Transition Finance

Transition finance refers to investments that help greenhouse gas-intensive companies and sectors to reduce their emissions and transform their business models.

The aim of transition finance is to make targeted investments that are compatible with the transition to a climate-resilient and environmentally sustainable economy and help to avoid lock-in effects. Such lock-in effects occur when companies remain tied to a particular path because of decisions and/or investments, and shifting to a better alternative involves significant costs and/or challenges. Transition finance can be used both to improve existing business models that are not yet particularly sustainable and to invest in innovative technologies and transition processes that contribute to achieving climate targets and sustainable development in the long term.

The role of regulation

As a guide, companies can use the EU taxonomy by applying its criteria as a reference for setting company-related decarbonisation targets. Read more about the regulatory framework here: EU Sustainable Finance Strategy. To avoid greenwashing, it is crucial to use science-based, company-specific transition plans for the financing of the transition. The focus is on implementing transition strategies that enable a gradual transformation without the need for immediate, radical changes.

Transition plans as a key management tool

Transition plans are an important tool for translating climate or environmental targets at the corporate or economic activity level into concrete measures and related financing and investment plans. At the same time, transition plans provide an important basis for communication with financial market players. For financial institutions, transition plans are a key element in assessing the physical and transition risks of financial products. The EU Taxonomy Regulation (disclosure of sustainable investments) and the creation of transition plans (CSRD) have already established guidelines for transition finance in legislation.