Transition Finance

Much of the economy cannot become low-carbon at once, and capital is needed to change heavy industry that is not yet clean enough to be called green. Transition finance supports that move through bonds, loans or direct investment, provided the borrower has a credible plan with targets, interim milestones and governance. Lenders look for a pathway matched to a net zero goal, and for a plan that avoids locking in carbon-heavy assets. It is a different idea from green finance, which funds activities that are already low-carbon, and it draws criticism where plans are vague. Several regions and industry bodies have published guidance on what qualifies. Lenders read the plan's milestones closely, since a vague pledge is the usual reason a transition label is challenged.

A cement producer asks banks for a loan to install carbon capture on two kilns and switch part of its fuel to biomass. The lender checks the company's published plan, which has a 2030 emissions target and a retirement date for its oldest kiln. It prices the loan at a standard rate but adds covenants requiring yearly reporting against the plan.