The transition to low-carbon energy sources will require significant investment, including from the private sector, that speaks to the unique context and needs of each country.
Agree upon a definition of transition finance that is flexible enough to account for local transition needs, while stringent enough to result in additional emission reductions.
Channel significant public and private transition finance toward heavy industry, transport, and energy systems, ensuring credible pathways to decarbonization while avoiding carbon lock-in.
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Transition finance is emerging as a value proposition concept for supporting the climate transition, especially in the Global South. Although the concept doesn’t have a universal definition, transition finance reflects a financial mechanism which can promote investment in projects, sectors, and industries which cannot yet be considered low carbon, but are either on or working towards a credible net zero pathway and require significant early-stage support for net zero emissions viability.
Some taxonomies - ASEAN-2, European taxonomy - take transition finance into consideration, but a universal definition or consensus has not yet been adopted. Definitions by GFANZ, ADB, CBI, and others provide broader guidance on the topic, but their definitions do not extend to either the sectoral or activity level. While transition finance is being spoken about, the mobilization of finance is limited, and its tracking comes with significant challenges.
CPI’s Net Zero Finance Tracker estimates that, in 2024, financial institutions’ direct investment in clean energy and transition projects reached approximately USD 114 billion. Of total direct investment in new energy projects, 65% went to clean energy and transition projects, while 35% went to fossil fuel projects. CPI estimates that, to align with net-zero pathways, the share for clean energy and transition projects in new investment would need to rise to 78–100%, based on net-zero scenario data from NGFS/GCAM and the IEA.
Products like transition bonds are seeing muted issuances compared to other labeled instruments and also the quantum of finance required. Carbon credits from transition activities (example - Coal-to-Clean Credit Initiative/ CCCI) have been launched and are being pursued. The Monetary Authority of Singapore (MAS) has proposed the creation of a new asset class of carbon credits, known as transition credits, which can be generated when coal-fired power plants are retired early and replaced with cleaner energy sources.
CPI’s Net Zero Finance Tracker estimates that, in 2024, financial institutions’ direct investment in clean energy and transition projects reached approximately USD 114 billion. Of total direct investment in new energy projects, 65% went to clean energy and transition projects, while 35% went to fossil fuel projects. CPI estimates that, to align with net-zero pathways, the share for clean energy and transition projects in new investment would need to rise to 78–100%, based on net-zero scenario data from NGFS/GCAM and the IEA.
IEA, and BNEF are providing definitions of transition finance for the power sector that are used to track investment flows. The definitions embed both clean energy finance, and fossil fuel low carbon technologies. Country-specific pathways should, ideally, be taken into account when defining transition finance at a regional or country level, but these are not always reflected in methodologies.
Cooperation is required between these actors and audiences to drive progress foward in Transition Finance.
Showcasing the key reform milestones for Transition Finance that have been addressed at global events.
Washington DC, US
Discussions should focus on scaling credible, harmonized frameworks for emissions accounting and transition finance, leveraging initiatives like the ISO–GHG Protocol partnership to simplify compliance and improve comparability.
Discussions should focus on scaling local-currency and FX risk-mitigation instruments to unlock private finance for EMDE infrastructure and climate projects. MDBs and DFIs should explore how blended finance, FX liquidity facilities, and derivatives programmes can reduce currency risk, support sustainable domestic capital markets, and align investments with national development priorities.
Washington, DC
1.Highlighted that climate finance and economic stability are interwined priorities 2. Discussions held around the need to build smarter prudential regulation alongside public finance instruments that can better absorb risk and crowd in private investment. 3. African and Latin American finance ministers also called for stronger representation in global financial governance.
A Knowledge Cafe' on the theme of Scaling Local Financing to close Infrastructure deficits highlighted the issue of rising foreign exchange risk in infrastructure financing for EMDEs. It involved sharing of insights from WBG knowledge/ country programs and international private investors to decode proven pathways and interventions to stimulate an action-oriented dialogue on local infrastructure financing solutions.
Publications and educational material to deepen understanding of Transition Finance.
A framework for transition finance for ASEAN.
To help facilitate and accelerate the financing flows, this document seeks to provide clear guidance and common expectations on the practices, actions and disclosures to be made available by issuers when raising funds for their climate transition strategy.
This discussion paper aims to establish credibility and integrity in transition finance by defining voluntary high-level Guidelines to support the market. These build on the TFMR and aim to support a wide range of users, including policymakers, industry, and the financial sector.
COP 28 Outcome Document
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