Transition finance has been identified as a critical tool in the battle against climate change in Asia. The region is facing a significant funding gap of US$4 trillion per year to support emission reduction projects and work towards the global climate goal of limiting global warming to 1.5 degrees Celsius.
In addressing this gap, there is a call to establish an ecosystem that will enable banks to engage in the transition finance sector and allocate resources towards decarbonisation activities in a credible manner, as stated by a green finance expert.
Experts forecast that transition finance, which involves financing emission reduction projects by companies in carbon-intensive industries, will play an increasingly important role due to the significant funding gap and regulatory backing in Asia. This is expected to occur despite the reputational risks issuers might face.
Moody’s Ratings highlighted the potential for transition finance to gain momentum in sustainable debt markets, supported by governments’ efforts, enabling companies in challenging sectors to access these markets and attract investors to fund both established and emerging green technologies.
The International Renewable Energy Agency estimated that there is a $4 trillion funding gap compared to the $5 trillion needed annually by 2030 to achieve the Paris Agreement’s goal of reaching net zero carbon emissions by 2050. However, it is noted that a large majority of sustainable finance investments have been directed towards renewable energy and electric vehicles over the past decade.
According to Ma Jun, chairman of the Hong Kong Green Finance Association, transition finance meeting international standards only represented 1% of green finance transactions in China in 2023. Ma emphasized the need to establish an ecosystem that encourages banks and insurance companies to engage in transition finance and allocate resources to decarbonisation activities in a credible manner.
Transition finance is defined as investments in emissions-intensive industries that lack economically viable or credible low or zero-emission alternative manufacturing technology. However, the current risk associated with many transition activities, such as the use of hydrogen in shipping and aviation, makes them non-bankable. Regulatory support is needed to enhance project returns, Ma emphasized.
Several countries, including Hong Kong, Singapore, mainland China, Japan, and Taiwan, have published or are in the process of drafting taxonomies of activities suitable for transition finance. However, there is still a lack of consensus among investors and financiers about the qualifying activities for transition finance, as highlighted by Marisa Drew, Chief Sustainability Officer at Standard Chartered.
Despite the subjective nature of transition finance, Kamran Khan, a sustainable financing and investing expert, emphasized the importance of supporting it. He highlighted that returns and the quality of investment are in the eyes of the investors and that the subjective nature of non-financial or ESG considerations in the investment process is just a part of the nature of the industry.