Navigating ‘transition finance’ in Apac

Interest in transition finance is growing, however, despite some countries, including Japan, taking a lead, such vehicles face many challenges, such as low comparability and tech uncertainty.

Transition finance has gained attention and popularity over the past few months across issuers, investors, financial institutions in the green and sustainable finance space, including in Asia Pacific (Apac).

Industry standards and guidelines on the new concept have been published by several regional and international organisations, such as the Asean Capital Markets Forum, Climate Bonds Initiative, the European Commission and the Glasgow Financial Alliance for Net Zero (GFanz).

Despite a growing interest in green finance and meeting carbon emission reduction goals, there are many complexities and some confusion around the practical implementation of such financing vehicles.

What is transition finance?

A consensus on the definition of transition finance is that such facilities help either a country’s economy, certain industries or a specific corporate in its transition towards a lower and greener development model.

The idea of transition finance is an overarching concept that encompasses specific financing vehicles including green and sustainability bonds, which specify use of proceeds, or sustainability-linked facilities, which incorporate key performance indicators (KPIs), when drafting terms.

A recent example is Japan’s climate transition bonds' issuance last month in February. As the world’s first sovereign to put forward these instruments, the country’s Ministry of Finance issued two batches of five-year and 10-year notes, totalling ¥1.6 trillion ($11 billion).

The offering is part of Japan’s Green Transformation (GX) Plan, initiated by the government in late 2022, to help reach its target of carbon neutrality by 2025, and 46% lower emissions of greenhouse gases by 2030 compared to 2013. The climate transition bond framework said that such climate transition bonds are individual securities of the GX Economy Transition Bond plan.

The use of the proceeds are prioritised for investments in sectors that are “truly difficult for the private sector alone to make investment judgement on”, through the form of government subsidies, equity investments and debt guarantees, according to the framework.

Investors and market participants have pointed out that the two tranches were well positioned to be classified and labelled as ‘green bonds’, aligned with the International Capital Markets Association’s (ICMA) green bond principles, among others.

That said, despite being labelled as a ‘transition bond’ to showcase its connection with the GX Plans, the instrument is essentially still a green bond, which dedicates its use of proceeds to the transformation of Japanese businesses. 

Xuan Sheng Ou Yong, green bonds and ESG analyst at BNP Paribas Asset Management, said: “Transition finance is about channeling capital towards deals that promote transition efforts. This spans across different use cases, instruments and asset classes.”

While such a broad definition has exceeded the traditional categorisation of asset classes, Ou Yong shared that it has brought challenges to fund structuring to invest in standardised products. So far, the idea of transition finance remains conceptual when making allocations.


One of the key challenges for transition finance development is to be able to clarify the outcome assessment and transition technologies that are adopted.

Comparability is low, Rahul Ghosh, managing director, sustainable finance, at Moody’s Ratings, explained: “The availability for investors to compare decarbonisation targets and transition plans at a country or company level is incredibly challenging. Baseline years, defined metrics and the scope of coverage can all vary significantly across sectors and regions, which makes it difficult for investors to make like-for-like comparisons.”

Another challenge is the uncertainty around the unproven technologies being adopted, and the risks of carbon lock-in -- referring to an inertia of sticking to high emission practices which could have been substituted.

BNP Paribas AM’s Ou Yong agreed that more statistics on transition projects are needed to offer precise and comparable measurements of outcomes.

He raised the calculation of 'avoided emissions' as an example. This is defined as the emissions avoided by firms through the substitution of high carbon activities with low carbon alternatives.

“Using the counterfactual concept of avoided emissions helps us understand a certain project or solution’s contribution to the environment,” he said. “But for some industries less applicable to carbon emissions' calculation, it can be difficult to quantify the scale of impact reduction and benefits that come with it.”

Ghosh emphasised that it is important to review such transition finance instruments in a local context. He said: “We are seeing a more nuanced story in the market, where practitioners are increasingly looking at what technologies and pathways work best for specific jurisdictions, and how to balance the need to decarbonise in a credible but economically rational way.”

Moody’s Ratings launched a Net Zero Assessment product in November 2023, providing an  independent assessment on corporates’ transition plans, looking into the credibility of implementation. Ghosh said the team is hoping to help set benchmarks in determining what constitutes a credible transition process.

Adaption challenge

During the conversation with FA, Ghosh said that a key aspect of transition finance is to channel investments for sectors which are hard to adapt to green transition processes (known as hard-to-abate sectors). These include the likes of cement, steel, glass and chemicals, among other heavy industries.

At a webinar discussing transition finance held by ICMA on March 12, Özgür Altun, associate director at ICMA, pointed out that issuers from hard-to-abate sectors are largely absent from the sustainable bond market, accounting for only 3.6% in total in the $4 trillion segment.

“Transition finance is not yet at where it’s most needed,” he noted.

Ghosh cited one of Moody’s Ratings’ environmental heatmap reports, saying that 16 sectors globally, including coal mining, oil and gas, utilities, auto (motor), steel and airlines, with a total of $4.9 trillion of Moody’s-rated debt outstanding, face elevated credit exposure to carbon transition risk.

Issuers in these sectors accounted for just $112 billion of sustainable bonds last year. This  underscores the significant potential for increases in future labelled bond issuance as outstanding debt is refinanced and companies ramp up investment in low-carbon solutions, he continued.

ICMA’s Altun suggested that early drafting of transition plans would help large corporates in hard-to-abate sectors take the first step. Japan’s Ministry of Economy, Trade and Industry (Meti), for example, has been rolling out sectoral transition roadmaps, as part of the GX Plan, since last year.

Such roadmaps and guidance still remain voluntary in most jurisdictions around the globe, but more of them would help issuers adapt more easily to upcoming regulatory changes.

The updated version of ICMA’s climate transition finance handbook highlighted that green, social and sustainability (GSS) bonds issued by businesses in hard-to-abate sectors will be strengthened through the alignment with the guidance. The handbook discusses in detail various pillars through an issuer’s transition finance process, including business model, transition strategy, science-based target and transparent implementation.

Kate Levick, co-head and secretariat at UK’s Transition Plan Taskforce (TPT), shared on the webinar that the UK's Financial Conduct Authority (FCA) is expected to commence consultations on mandatory transition plan reporting regulations, based on TPT standards, by the end of this year.

While a wider adoption of transition finance remains complicated, the experts agreed that this should not prevent the industry from taking action. With European countries taking the lead, opportunities in Apac have arisen from markets including Japan, China and in Southeast Asia (SEA), where there are huge pushes towards green transition. The key lies in how different players come together to fix the puzzle.

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