Bridging the gap between traditional and sustainable financing

2 November 2021

The growing role of transition finance

Last week, Nigel Beck, Head of Sustainable Finance and ESG Advisory at RMB, spoke at the JSE-IFC Transition Finance symposium on the growing importance of transition finance in bridging the gap between traditional and sustainable financing as businesses begin the journey to net-zero.

With a global 64% CAGR over the past eight years, sustainable finance has well and truly moved into the mainstream. Companies are under increasing pressure to reach zero carbon, and the costs of decarbonisation – switching towards environmentally sustainable modes of operation– are becoming a key investment decision point for funders. Yet, this switch can’t take place overnight, and external considerations such as maintaining a stable energy supply need to be front of mind in any plan.

To achieve ambition, transition pathways need to have end goals for environmental factors that are consistent with planetary boundaries and have sufficiently ambitious trajectories to get there. Social cost created by an unstable energy supply remains a concern. This is where the need for a ‘Just Transition,’ is critical and globally relevant (considering the environmental and social aspect concurrently in transition financing solutions).

What does transition look like, and how is this finance commonly structured? As companies look to shift towards more environmentally sustainable modes of operation, transition bonds are increasingly being seen as a key financial tool for those in fossil fuel intensive sectors such as energy, transport, mining, chemicals, iron, steel and cement.

This differs to traditional forms of sustainable finance, such as green bonds, which are not always a good fit for the transitional phases of high carbon industries. Transition finance plays a vital role that is tailored to specifically funding decarbonisation activities in ‘brown industries.’

The market is still in its early phases. Dealogic estimates that only $7.3bn of transition bonds have been sold since 2017, but market activity is growing (with the London Stock Exchange launching a transition bond category in February 2021 & JSE Transition Segment under discussion). S&Ps forecast that transition finance could account for $1tn of expected total $3tn annual funding required to meet climate goals.

As transition finance becomes more common, it’s important to remember some key principles to defend against greenwashing. Goals and pathways must align with zero carbon by 2050 and nearly halving emissions by 2030. Projects must be led by scientific experts and standardized across countries. Companies must be sure that transition goals include an assessment of current and expected technologies, which can be used to determine a decarbonisation pathway. The transition strategy must be backed by clear operating metrics, as opposed to a commitment of pledge.

Transition finance will only increase in its relevance as we see more companies aligning their business to below a 2^oC future.

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