Our work on transition finance has found that there is a mushrooming of different approaches by governments and market actors on transition finance. The absence of universally accepted criteria raises questions about the environmental and market integrity of transition finance approaches and potential risks of greenwashing.
It's early in the development of this market, but it's important to provide maximum transparency and guidance to companies that wish to be seen as serious in their efforts to transition to low carbon. The guidance considers transition finance to be finance intended for emissions-intensive economic activities, those that currently have no viable green substitute but are on their way to becoming sustainable or reaching net zero.
The key distinction between green and transition finance is that green finance focuses on activities that are already green. It's a point-in-time assessment, and today you can say that renewable energy is consistent with meeting Paris goals, whereas transition finance is directed at entities' entity-wide efforts to become green—a corporation that's looking to move to net zero from where it is today, particularly in emissions in sensitive sectors.