Transition finance is critical if the world is to cut carbon emissions and adopt renewable energy on a wide scale, but while the concept is clear there are plenty of details that still need to be ironed out.
One of the prickly questions at the heart of the matter is how to increase access to energy, especially in the developing world, while also lowering emissions.
This is particularly pertinent in Asia where 940 million people lack a reliable power supply and where fossil fuels account for 75% of the region’s energy, according to the Asian Development Bank. At the same time, Asia’s population is the most vulnerable to climate change.
Under a high emissions scenario, the ADB estimates climate change could result in GDP losses of 24% in the whole of developing Asia, 35% in India, 30% in South-East Asia, and 24% in the rest of South Asia by 2100.
However, without clear definitions investors have been cautious to participate in transition finance. The lack of accepted and standardised guidelines means the financing of high-emission industries has come under closer scrutiny, presenting questions to which there are no easy answers. Rather than run the risk of being criticised for greenwashing, some investors have found it easier to just wash their hands totally of these hard-to-abate sectors.
A Glasgow Financial Alliance for Net-Zero (GFANZ) report from November 2022, though, argues that financing or enabling an “accelerated managed phase-out” of high-emitting physical assets is preferrable to divesting.
Financing tools can be used to make projects more bankable and attractive to investors. Renewable energy projects can be securitised and broken up into tranches with risk profiles and returns to suit different kinds of investors. Multilateral institutions and governments could provide credit enhancements to catalyse private sector investment of many times their own commitments.
In order for emission-intensive borrowers to finance their transitions, though, they need to have clear and credible transition plans, based on KPIs that are quantifiable and verifiable.
Without international standards and definitions, it is understandable that transition finance remains a controversial subject and some on the
sellside and buyside are still reluctant to engage with it.
But with such far-reaching consequences if emissions are not cut, time is running out.
The transition to a greener path needs to be carried out in a fair and inclusive way. There is no more time for delays or excuses — only for action.
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