A guest editorial by Parina Parikh, senior sustainability assessor at DNV
Sustainable finance is evolving. For much of the past decade, it has been synonymous with what is easily labelled “Green”: solar and wind farms, electric vehicles, and other low-carbon technologies that align neatly with ESG screening frameworks. These projects and assets are tangible, familiar, and relatively low risk.
But the next chapter of decarbonisation demands something more. As net zero targets draw nearer and focus shifts to harder-to-abate sectors, a new asset class is emerging: transition-enabling infrastructure. These are investments that may not qualify as green under current taxonomies but are essential in the shift to a low-carbon economy.
This is the essence of transition finance. It refers to capital directed at assets and activities that facilitate emissions reductions over time, even if they are not low emission today. Examples include hydrogen-ready gas turbines, carbon capture-equipped cement plants, power grid updates that unlock new renewable energy zones, or industrial facilities converting from coal to biomass as an interim measure. These are not perfect assets, but they play a critical role in getting us from where we are to where we need to be.
Across Europe, sustainable finance frameworks are increasingly recognising the role of transition activities. The EU Taxonomy for Sustainable Activities now offers clearer guidance for high-emitting sectors, enabling conditional inclusion where activities follow science-based transition pathways and robust decarbonisation plans. Its “Transitional” label, updated over time, requires assets to meet performance thresholds consistent with the EU’s sustainability agenda. National initiatives reinforce this approach, such as France’s Greenfin Taxonomy, which sets strict eligibility criteria for funds marketed as green, and Germany’s sustainable finance strategy, which aims to mobilise capital for both green and transitional projects under the European Green Deal.
The UK’s Transition Finance Market Review (TFMR) adds further momentum, recommending measures to expand credible transition finance, boost investor confidence, and define sector-specific pathways with transparent disclosure. Beyond Europe, Japan has become a global leader in transition finance, with strong government policy and sovereign-level commitments shaping market standards and mobilising both public and private capital.
In Southeast Asia, the ASEAN Taxonomy applies a traffic-light classification system, with many transition projects identified as “Amber”. These are assets and projects not yet fully aligned with net zero targets but recognised as enabling progress when supported by credible transition plans and safeguards against lock-in. The rise in transition finance signals a significant mindset shift. It is moving from a focus on avoiding climate risk to actively enabling climate solutions. European investors, lenders, and regulators are increasingly asking whether an asset contributes meaningfully to the transition and whether there is a credible, science-aligned plan in place.
Globally, financial instruments are evolving to reflect this shift. Transition bonds, sustainability-linked loans, and hybrid structures are being used to fund projects that sit in the “Amber” category. These may be high-emitting assets today, but they are backed by plans for measurable progress. Unlike traditional green bonds that restrict the use of proceeds to pre-approved categories, these instruments are performance-based. Borrowers must meet ambitious key performance indicators (KPIs) and sustainability performance targets over time, which are credible and linked to outcomes.
For transition finance to work, credibility is everything. Investors need confidence that KPIs are grounded in science, emissions reductions are real, and transition plans are both technically and commercially sound.
Transition finance is not second-best. It is a strategic tool to cut emissions where the impact is greatest. Reaching net zero means backing credible progress, not just ideal end-states. What matters is whether an asset is moving in the right direction, with clear targets, accountability, and transparency.
Getting to net zero won’t come from waiting for perfect solutions. It will come from financing the imperfect steps that take us there.
Robert Welbourn
Robert Welbourn is an experienced financial writer. He has worked for a number of high street banks and trading platforms. He's also a published author and freelance writer and editor.
