deployed blockchain-based commodity tracking, enabling real-time verification of responsible sourcing claims across 40+ countries.

Blended Finance Innovation

Breakthrough structures are unlocking emerging market capital. The Just Energy Transition Partnerships (JETPs) in South Africa, Indonesia, and Vietnam mobilized $46.5 billion in concessional and commercial finance for coal phase-out and renewable deployment. The Climate Investment Funds' Accelerating Coal Transition program demonstrates how multilateral de-risking can attract private capital at scale—achieving 4:1 leverage ratios in Indonesia.

What's Not Working

Transition Washing and Weak Commitments

Despite progress, credibility gaps persist. A 2024 analysis by InfluenceMap found that 58% of oil and gas company transition plans were inconsistent with stated net-zero commitments, with capital expenditure still flowing predominantly to fossil fuel expansion. The lack of binding accountability mechanisms means companies can announce ambitious targets while continuing business-as-usual operations.

Emerging Market Data Gaps

While digital MRV solutions proliferate, their deployment in emerging markets lags significantly. Only 12% of Sub-Saharan African companies have third-party verified emissions data, compared to 67% in Europe (CDP, 2024). This data asymmetry creates barriers to transition finance access, as investors cannot assess baseline emissions or track progress.

Misaligned Incentive Structures

Current sustainability-linked loan structures often include KPIs that are too easily achieved. Research by Barclays found that 85% of SLL sustainability performance targets (SPTs) were met in 2024, suggesting widespread "ratcheting down" of ambition. When margin adjustments (typically 2.5-7.5 basis points) are dwarfed by base interest rates, borrowers lack meaningful financial incentive for aggressive decarbonization.

Additionality Confusion

Teams frequently struggle with additionality—demonstrating that financed activities would not have occurred absent the transition financing. A World Bank assessment found that 35% of labeled transition bonds funded projects that were already economically viable without concessional terms, undermining the instrument's purpose.

Key Players

Established Leaders

1. HSBC: Committed $1 trillion to sustainable finance by 2030; pioneered transition taxonomy for Asian markets
2. BlackRock: Manages $300+ billion in sustainable assets; developed Climate Transition Benchmark methodology
3. Standard Chartered: Leading emerging market transition finance with $40 billion sustainable finance portfolio
4. BNP Paribas: Created Low-Carbon Transition Score methodology evaluating 4,000+ companies
5. Mitsubishi UFJ Financial Group (MUFG): Japan's largest transition finance provider with $50 billion commitment

Emerging Startups

1. Persefoni: AI-powered carbon accounting platform serving 200+ enterprises; raised $101 million Series B
2. Watershed: Enterprise climate platform with supply chain emissions tracking; $100 million Series C in 2024
3. CarbonChain: Commodity emissions tracking for metals, mining, and agriculture supply chains
4. Sylvera: Carbon credit rating platform providing quality assessments for offset portfolios
5. Sinai Technologies: Decarbonization software for industrial operations; $20 million Series A

Key Investors & Funders

1. Climate Investment Funds (CIF): $11 billion multilateral fund supporting country-level transitions
2. Asian Development Bank (ADB): Energy Transition Mechanism targeting $20 billion for coal retirement
3. Breakthrough Energy Ventures: Bill Gates-backed fund investing in transition technologies
4. Generation Investment Management: $45 billion sustainable investment firm co-founded by Al Gore
5. Green Climate Fund: $11.4 billion capitalization supporting developing country transitions

Sector-Specific KPIs

Sector	Key Transition KPI	Benchmark Range (2025)	Best-in-Class
Steel	CO2 intensity (t CO2/t steel)	1.8-2.2	<1.4
Cement	Clinker factor (%)	65-75%	<60%
Shipping	EEXI rating	C-D	A-B
Aviation	SAF blend (%)	2-5%	>10%
Chemicals	Renewable feedstock (%)	5-15%	>25%
Utilities	Coal capacity factor (%)	<50%	<30%

Real-World Examples

Example 1: Enel's Sustainability-Linked Bond Framework

Italian utility Enel issued €7 billion in sustainability-linked bonds between 2019-2024, with coupon step-ups tied to renewable capacity additions and emissions intensity reductions. The framework's credibility stemmed from ambitious KPIs: achieving <148 g CO2/kWh by 2024 (versus 229 g in 2020). Independent verification by DNV confirmed target achievement, demonstrating how robust SPT design and third-party assurance create accountability. Enel's approach became the template for utility sector transition finance globally.

Example 2: Olam International's Sustainable Sourcing Transition

Singapore-based agricultural commodity trader Olam transformed its supply chain through transition-linked financing. A $500 million revolving credit facility from DBS, ING, and Rabobank linked pricing to deforestation-free sourcing targets. Using Starling satellite monitoring and AtSource traceability platform, Olam achieved 100% traceability in cocoa and 85% in palm oil by 2024. The program demonstrates how digital MRV enables credible transition claims in complex, fragmented supply chains spanning 60+ countries.

Example 3: Indonesia's Just Energy Transition Partnership

Indonesia's JETP, announced in 2023, mobilized $20 billion to accelerate coal power retirement and renewable deployment. The plan targets peak power sector emissions by 2030—seven years earlier than previous projections—and 34% renewable generation by 2030. Critically, the partnership addresses social transition: $1.5 billion allocated for worker retraining and community development in coal-dependent regions. While implementation challenges remain, the JETP establishes a replicable model for emerging market transition finance at national scale.

Action Checklist

• Conduct supplier emissions mapping: Use platforms like Watershed or CarbonChain to establish Scope 3 baselines before engaging on transition requirements
• Align procurement criteria with recognized frameworks: Reference SBTi, TPI, or ACT methodologies when evaluating supplier transition plans
• Implement tiered supplier engagement: Prioritize high-emissions suppliers for intensive decarbonization partnerships; set baseline expectations for all vendors
• Require third-party verification: Mandate independent assurance (e.g., DNV, Bureau Veritas) for supplier emissions claims and transition milestone achievement
• Build blended finance partnerships: Engage development finance institutions to de-risk supplier transition investments in emerging markets
• Track leading indicators: Monitor capex allocation, technology adoption rates, and interim milestones—not just lagging emissions data
• Address additionality explicitly: Document how procurement incentives (preferred supplier status, volume guarantees) enable decarbonization investments

FAQ

Q: How can we assess whether a supplier's transition plan is credible versus greenwashing?

A: Apply the "credibility triangle": First, verify science-alignment by checking if targets are validated by SBTi or benchmarked against TPI sector pathways. Second, examine capex allocation—credible plans direct 50%+ of capital investment toward decarbonization technologies, not maintenance of existing high-carbon assets. Third, assess governance by confirming executive compensation links to climate KPIs and board-level climate oversight. Red flags include targets without interim milestones, reliance on offsets exceeding 10% of abatement, and absence of third-party verification.

Q: What role should carbon offsets play in supplier transition plans?

A: Offsets should be a residual strategy, not a primary decarbonization mechanism. Best practice limits offsets to 5-10% of total emissions abatement, reserved for genuinely hard-to-abate residual emissions after all feasible operational reductions. Prioritize removal credits (e.g., direct air capture, biochar) over avoidance credits, and require third-party quality ratings from providers like Sylvera or BeZero. The Science Based Targets initiative explicitly prohibits using offsets to meet Scope 1 and 2 targets.

Q: How do we handle suppliers in emerging markets lacking emissions data infrastructure?

A: Adopt a capacity-building approach rather than exclusionary screening. Partner with organizations like CDP Supply Chain or the SME Climate Hub to provide free emissions calculation tools. Consider funding supplier MRV infrastructure as part of transition support—the cost is typically offset by reduced audit burden and improved data quality. Use proxy methodologies (spend-based or industry-average factors) initially while building primary data capabilities over 2-3 years.

Q: What's the difference between "transition" and "green" finance instruments?

A: Green finance funds activities already aligned with net-zero (renewable energy, electric vehicles), while transition finance supports the journey of high-emitting entities toward alignment. A solar project receives green bonds; a steel company deploying hydrogen-based DRI receives transition bonds. The distinction matters because applying green criteria to transition contexts creates impossible standards—no steel producer today can meet green taxonomy thresholds, but the sector must decarbonize.

Q: How should we structure supplier contracts to embed transition requirements?

A: Include specific, measurable transition KPIs in master service agreements with annual milestone requirements. Link volume allocation or preferred supplier status to achievement—not price penalties, which create adversarial dynamics. Establish joint governance through annual transition reviews with senior stakeholder participation. Build in flexibility for technology uncertainty while maintaining accountability for emissions outcomes.

Sources

• International Energy Agency. (2024). World Energy Outlook 2024. Paris: IEA Publications.
• BloombergNEF. (2025). New Energy Outlook: Emerging Markets Edition. New York: Bloomberg LP.
• Climate Bonds Initiative. (2024). Transition Finance: Credibility Assessment of Corporate Plans. London: CBI.
• Glasgow Financial Alliance for Net Zero. (2024). 2024 Progress Report. Edinburgh: GFANZ Secretariat.
• CDP. (2024). Supply Chain Report: Closing the Gap. London: CDP Worldwide.
• InfluenceMap. (2024). Oil and Gas Transition Plans: Reality Check. London: InfluenceMap.
• Barclays Research. (2024). Sustainability-Linked Loans: Market Review and Performance Analysis. London: Barclays.
• Mission Possible Partnership. (2024). Sector Transition Strategies: Implementation Update. New York: MPP Secretariat.