The Sustainable Finance Working Group has developed a transition finance framework to guide investment in the decarbonisation of high emitters and hard to abate industries.
- The G20’s Sustainable Finance Working Group (SFWG) has developed a framework to support climate-aligned financing across all sectors.
- Climate-aligned investment has been mostly focused on ‘pure green’ activities, while some emission-intensive sectors have struggled to access financial support to decarbonise.
- Financial services need to support the whole economy to avoid the risks associated with a disorderly transition.
What is transition finance?
Transition finance is an investment approach whereby the financial services support the transition of the whole economy in line with the Paris Agreement. It is intended to reduce the recipient’s carbon footprint while delivering profitable returns.
It involves investing in the transition strategies of high emitters, or in new technologies that might not be initially profitable. Transition finance also covers the funding of infrastructure transformations and of projects in emerging markets, where emissions are more likely to be fast-growing.
The G20’s Framework for Transition Finance
In the 2022 G20 Sustainable Finance Report, the SFWG developed a range of principles on transition finance across five pillars. These are: identification of transitional activities and investments, reporting of information on transition activities and investments, transition-related finance instruments, designing policy measures and assessing and mitigating negative social and economic impacts.
The report comes after G20 leaders endorsed the G20 Sustainable Finance Roadmap in October 2021 in Rome, which identified gaps to enable the transition in the existing sustainable finance landscape, as well as specific actions to fill those gaps.
The framework is intended to guide the development of policies and financial services in supporting the climate-related transition. The SFWG said that, over time, transition finance can cover other sustainability related objectives, such as conservation of nature and biodiversity, pollution control and development of the circular economy.
It said in the report: “We acknowledge that jurisdictions could consider adoption of these principles on a voluntary basis, and implement them in a phased manner, and capacity building services offered by the international community will be important for accelerating their adoption especially in developing countries.”
Shifting the focus from ‘pure green’ activities
The focus of climate-aligned investment has been on ‘pure green’ and ‘near pure green’ activities, even though emission-intensive sectors need financing to support their transition, the SFWG said. Some of these high emitters have struggled to access bank loans and capital markets for this reason.
According to estimates by consultancy firm Baringa, the world needs $350 trillion to support the transition and limit global warming to 1.5 degrees. Most of this capital is required by the power and transport sector so that they can adopt and scale new green technologies.
The SFWG said: “Despite the rapid growth of climate financing in recent years, its proportion to total global financing remains low.”
“This is partly due to the fact that current green and sustainable finance alignment approaches generally aim to support activities that are already green and sustainable.”
It added: “An excessively narrow interpretation of ‘green’ or ‘sustainable’ finance could limit the flow of capital towards activities and investments that are needed to support the climate transition.”
The risks of a disorderly transition
As the G20 recognised, it is key that governments support an orderly, just and affordable transition, while the financial services mobilise capital so that the private sector can decarbonise.
A disorderly transition could lead to restricted access to affordable and reliable energy and unemployment, amid a series of potential social impacts.
The SFWG said that its framework can also avoid ‘green and SDG’ wash, which is misleading stakeholders on the benefits an investment can have in reducing the carbon footprint of a certain project, or in what way it aligns with the Sustainable Development Goals.
