As countries, companies and industries in many parts of the world look to reduce their emissions, transition finance can play an important role in mobilising the capital needed for energy projects that support these ambitions, according to a new IEA report published today.
Scaling Up Transition Finance examines the potential for expanding the use of this financing mechanism, whose uptake has so far been slowed by challenges associated with defining it. It finds that when complemented by credible government and corporate strategies, transition finance can help unlock investment for projects that fall outside the "green finance" label but are nonetheless essential for sustainable transitions.
At present, transition finance flows remain modest, according to the report. But scenarios consistent with national or global emissions reduction targets suggest that $400 billion to $500 billion per year in transition finance could be mobilised over the next decade, or $4 trillion to $5 trillion in total. This is comparable in scale to the current global green bond market.
The report, which was requested by IEA Member governments at the Agency's 2024 Ministerial Meeting, will be launched today at the Asia Zero Emission Community (AZEC) Business Forum in Kuala Lumpur, Malaysia, by IEA Director of Energy Markets and Security Keisuke Sadamori. It builds on analysis included in the World Energy Investment 2025 report, identifying the core foundations of transition finance and unpacking its possible application across three key sectors: steel and cement, critical minerals, and natural gas.
The report emphasises that for transition finance to deliver meaningful results globally, it needs to be deployed in sectors where emissions are hard to abate and in emerging and developing economies - and it should be tailored for small and medium-sized businesses as well as large corporations. Otherwise, financial institutions may wind up cutting their emissions on paper by reducing their exposure to emissions-intensive sectors and countries rather than reducing emissions in the real economy.
However, the report notes that with the right supporting structures in place, transition finance can move from being seen as a "second tier" of green finance to serving as a "second pillar" of global financing for emissions reductions.
