International
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North America
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A huge amount of capital is required to get economies on track for net-zero emissions by 2050. Green and sustainability-linked bonds and loans have been the pioneer products in this space. However, a new concept of "transition finance" is emerging as the requirements for green and sustainability-linked financing products are often not met in the context of high emitting sectors looking to reduce emissions. Nonetheless, the underlying nature of transition finance inevitably brings with it greater legal, regulatory and reputational risks.
The key implication of transition finance for the financial sector is that those borrowers with credible transition plans should increasingly be able to access new products and services at a lower cost. In contrast, those that do not have credible transition plans will face higher costs and/or restricted access to financial products and services (e.g., higher costs of capital) depending on the underwriting process of their finance provider.
Well-executed, credible transition plans should allow those finance providers that embrace the concept to enjoy a competitive advantage. In consequence, they will be able to expand their portfolios to businesses that otherwise would not have aligned with the expectations of their supervisors and financial institutions' own transition plans. In short, their financed emissions will remain aligned to the net-zero target.
Similar to the development of green and sustainability-linked bonds and loans, we expect industry-wide frameworks to be developed for transition finance, and finance providers and borrowers should actively monitor this space.
For the full detail and analysis please read our briefing on Transition Finance click here.
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