The report highlights that transition finance, any form of financial support that helps decarbonise high-emitting activities or enables the decarbonisation of other economic activities, plays a pivotal role in achieving net-zero goals. Nonetheless, the lack of standardised definition, transition finance instruments endorsements and high-risk perceptions associated with decarbonising high-emitting sectors are the challenges that inhibit the transition finance adoption.

The authors provide the following recommendations to advance the transition finance. Firstly, institutional investors should disclose both portfolio emissions and the reduction of portfolio emissions year-on-year (YoY) and establish portfolio decarbonisation targets. Secondly, corporations should present credible and feasible transition plans. Furthermore, they should provide inflation- and forex-adjusted carbon intensity per revenue so investment managers can better measure the impact on the real economy of their portfolios. Additionally, the authors suggest policymakers establish relevant tax credits and other supportive policies to encourage private investment in hydrogen and CCUS initiatives. Lastly, stakeholders should establish the transition finance asset class as a distinct category to provide clarity and transparency.

Several aspects are pertaining to the relationship between the real economy and portfolio decarbonisation. For instance, the authors suggest that weighting the carbon-intensive industries is the most significant contributor. They urge investors to focus on the change in Weighted Average Carbon Intensity rather than traditionally used metrics like carbon footprint and Scope 1, 2, and 3 emissions. The authors suggest adopting the concept of the Portfolio Anatomy Curve (PAC) assessment, which provides the issuer’s and the borrower’s transition strategy, commitments and practices to mitigate apprehension for transition finance and provide clarity.

The report highlights sustainable finance’s holistic approach, where green finance focuses on diverse environmental aspects, and climate finance targets activities mitigating climate change. Nonetheless, transition finance places a strong emphasis on the issuer’s or borrower’s transition strategy, commitments and practices and manages phaseout transactions that decarbonise high-emitting activities. The authors urge all stakeholders in the transition finance system to cultivate new skills, establish fresh priorities, and embrace a new mindset. Stating that collaboration synergy is crucial to achieving change.