Helping investors navigate the complexities behind decarbonising hard-to-abate industries will be essential, given the need to attract more capital
The Financial Times article, “Can Transition Finance Get Us to a Greener Future?” by Sarah Murray, lays out the immense financial challenges of decarbonizing hard-to-abate industries like cement, steel, and energy. Approx. $13.5 trillion will be required by 2050 to facilitate this transformation.
The concept of transition finance is emerging as both a potential game-changer and a topic of debate in sustainable finance. Transition finance offers a way to channel funds not just into isolated green projects but into entire industries.
This finance is crucial for decarbonizing high-emission industries like cement, steel, and energy, which are challenging to transform and require significant investment to reduce their carbon footprint.
The cement industry illustrates these challenges well: carbon dioxide is emitted not only from burning fuel to heat kilns but also through the chemical processes involved in cement production. Cutting these emissions demands substantial funding for changes like alternative fuel use and concrete recycling.
At JPMorgan’s Center for Carbon Transition, managing director André Abadie sees transition finance as encompassing everything from clean technologies such as electric vehicles and renewables to nascent technologies needed to facilitate decarbonisation in hard-to-abate sectors such as carbon capture and storage, hydrogen and sustainable aviation fuels. “It’s a broad church, which doesn’t lend itself easily to definition — and that’s part of the struggle,” he says.
Transition finance is as complex as it gets. You’re operating at the frontier of the transition and you’re trying to conduct holistic assessments of a business’s transition strategy.
Alex Lombos, lawyer at ClientEarth who leads the commercial banking and transition finance initiatives at the non-profit
To achieve net-zero goals, the World Economic Forum estimates that approximately $13.5 trillion will be necessary by 2050 to decarbonize these industries, with McKinsey projecting that global annual investments in physical assets must increase from $5.7 trillion to $9.2 trillion to meet the demands of a low-carbon transition.
There is growing recognition that global decarbonisation will not be achieved simply by building wind farms and solar parks. “You need to green the existing economy and incumbents. That’s a much bigger challenge and that gets you into murkier water.”
Ben Caldecott, founding director of Oxford university’s Sustainable Finance Group
Developing economies like India face added complexity, needing to build low-carbon infrastructure from the ground up. In India alone, industrial emissions account for nearly a quarter of the country’s total energy-related emissions, underlining the need for scalable transition finance.
Scaling up transition finance, however, is hindered by significant barriers, including:
- Lack of standardized definitions across industries and regions
- Insufficient data for informed decision-making
- Limited offtake agreements, which provide purchase guarantees
- Policy inconsistencies and uncertainties
- The risk of greenwashing is also a concern, as funds for green projects could end up extending the life of fossil fuel assets instead, thereby undermining true decarbonization efforts.
Experts advocate a company-wide approach to transition finance, focusing on the entire enterprise’s emissions strategy rather than individual projects. This shift could help prevent funds from being redirected toward maintaining high-emission activities.
Ensuring rigor, credibility, and standardized assessment frameworks is vital to attract capital that drives actual progress. By establishing robust guidelines and monitoring, investors can have confidence that their funds are contributing to genuine climate solutions rather than perpetuating a high-emission status quo.
Read the Financial Times article, “Can transition finance get us to a greener future?”, October 3, 2024
Read the McKinsey Report, “The net-zero transition: What it would cost, what it could bring”, 2022
Read the World Economic Forum Report, “Net-Zero Industry Tracker 2023 Edition”, November 2023
