If 2024 is the year when people started talking earnestly about transition finance, the conversation is likely to extend into the new year.
The segment, referring to financing vehicles that are created to help high emitting industries through their green transition journey, is still filled with great uncertainty, from regulation, technology to costs.
Standardised taxonomies from regulatory bodies remain key, with progress last year such as the multi-jurisdiction common ground taxonomy recognised jointly by the European Union (EU), Singapore and China, announced during COP29 held in Baku, Azerbaijan.
Such initiatives will provide international investors with a standardised reference on what counts as a transition project or a transition technology, and will be a starting point for aligned domestic taxonomies that cater to local conditions.
Meanwhile, as investors haven’t yet fully understood the definition of transition finance products and grapple with the additional risk and costs that entail, appetite for products such as transition bonds and loans remain lacklustre.
Stepping into the new year, as regulators, industry bodies and market participants continue to boost efforts, FinanceAsia asked about the challenges, and what the market can expect to unfold.
Transition products
Globally, transition bond issuances represented some 4% of all environmental, social and governance (ESG) bond issuances in the first half of last year. The portion is small, yet up from less than 1% during the same period in 2022 and 2023. Last year was also the second highest year on record for transition bond issuances, with a double-digit increase compared with 2023.
Terence Lau, capital markets partner at law firm Linklaters, pointed out that volumes remain highly concentrated when examined by issuer type.
For example, Japan was ahead of the game, accounting for almost 90% of the $17 billion transition bonds issued in 2024, dominated by its $15.1 billion equivalent sovereign transition bond issuance in the first half.
Lau said that the Japan case has demonstrated that “the market responds very well to detailed clarity and guidance from the regulators on the topic of transition bonds”, citing the guidelines on climate transition finance it published in May 2021, and the government’s pioneering approach in issuances.
“Hopefully this will inspire more Asian sovereigns, particularly in emerging Asian countries, to execute similar transactions,” he added.
One of the key challenges in the transition bond space, as Lau highlighted, is a lack of investor understanding on the topic.
“The process of investing in transition bonds may often be a lot more complex than a traditional use-of-proceeds green bond where the proceeds are applied to eligible projects,” he explained.
Concerns include an issuer’s transition plan; the contextualisation of the issuance against business models; existing and future technologies; taxonomies for reference, among others.
“At the end of the day, funds will flow to where the markets believe there will be the best possible future returns, but in the case of transition finance, more work is probably required before that can happen on a larger scale.”
As another facility corporates might consider adopting, transition loans have yet to take shape in the market.
“A specific use-of-proceeds transition finance product, similar in structure to a green or social loan, has been suggested,” said Sunil Veetil, head of Apac commercial banking, sustainability, at HSBC.
Such facilities could assist in making funds available for projects or to finance assets which are vital in the energy transition journey, he added. The structure would be similar to green loans, which help channel funds towards sustainability-related projects on a use-of-proceeds basis.
However, there are currently no universal definitions of transition, Veetil pointed out.
Meanwhile, industry efforts should be able to push the agenda forward to some extent.
“At a corporate level, the broader adoption of transition plans and the on-going improvement to disclosure should increase the number of corporates who will set sustainability targets and improve the ability of lenders to monitor compliance,” he told FA.
On the other hand, sustainability-linked loans, another form of loan structure which involve setting key performance indicators (KPIs) for interest rate benefits, also had less traction in 2024.
This was due to an increasing concern over greenwashing risks and mounting public scrutiny, which is also reflected in both corporates and investors’ cautious stances when it comes to transition.
Complexity
“The hurdles to scale transition finance are complex and significant,” said Denise Wong, co-head of sustainable banking group, Apac, at Barclays.
These start with a lack of multilateral consensus on what constitutes credible transition activities; reliable technology and decarbonisation pathways; mechanisms to mitigate transition-related risks; the ability to price associated costs including carbon; and multi-stakeholder collaboration.
The delay surrounding pilot projects as part of the Just Energy Transition Partnerships (JETPs) highlight the practical challenges when it comes to transition activities, Wong pointed out.
The JETPs, led by the Group of Seven (G7) countries, are platforms where developed economies deliver financial support to emerging countries, including Indonesia, Senegal, South Africa and Vietnam, to meet decarbonisation targets.
A July 2024 deadline, to reach a deal to shut down Indonesia’s 660 megawatt Cirebon-1 coal power plant by 2035, was missed due to cost concerns, demonstrating some of the difficulties implementing transition projects.
Despite continuing challenges and upcoming geopolitical uncertainty, especially with the incoming Trump administration that could dampen the momentum, Wong said transition finance is a space which will further develop this year.
“In 2024, seven Asian nations held elections influencing climate agendas. Moving into 2025, [several] newly elected governments will focus on implementing the promises made during the electoral cycle," she said.
For example, Indonesia’s president Prabowo Subianto, elected in October 2024, wants to phase out all coal-fired and fossil fuel power plants within 15 years and to develop over 75 gigawatts (GW) of renewable energy capacity. This plan includes geothermal, solar, wind, and hydropower, and will need international cooperation and private investment.
Gilly Hutchinson, head of ESG regional development (Asia) at Linklaters, added that a wider adoption of ISSB-aligned reporting standards across Asian jurisdictions would be of help, as well as the development of taxonomies covering transition activities.
A platform-based or blended finance approach could also help scale up transition financing initiatives, combining efforts and capital from public and private capital, from various types of stakeholders.
Wong explained: “Often, each stakeholder will have different needs and risk appetites. Credible, long-term corporate offtakes are also often necessary to support the commercial viability of the new technology or low-carbon alternative.”
Successful examples of such attempts are yet to be seen across Asia; this leaves the possibility for the new year to witness a landmark deal, or more.
