A new class of financial instruments is emerging to fund decarbonisation in hard-to-abate industries. Transition bonds, sustainability-linked loans, and blended finance structures are giving steel, cement, and shipping a credible path to net zero.
Key Takeaways
The sustainable finance market has long had a clean energy problem. Green bonds and green loans excel at funding assets that are already clearly low-carbon: solar farms, wind turbines, EV charging infrastructure, certified green buildings. They are far less suited to funding the gradual, capital-intensive, multi-decade transformation of the industries that are hardest to decarbonise. Steel production accounts for roughly 7% of global greenhouse gas emissions and cannot, with current technology, be decarbonised simply by switching to renewable electricity. Cement production produces CO2 as a direct chemical byproduct of calcination, not just as a result of burning fossil fuels for heat. International shipping is responsible for approximately 3% of global emissions and operates on a decades-long vessel replacement cycle that makes rapid fleet transformation economically impossible. These are not industries that can be excluded from investment portfolios and left to fend for themselves. They are industries that must transform, and transition finance has emerged as the mechanism for funding that transformation.
The numbers confirm the scale of the shift. Capital mobilised through instruments explicitly labelled as transition finance or structured around sector-specific decarbonisation pathways reached $130 billion in 2025, according to analysis by the Climate Policy Initiative. That represents a 340% increase from the $29 billion mobilised in 2022, driven by the emergence of new instrument types, growing appetite from institutional investors for exposure to transition assets, and a significant expansion of multilateral and development finance institution involvement. The growth trajectory suggests transition finance could become a market comparable in scale to green bonds within five years, though the credibility challenges that have bedevilled the green bond market are already beginning to surface in the transition finance context as well.
Three instrument types have emerged as the primary vehicles for transition finance capital. Transition bonds, which are structurally similar to green bonds but with use-of-proceeds categories specifically defined to include decarbonisation investments in heavy industry, have been used most prominently by Japanese issuers following the Japanese government's publication of a Transition Finance Taxonomy in 2021, which has since been updated twice. ArcelorMittal issued Europe's first transition bond from a steel producer in late 2024, raising €800 million to fund hydrogen-based direct reduced iron production at its Belgian operations. The bond was structured under the ICMA Climate Transition Finance Handbook, which requires issuers to publish a credible, science-based climate transition strategy as a condition of using the transition label. Sustainability-linked loans, which tie borrowing costs to the achievement of pre-agreed sustainability key performance indicators rather than restricting use of proceeds to specific projects, have grown faster than transition bonds in volume terms. In the shipping sector, major lenders including ING, Société Générale, and BNP Paribas have developed sector-specific SLL frameworks that link interest rates to reductions in the carbon intensity of vessel operations, measured in grams of CO2 per tonne-nautical mile, aligned with the International Maritime Organization's trajectory for achieving net zero by 2050.
"Transition finance is not a licence for carbon-intensive companies to keep doing what they are doing with a green label attached. The credibility of the whole category depends on instruments being tied to genuine, measurable, time-bound decarbonisation commitments. The market is getting better at enforcing that standard, but it is not there yet." said Priya Nair, Managing Director of Sustainable Finance at Standard Chartered.
Blended finance, which combines concessional capital from development finance institutions with commercial capital from private investors to improve the risk-return profile of transition investments in emerging markets, is the third major instrument category. The Asian Development Bank's Energy Transition Mechanism has been the most prominent example, using concessional capital to accelerate the retirement of coal-fired power plants in the Philippines, Indonesia, and Vietnam by buying out plant operators and funding replacement renewable energy capacity. The Just Energy Transition Partnerships, negotiated at COP26 through COP28 with South Africa, Indonesia, Vietnam, Senegal, and India as initial recipients, represent the largest coordinated multilateral effort to structure blended transition finance at national scale. Total pledged capital under the JETPs reached $68 billion by the end of 2025, though disbursement has lagged significantly behind commitments, reflecting the difficulty of structuring bankable projects that can absorb concessional and commercial capital in a blended structure.
The central tension in transition finance is between ambition and accessibility. Instruments structured around the most rigorous decarbonisation pathways with binding science-based targets and independent verification are credible but expensive to structure and difficult for smaller issuers to access. More permissive frameworks that allow a broader range of activities to qualify as "transition" risk becoming a new category of greenwashing, providing the label of decarbonisation finance to investments that would have been made regardless of the sustainability framing. Regulators are moving to address this. The EU is consulting on extending its Taxonomy to include a dedicated Transition Activities category that would set binding technical screening criteria for hard-to-abate sector investments. Singapore's Monetary Authority has published a Transition Taxonomy that has been adopted as a model by several ASEAN member states. The direction of travel is toward greater standardisation, and the market is likely to bifurcate between instruments that meet regulatory-grade transition standards and those that do not, with significant implications for pricing, investor eligibility, and the cost of capital for carbon-intensive industries globally.
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