Global landscape of transition finance
Transition finance was a key area of focus for COP28. Conversations surrounded the need to endorse a roadmap to develop and implement common definitions of the transition finance strategies needed to unlock global finance in support of net zero commitments and measure progress.
OECD’s defines transition finance as being intended to decarbonize entities or economic activities that are: (i) emissions-intensive [1], (ii) may not currently have a low- or zero-emission substitute that is economically available or credible in all relevant contexts but are (iii) important for future socio-economic development. Other guidances of transition finance have been issued by ICMA [2], Climate Bonds Initiative [3] and GFANZ [4], to name a few.
The IPCC estimates that a three- to six-fold increase in transition finance is needed by 2030 to support a 1.5 degrees C goal [5]. Even though global investments in the energy transition hit $1.8 tn in 2023 [6], up 17% from the previous year and a new record, the global transition finance gap stands at almost US$4 tn a year. To reach net-zero targets globally by 2050, a total of about US$5 tn annually is required [7].
Barriers to scaling transition finance
Lack of clear frameworks, definitions – Globally, transition finance still lacks standardized frameworks and clarity of definitions surrounding transition finance and what activities can be considered as “transition”. The potential of greenwashing accusations may deter financial institutions from investing into companies that require capital to decarbonize their operations.
Currently, the Singapore-Asia Taxonomy is best fit to address the barriers of labelling by defining transition finance clearly to help reduce the risk of green or transition washing in the context of Asia. However, further work is needed to map the interoperability of the Singapore-Asia Taxonomy with global taxonomies. MAS has commenced an exercise to map the Singapore-Asia Taxonomy to the International Platform for Sustainable Finance (IPSF)’s Common Ground Taxonomy (CGT), which currently covers the EU Taxonomy and People Bank of China’s (PBOC) Green Bond Endorsed Project Catalogue. Once the mapping is complete, the common set of definitions under the CGT would help increase taxonomy-aligned financing solutions and better facilitate cross-border financing flows.
Lack of data for measurement – A notable challenge is the lack of quantitative metrics to measure, report and incentivize transition finance [8]. This makes it difficult to track and quantify progress and impact of invested capital into transition and decarbonization, especially in emerging markets and developing economies (EM&DEs) where financing is needed. The lack of financing also presents barriers of entry especially for high-emitting sectors where transition finance is needed urgently, thus delaying our progress towards climate goals. This is where transition plans come into play for FIs and the real economy to indicate credible pathways to 1.5 °C and encourage financing opportunities to support the transition. The launch of the Net-Zero Data Public Utility (NZDPU), a centralized repository of global company-level greenhouse gas emissions data that is openly accessible, helps FIs and the real economy step closer towards more credible data to aid in financing and transition planning.
Multifaceted risks – More often than not, transition projects do not meet the required risk-return profiles or have sufficient safeguards like guaranteed offtake contracts and reliable governance structures to be deemed bankable [9]. Sustainable aviation fuel projects (SAF) are a good example of how demand and supply signals remain mismatched in the current timeline despite a significant medium term demand floor. Additionally, technological uncertainties inherent in climate tech solutions can deter investments in these areas due to its higher risk. These risks are also further undermined where regulatory and policy support remain unclear.
Japan at the forefront of transition bonds
While there are gaps present to bridge transition finance, Japan has showcased that this gap is indeed not insurmountable. Japan is currently the world’s leader in transition bond issuance [10], and the government intends to issue US$1 tn in sovereign transition bonds over the next 10 years. Earlier this year, the Japanese government issued US$11 bn in climate transition bonds as part of its Green Transition (GX) programme. These proceeds are expected to be channeled towards R&D and subsidies for different decarbonization areas as seen below:
Figure 1: Japan’s Climate Transition Bond Use of Proceeds (UoP) [11]
These bonds are crucial, especially at a time where a sizeable proportion of renewable technologies are far from cost parity than its incumbents. For example, green hydrogen in Japan currently costs more than 4 times of grey hydrogen [12], 10, placing a significant hurdle to widespread adoption of clean co-firing power generation technologies if not for subsidies. In general, these schemes are a great starting point to incentivize clean technologies, but more must be done to increase certainty in the GX’s pricing system, while reducing overall reliance on coal as well.
SEA landscape of transition finance
In Asia, there is an urgent need for transition finance, let alone Southeast Asia (SEA). At present, the region is not on track to meet its 2030 climate targets. ASEAN emitted about 3.9 GtCO2e of GHG in 2022 (approximately 7% of global GHG emissions), with Indonesia accounting for 41% of ASEAN emissions [13]. ASEAN’s reliance on fossil fuels is still very high at 83% of ASEAN’s energy supply in 2021, compared to 14.4% renewables [14]. Given that energy demand is expected to increase 2.5x by 2050 [15], transition finance plays a crucial role in decarbonizing SEA.
The ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy) has been developed as an overarching guide for all ASEAN member states (AMS) to ensure that all AMS have a framework that suits their different economic and social contexts. The ASEAN Taxonomy also includes a guide on how to classify the different financial instruments as green, transition or unsustainable. Transition is a key element of ASEAN’s sustainability agenda, and the ASEAN Taxonomy will incorporate an effective pathway to enable an orderly transition. The ASEAN Taxonomy Board (ATB) released its latest update, Version 3, in March 2024.
In December 2023, the Monetary Authority of Singapore (MAS) launched the Singapore-Asia Taxonomy for Sustainable Finance (Singapore-Asia Taxonomy [16]) which sets out detailed thresholds and criteria for defining “green” and “transition” activities that contribute to climate change mitigation across eight focus sectors [17]. The Singapore-Asia Taxonomy recognizes the need for credible definitions for transition activities given that the shift towards a net zero economy happens concurrently with Asia’s economic development and rising energy demands. The Singapore-Asia Taxonomy is the first taxonomy globally to pioneer the concept of a “transition” category, acknowledging the importance of properly contextualizing “transition” for the Asian region [18].
Transition Finance in Asia’s Coal Phaseout (Case Study)
Despite acknowledging that Asia’s future GHG emissions will fall short of the 1.5 °C goal, there remains a lack of urgency and action in achieving a successful energy transition. With the largest source of energy related carbon emissions attributed to coal, a large focus has been placed on the early retirement of coal-fired power plants (CFPPs), but momentum remains low for several reasons. Firstly, Asia’s coal plants are less than 15 years on average, and account for 60% of energy production in the region. Plant owners are more reluctant in its early retirement, due to favourable purchase agreements and policy reliefs that have not expired. CFPPs also provide a reliable and cheap source for the growing energy demand in Asia and continues to serve as a backbone for economic development, population growth, and rapid urbanization.
The role of transition finance has become increasingly clear over the years, as demonstrated by a series of transition efforts for coal phaseout. New asset classes like sustainability linked loans, green bonds, and guidance [19] for green financing help to develop and scale energy solutions. In 2023, MAS implemented an eleventh-hour change to designate coal phaseout as an eligible green activity [20], making it qualify for both transition and green loans/bonds. Another strategy employed in transition finance is to accelerate the retirement of high-emitting physical assets. Several groups have explored and published work for the phaseout of CFPPs, such as GFANZ - Managed Phaseout of Coal-Fired Power Plants in Asia Pacific (Jun 2023), and MAS - Accelerating the early retirement of coal-fired power plants through carbon credits (Sep 2023). More recently, transition coal credits have gained attention as a potential financing tool. Though still in their early stages, various initiatives like Energy Transition Accelerator (ETA), Transition Credits Coalition (TRACTION), and Coal to Credit Initiative (CCCI) are actively exploring and refining these credits. With a growing commitment and the introduction of new strategic initiatives, transition finance is proving to be the crucial driver in advancing the climate agenda in Asia.
What else is needed?
Scaling transition finance is a concerted effort from all stakeholders. Countries should consider making transition planning mandatory with standardized frameworks and the use of sectoral pathways that are specific to the needs of various sectors. Currently in Singapore, in addition to the published taxonomies (ASEAN and Singapore-Asia Taxonomy), MAS recently issued a consultation paper proposing guidelines for FIs on transition planning towards a net zero economy. Once the final guidelines are published, we anticipate that greater action will be taken by FIs to decarbonize their portfolios, though adequate financial support and engagement should be provided to their portfolio companies to support their decarbonization journey. If mandatory transition planning is not suitable, governments can consider incentivizing FIs and the real economy to support their transition planning process. With credible transition plans and safeguards on transition projects, transition finance can potentially become scalable to meet the financing gap towards net zero.
[1] Exact activities can range from energy-intensive manufacturing activities to hard-to-abate sectors and investments in fossil-based energy production, OECD 2021.
[2] ICMA. Climate Transition Finance Handbook 2023.
[3] CBI. Financing Credible Transition 2020.
[4] GFANZ. Defining Transition Finance and Considerations for Decarbonization Contribution Methodologies 2023.
[5] IPCC. AR6 Synthesis Report: Climate Change 2023.
[6] BloombergNEF. Energy Transition Investment Trends 2024.
[7] IRENA. [8] RMI. Unpacking Five Key Barriers to Transition Finance, 2024.
[9] CFA Institute. Navigating Transition Finance: An Action List, 2024.
[10] Fidelity. Asia leads the way as transition finance seeks to plug the net-zero investment gap, 2024. [11] CBI. Japan’s Climate Transition Bond 2024.
[12] BloombergNEF. Green Hydrogen to Undercut Gray Sibling by End of Decade, 2023.
[13] Climate Trace, 2022.
[14] ASEAN Centre for Energy. 7th ASEAN Energy Outlook, 2022.
[15] IEA. Southeast Asia Energy Outlook, 2022.
[16] Note: the ASEAN Taxonomy was developed in parallel to the Singapore-Asia Taxonomy
[17] The eight focus sectors are: Energy, Real Estate, Transportation, Agriculture and Forestry/Land Use, Industrial, Information and Communication Technology, Waste/Circular Economy, Carbon Capture and Sequestration.
[19] ICMA Green Bond Principles, LMA Green Loan, CBI Climate Bond Standards, China Green Bond Catalogue
[20] Defined as a green activity under the Singapore-Asia Taxonomy
This article is co-written by:
Adele Lim, a Year 3 SMU undergraduate who co-heads the research division at SMU Sustainable Investment Club. She is currently working as a Sustainability Intern at MAS.
Clive Tan, a year 2 SMU undergraduate who co-heads the research division at SMU Sustainable Investment Club. He is currently interning as a Management Consultant Intern at PwC Singapore.
Lam Ting Kang, a Year 2 SMU Accountancy undergraduate who co-heads the research division at SMU Sustainable Investment Club. He is currently working on transfer pricing at BDO LLP.
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