Thought Piece · Transition Finance

What Transition Finance Really Means and Why It Matters Now

Author: Shaun Walden

The language of sustainable finance has always struggled to communicate the change it’s trying to make. For instance, Green Finance has become too narrow, focused almost entirely on what was already clean. ESG investing has became ubiquitous, and even contested. Now, another term is becoming the hot topic across boardrooms, regulators and capital markets: transition finance. Yet, the definition of this also feels unclear. The term deserves serious attention because it signals a genuine shift in how investors, lenders and policymakers are thinking about the relationship between capital and decarbonisation, and what that means for corporates who need to act.

I first worked in transition finance back in 2018, opining on bonds that did not meet the market definition of "green" but provided capital to projects and assets that significantly reduced emissions. We took a simple approach: start with the carbon reduction credentials of the project or asset, trace those through to local policies and plans, then up to national frameworks such as energy plans, INDCs and climate strategies, and test alignment with the Paris Agreement, all while ensuring we were not locking in fossil fuel dependency.

It was a robust starting point, but the market felt it was too simple, and they had a point. Our approach said nothing about the trajectory of the company issuing the bond. We argued that investment flowing only to assets and companies that are already clean helped, but it was never going to be enough. We argued capital directed at assets or companies that, while not green, enabled significant emissions reductions, should have access to this finance.

In my view, transition finance, done well, should direct capital to exactly where emissions reductions are hardest to achieve and most consequential.

So where has transition finance landed?

What Transition Finance Actually Is

At its core, transition finance is the deployment of capital to support the decarbonisation of high emitting and hard to abate sectors. Steel, cement, aviation, shipping, chemicals, oil and gas, industries that cannot simply switch off overnight, but whose transformation is essential if any net zero scenario is to hold.

This is where the concept earns its distinction from green finance. A wind farm is green. A steel plant shifting from coal powered blast furnaces to green hydrogen is a transition. The asset remains carbon intensive today, but the trajectory is credible and the capital is enabling that trajectory. That distinction matters for both market integrity and corporate credibility.

In practice, transition finance takes several forms. Use of proceeds instruments, such as climate transition bonds and transition loans, direct capital to specific decarbonisation activities but are not popular. Sustainability linked instruments tie pricing or covenants to measurable climate performance targets but again are not popular. Increasingly, general corporate financing is being structured around whether a borrower has a credible, Paris aligned transition plan in place, and this appears to be where most of the action is.

What Has Changed, and What is Changing?

The transition finance landscape has moved considerably in the past twelve months, and the pace appears to be accelerating.

The UK’s Transition Finance Council has been building out the infrastructure the market needs to operate with integrity. Its guidelines, designed to distinguish credible from non credible transition finance, are on track for finalisation following a second consultation. For the first time, there is a serious attempt to establish a common minimum standard that lenders, investors, and corporates can work from.

ICMA updated its Climate Transition Finance Handbook in November 2025, setting out four elements issuers need to demonstrate: a credible climate transition strategy with governance, evidence of environmental materiality, science based targets, and implementation transparency. These are becoming the baseline expectation for accessing transition labelled capital markets.

The EU’s sectoral pathways, published by the European Commission in November 2025, took a different but complementary approach, setting out 25 sector specific decarbonisation benchmarks aligned with the European Climate Law. These pathways matter because they give both companies and financiers an external reference point: is this transition plan consistent with what the sector as a whole needs to achieve? That is increasingly the question being asked in committees and investment reviews.

The FCA’s new prospectus disclosure rules, in force since January 2026, add another layer of accountability. Where a transition plan is material to the business, listed companies will be expected to summarise it within their prospectus disclosures. Publishing a plan and moving on is no longer a viable posture for public companies.

At the same time, the market itself is recalibrating. The broader sustainable debt market contracted by around 20 percent in 2025, and sustainability linked bonds have continued to decline, in part because investors have grown wary of weak structuring and unambitious targets. Capital is becoming more discerning. The gap between well structured transition finance and greenwash is narrowing, driven by rising expectations of credibility.

The Credibility Problem

Transition finance only works if transition plans do, and this is where we see most corporates struggling.

A credible transition plan is a detailed, time bound, financially integrated roadmap that explains how a company will reduce its emissions in line with 1.5 degrees, what it will cost, how capital expenditure will be realigned, and how governance will hold the process to account. Many current transition plans we’ve reviewed, fall well short of this standard.

The EU Platform on Sustainable Finance’s January 2025 report on building trust in transition identified four core elements for assessing credible corporate transition plans: science based and time bound targets, clear actions and levers, financial planning, and governance. The framing will feel familiar to those who have worked with the TPT’s disclosure framework. What is new is the seriousness with which financial counterparties are beginning to use these elements as gating criteria.

We’ve already seen banks starting to move, for instance, Deutsche Bank’s Transition Finance Framework, January 2026, requires a validated transition plan, assessed against a formal maturity scoring methodology, before general corporate transactions qualify as transition finance. From my view, this approach is likely to become the template across the lending market.

For corporates, the implication is direct: the quality of your transition plan will increasingly determine the terms on which you can access capital, across labelled instruments and general corporate facilities alike.

What Corporates Need to Know

There are three things organisations should be focusing on right now.

First: Embed finance into the transition plan from the outset. The most common failure we see are transition plans developed by sustainability teams, validated by sustainability teams, and then handed to finance as a communications exercise. But, lenders and investors want to understand how capital expenditure will be reallocated, what stranded asset risks are being managed, and whether the financial model holds up when carbon costs rise. Finance and treasury involvement during the process is now essential.

Second: Understand which instruments are relevant to your situation, and why. The right instrument depends on whether your transition is primarily activity level, covering specific projects and technologies, or entity level, covering whole business decarbonisation, and on the robustness of your targets and measurement methodology. Accessing transition finance well requires the same rigour as any other capital markets decision.

Third: Act before the standards finalise and questions come in. The Transition Finance Council’s final guidelines are due shortly. IFRS and ISO are both developing further transition planning guidance. The organisations best positioned will be those building the foundations now, have credible targets, integrated financial planning, transparent reporting, rather than retrofitting compliance once the standards land getting enabling you to get ahead of investor questions.

The Bigger Picture

Transition finance is becoming one of the central mechanisms through which capital markets will either support or frustrate the real economy decarbonisation that science requires.

Green finance was always going to be insufficient on its own, we knew this in 2018. If capital flows only to assets that are already clean, then the assets that need to change most receive the least support. As stated above, transition finance done well, directs capital to where emissions reductions are hardest to achieve and most consequential. However, done badly, it becomes another mechanism for greenwash, mislabelled instruments, unsubstantiated claims, or promises with no credible delivery pathway.

The market knows this, which is why scrutiny is intensifying. Investors and lenders who were once content with a net zero target and a basic roadmap are now asking harder questions. Regulators are building the frameworks to make those questions answerable. Corporates who move early, building genuinely credible transition plans and using them to access well structured transition finance, will find themselves both better capitalised and better positioned for the regulatory environment ahead.

The strategic choice for corporates is whether to engage proactively and on their own terms, or to be shaped by lender and investor requirements that will only become more demanding over time.

At Summit, we work with organisations to make that strategic engagement practical and achievable, cutting through the complexity of frameworks, instruments and regulatory requirements to focus on what actually matters: building resilience, managing risk and creating the value that a well executed transition makes possible.

For more on how Summit supports organisations with sustainable finance strategy and transition planning, get in touch.

References

Deutsche Bank (2026). Transition Finance Framework. Deutsche Bank Group. Effective January 2026. ttps://www.db.com/what-we-do/responsibility/sustainability/documents/2025-11-november/Transition-Finance-Framework.pdf

European Commission (2025). Commission Notice on the interpretation and implementation of certain legal provisions of the European Green Bond Regulation. European Commission. November 2025.

European Commission (2025). 25 Sector Specific Decarbonisation Pathways aligned with the European Climate Law. European Commission. November 2025.

EU Platform on Sustainable Finance (2025). Building trust in transition: core elements for assessing corporate transition plans. European Commission. January 2025. https://finance.ec.europa.eu/publications/sustainable-finance-platform-reports_en

Financial Conduct Authority (2025). Policy Statement PS25/9: Public Offers and Admission to Trading Regulations 2024. FCA. July 2025. https://www.fca.org.uk

ICMA (2025). Climate Transition Finance Handbook. International Capital Market Association. November 2025. https://www.icmagroup.org/assets/documents/Sustainable-finance/2025-updates/Climate-Transition-Finance-Handbook-November-2025.pdf

ISS Corporate (2026). Sustainable Finance Market Highlights: January 2026. ISS Corporate. January 2026. https://www.iss-corporate.com/resources/blog/january-2026-sustainable-finance-market-highlights/

Loan Market Association, Asia Pacific Loan Market Association, and Loan Syndications and Trading Association (2025). Guide to Transition Loans. LMA APLMA LSTA. October 2025.

Taskforce on Net Zero Policy (2025). Policy Matters: From Pledges to Delivery, A Decade After Paris. COP30 Report. UNEP FI. 2025. https://www.unepfi.org/news/sectoral-roadmaps/

Transition Finance Council (2025). Mid year Progress Report. TFC. September 2025.

UNEP FI (2025). 2025 in Review: Building resilience and advancing the transition. United Nations Environment Programme Finance Initiative. December 2025. https://www.unepfi.org/industries/banking/2025-in-review-building-resilience-and-advancing-the-transition/