Transition finance is moving into a new and more clearly defined phase. In recent weeks, two major publications – the Guide to Transition Loans from the LMA, APLMA and LSTA, and ICMA’s Climate Transition Bond Guidelines – have set out a shared foundation for how markets can credibly support the decarbonisation of high-emitting, hard-to-abate sectors. Although each document serves a different part of the market, together they establish a common language and a clearer pathway for financing activities that sit between today’s high-carbon reality and tomorrow’s low-carbon economy.
This crucial topic was the focus of discussion in the latest episode of Green Hub TV.
To learn more, read about the topic below, and watch the replay to discover the intricacies of transition finance, discussed by Laurie Chesné and Orith Azoulay, from Natixis CIB’s Green & Sustainable Hub, and Malika Takhtayeva, ESG Analyst, Sustainable Fixed Income - BNP Paribas AM, and Nicholas Pfaff, Deputy CEO and Head of Sustainable Finance – ICMA.
Why Transition Finance Matters Now
The timing of these guidelines is no accident. Global decarbonisation increasingly depends on industries where emissions are deeply embedded in production processes – such as steel, cement, chemicals, aviation and heavy transport. These sectors cannot turn green overnight; they need investment in transitional solutions that reduce emissions now while enabling deeper decarbonisation later. Emerging and developing economies, where energy systems and industrial pathways differ from those in Europe or North America, face an even more complex challenge.
Hard-to-abate sectors don’t transform overnight. If we want real decarbonisation, we need financing tools designed for their specific pathways and realities.
Recent analysis by the International Energy Agency (IEA) suggests that transition financing could mobilise USD 4–5 trillion over the next decade, a scale comparable to the global green bond market. Without a credible framework to guide this capital, many high-impact projects may struggle to access finance. The new guidelines therefore fill an important gap: they offer clarity on what constitutes a legitimate transition activity and the necessary safeguards, how it should be assessed, and how it should be reported.
What the New Guidelines Bring
Though written for different instruments – loans in one case, bonds in the other – the two publications share a core philosophy. Both are anchored in the ambition of the Paris Agreement and rely on science-based pathways to evaluate whether a project or corporate strategy is genuinely aligned with long-term climate goals. Both acknowledge that transition is context-specific: it looks different from one sector to another and from one region to another. And both set expectations around transparency, the use of funds, and impact reporting.
Where they differ is largely in emphasis. The loan guidelines place particular weight on the borrower’s overall transition strategy, making this entity-level credible strategy as a core component. ICMA’s bond guidelines also consider the issuer’s strategy, but treat it more as a safeguard than a formal pillar. ICMA additionally provides a preliminary and non-exhaustive list of eligible project categories – from industrial carbon capture to the early retirement of high-emitting assets – whereas the loan guidelines deliberately avoid creating a list. These nuances reflect differences between the loan and bond markets, but the underlying principles are highly aligned.
One of the most significant achievements of both publications is the balance they strike: ambition anchored in science, but also pragmatism to reflect real-world transformation challenges.
The substance of what can be financed is also becoming clearer. Activities such as fuel switching, methane abatement, low-carbon fuel development or the managed phase-out of carbon-intensive assets can deliver meaningful emissions reductions. The new guidelines give these activities a credible home within the sustainable finance universe.
How Investors Are Responding
From an investor perspective, the emergence of a dedicated transition label is welcome. It helps protect the integrity of the green label, provides greater visibility on decarbonisation strategies, and opens the door to financing solutions that previously fell into a grey area. Investors emphasise, however, that credibility will depend on clear evidence of emissions impact, robust reporting, and transparency on how financed activities fit within a company’s wider pathway.
There is also sensitivity around perception: transition finance often involves working with high-emitting sectors, which can raise questions about greenwashing especially in a labelled instrument context. The new guidelines attempt to strike a balance between ambition and practicality, ensuring that transition instruments can support genuine decarbonisation without lowering standards.
A Global Market Taking Shape
Geography will play a significant role in how transition finance evolves. Asia, and Japan in particular, is already moving quickly, with national strategies and sovereign transition bond issuances. Other regions with large industrial and/or fossil-fuels related sectors and diversified energy systems – such as the Middle East, Latin America and emerging markets more broadly – are also expected to adopt transition tools early.
For many organisations, especially in emerging markets, these guidelines finally provide a workable path for financing the transition — not perfection, but meaningful progress.
Europe remains more cautious, shaped by regulatory frameworks that have historically prioritised strict definitions of what counts as “green”. Proposed draft revisions to the EU’s Sustainable Finance Disclosure Regulation, including a new transition category, may help bring regulatory clarity and allow European investors to engage more confidently with transition-labelled instruments. Even if we are still far away from the final picture of SFDR 2.0.
Challenges Still to Overcome
Even with the new guidelines, several challenges remain. In particular, assessing the risk of carbon lock-in – where an investment prolongs the life of high-emitting technologies or obstruct long-term decarbonization goals – requires careful assessment and deep understanding of sector pathways. Ensuring the integrity of transition will be just as challenging, as it depends on robust evidence of real emissions reductions, particularly for activities in harder-to-abate- sectors . And as with any emerging category, maintaining high integrity standards will be critical to building long-term credibility.
A Second Pillar of Sustainable Finance
Despite these challenges, there is broad consensus that transition finance has become indispensable. Green finance alone cannot deliver the scale of transformation needed, particularly in sectors and regions where emissions are most difficult to tackle. With the publication of these new guidelines, transition finance now stands as a fully recognised second pillar of sustainable finance – distinct from green, but equally crucial.
Green and transition finance are not competing ideas. They are two legs of the same ambition to accelerate the shift to a low-carbon economy. Transition finance can move from being seen as a “second tier” of green finance to serving as a “second pillar” of global financing for emissions reductions.
As the market continues to evolve, these frameworks provide a clear foundation for directing capital to the activities that can drive the most meaningful reductions in global emissions. Our experts collectively call for Transition finance being no longer considered as a niche concept; but for becoming a central mechanism for enabling the real-world shift to a low-carbon future.
