Priya PatelThe development of a common transition finance framework remains largely absent after COP28; transition finance should focus on the dynamic process of becoming sustainable.
While GFANZ provides a high-level framework, financial institutions should rely on science-based tools to seek transition finance opportunities.
A financial institution’s transition finance framework should ensure that the flow of use of proceeds to non-qualified activities, especially the expansion of fossil fuels, is not allowed.
Transition finance should focus on country- and sector-specific feasibility assessments for activities and considerations of credible transition plans for entities, developed with a well-defined timeframe.
The 2023 United Nations Climate Change Conference (COP28) prompted some positive developments on climate finance. Meanwhile, “transition finance”—having lagged behind—is becoming an important theme this year. The real economy increasingly seeks capital under a “transition” label, notably for decarbonising high-emitting, “hard-to-abate” assets where zero- or near-zero-carbon alternatives are not available; financial markets offer more transition-labelled products and tools.
The European Commission has attempted to differentiate transition finance from green finance and suggested that in the long term, all transition finance will be considered either green or low impact. The Organisation for Economic Co-operation and Development (OECD) has highlighted that transition finance focuses on the dynamic and forward-looking process of becoming sustainable. This is a plausible approach catering to technological advancements over time. A clear distinction between green, transition and general finance can lower greenwashing risks.
The GFANZ framework’s principle-based nature provides a holistic view to begin with. FIs will need to turn to taxonomy tools, which may not all be well designed or fit for purpose, thereby necessitating caution when applying. For example, IEEFA has pointed out that the latest planned revision to the Indonesian taxonomy may be “muddying the waters regarding transition needs.”
The OECD has highlighted that transition finance bears a high risk of carbon lock-in (where fossil fuel assets continue to be used) and emphasised the role of feasibility (economical, institutional and social) in eligibility assessments. GFANZ has referenced this consideration when assessing early-stage technologies in the aligning category.
IEEFA believes ceasing new fossil fuel financing, according to the International Energy Agency roadmap, should be the overarching guiding principle for transition finance. Transition finance with ringfencing requirements will ensure capital flows only to qualified activities. Applying the climate solutions category to entities needs extra care to avoid entities with some non-qualified activities (such as fossil fuel) being eligible without restrictions.
GFANZ defines entities as aligned or aligning if they are in line with or committed to transitioning towards, respectively, a 1.5 degree pathway with additional features of a credible transition plan. Transition finance can reward entities that successfully transition from high-emitting activities, but should specifically
