About this playbook

The Playbook is part of the Moving Capital Markets project, developed by Accounting for Sustainability and the Institute for Sustainable Finance to provide practical guidance for financial institutions on deploying transition finance. It summarises insights from major Canadian institutions and includes practical examples, market realities and external resources. Transition finance guidance is current as of June 2025, but the field is evolving.

Terminology

Key terms include: ‘financial institution’, referring to banks, credit unions and asset owners/managers; and ‘asset’, referring to physical assets, company holdings, projects and fixed-income instruments. The Playbook is intended for general guidance and not professional advice.

Background: The role of transition finance

Climate and biodiversity risks create material threats for financial stability and asset values. A US$200 trillion global financing gap exists between now and 2050 to achieve a 1.5°C pathway. Investors increasingly integrate transition finance to manage risks, capture opportunities and support real-world decarbonisation, particularly in high-emitting sectors where underinvestment persists. The Playbook highlights the risk that exclusive focus on low-carbon assets can deprioritise high-emitting assets with credible transition plans, risking their transfer to investors with weaker climate commitments.

Canada

Around 30 Canadian financial institutions, including the Big Six banks, have set net zero targets. Canada faces an annual transition financing gap of roughly CA$115 billion. Oil and gas, transport, buildings and heavy industry represent over 75% of national emissions and require significant investment to enable an orderly transition (Figure 1). Many high-emitting sectors are financially constrained despite their economic importance.

Barriers to transition finance

Institutions face difficulties due to stigma associated with temporary rises in financed emissions, inconsistent definitions of transition finance, lack of high-quality and assured data (notably for scope 3), inconsistent metrics, and a shortage of investable transition activities. Strict regulatory interpretations, such as in Canada under Basel III, also limit investment in early-stage or higher-risk enabler technologies.

Top tips

Secure executive support and strengthen governance

Institutions should align transition finance with strategic objectives, value creation and risk management to gain senior support. Examples include OMERS’s transition sleeve requiring multi-level approval and Co-operators’ embedding of climate metrics in leadership incentives. Mature governance involves board oversight, clear accountability and supporting policies.

Define the scope of your transition finance activities

Institutions should use third-party frameworks and taxonomies (eg ICMA, CBI, GFANZ, EU, national systems) to define transition finance and communicate their chosen approach. A flexible, multi-framework method may be necessary. Eligibility criteria can follow sectoral, thematic or sector-agnostic approaches, layered with emissions-intensity thresholds or principles such as additionality. Flexibility is required given the limited number of high-emitting companies with robust transition plans.

Build your capacity to invest in transition activities

Institutions can segment portfolios by transition maturity, apply sustainability screening, and establish transition vehicles or envelopes to target high-emitting assets. CDPQ’s portfolio segmentation (CA$152 billion Paris-aligned or nearly aligned) and CA$10 billion transition envelope illustrate this approach. Internal alignment is essential, supported by training, a transition finance playbook and external resources.

Factor transition planning and targets into due diligence and underwriting

Assessment criteria should draw on external frameworks and incorporate forward-looking indicators, capex allocation and credible transition pathways. Engagement potential should be assessed before investment, considering influence mechanisms across asset classes. Underwriting can reinforce commitments through clauses linking financing terms to decarbonisation targets, verification requirements and use-of-proceeds conditions.

Strengthen accountability through effective monitoring and engagement

A mix of backward- and forward-looking metrics should be used to track progress, including emissions intensity, committed emissions reductions, avoided emissions, temperature scores and governance indicators. Addenda Capital’s climate maturity criteria illustrate a structured assessment model. Engagement strategies should be dynamic, using tools such as proxy voting, integration of climate targets into executive incentives and escalation mechanisms including dynamic divestment.

Embrace your role as a steward of systemic change

Financial institutions can amplify impact through peer collaboration, knowledge sharing and co-investment, as shown in the Emerging Markets Transition Debt initiative (US$400 million). Engagement with policymakers can support stable conditions, address market barriers and align policy with transition finance needs.