How Transition Finance Will Make or Break Our Net Zero Future

Growing awareness of climate change has turned green technologies and renewable energy projects into popular investments, particularly for financial institutions that have made their own environmental commitments. But to really reduce emissions, steel makers, airlines, power companies and other heavy emitters will have to make big, expensive changes. Enter “transition finance,” a fast-growing asset class with the potential to dwarf green investments and support cleaner economic growth in developing countries. For now, there’s no consistent standard for what qualifies as transition finance; skeptics say it’s especially susceptible to greenwashing, or misleading consumers or investors about a company’s environmental impact.

Transition finance refers to investments — typically bonds or loans — designed to help companies in heavy-emitting industries become more energy efficient and reduce their greenhouse gas emissions. So far, there’s no common definition or rules around what kinds of projects qualify — or don’t. Some early transition finance has raised money for natural gas power plants with potential for hydrogen co-firing, or for fuel-efficient aircraft.