Skip to main content
Back to Glossary
Definition

Transition finance

Transition finance is capital that supports a credible company shift toward Paris-aligned net-zero emissions, linking financing to material reductions, a time-bound pathway, safeguards against keeping high-emitting assets in use, and reported progress.

What is transition finance?

Transition finance funds a company's credible move toward net-zero emissions. It often serves high-emitting or hard-to-abate activities, but is not limited to them. The company's strategy should cover its main emissions sources and a time-bound reduction plan; the financing should support it. ICMA applies this test to sustainable bonds; LMA to labelled loans, with use-of-proceeds Transition Loan Principles still an exposure draft.

Why does transition finance matter to you?

A lender or investor tests whether the transaction changes the business, not merely its label. A deal tied to minor emissions can mislead if larger sources grow or a new asset delays lower-emission replacement.

How does transition finance work?

Choose the instrument structure first. A use-of-proceeds instrument restricts money to approved projects. A sustainability-linked instrument can fund general purposes; its terms change when a key performance indicator (KPI), the measure, reaches a sustainability performance target (SPT), the threshold. Compare it with a named pathway, show actions closing the gap, check whether assets delay cleaner replacements, and report verified results.

What mistakes should you avoid?

  • Calling ordinary borrowing transition finance because the company has a net-zero goal.
  • Using a KPI that excludes a material emissions source without a reason.
  • Counting forecast reductions as results before measurement and verification.
  • Funding a small efficiency gain that keeps a high-emitting asset operating longer.

Is transition finance the same as green finance?

No. Green finance supports eligible green projects. Transition finance tests whether financing helps a company move from its current emissions toward a credible net-zero pathway. Some green projects can still form part of that transition.

What should you send when a lender asks for proof?

Send the financing terms, approved transition plan, emissions baseline, named pathway, target calculation, action budget, asset-life assessment, governance approval, latest results, and independent review.

Example

Suppose a hypothetical electronics contract manufacturer in Thailand signs a four-year THB 150 million sustainability-linked loan for general corporate use. The loan has separate KPIs for combined Scope 1 and Scope 2 emissions and for material Scope 3 emissions. This calculation checks the first KPI. Its 2026 Scope 1 and Scope 2 baseline is 10,000 metric tonnes CO2e, split equally between the two scopes.

The SBTi Corporate Net-Zero Standard V1.3.1 Method Appendix gives a representative 5.45% linear annual reduction rate for that 2026 base year and 50:50 split. Over four years, the benchmark cut is 21.8%: 5.45% x 4. That equals 2,180 tonnes, leaving a benchmark ceiling of 7,820 tonnes. The facility's 2030 SPT is 7,500 tonnes, a 25% cut and 3.2 percentage points deeper than the benchmark.

The action plan estimates annual reductions of 1,700 tonnes from electric curing ovens and 800 tonnes from cooling upgrades. Their 2,500-tonne total matches the target gap. The loan margin rises by 20 basis points if independent verification finds emissions above 7,500 tonnes. The company also rejects a gas oven with a 15-year life because it would operate beyond 2030 and delay electrification. The company, action estimates, loan terms, and figures are hypothetical.

Where it comes up

ICMA test that transition financing addresses the issuer's core sources of environmental impactClimate Transition Finance Handbook, November 2025, Element 2, pages 6 and 11Official sourceICMA comparison of transition targets with recognised third-party science-based trajectoriesClimate Transition Finance Handbook, November 2025, Element 3, pages 7-8Official sourceICMA disclosure of transition spending, expected outcomes, and potential locked-in emissionsClimate Transition Finance Handbook, November 2025, Element 4, pages 9-10Official source

Related terms

Climate transition plan

A climate transition plan turns a climate target into dated actions, assigned resources, governance, financial assumptions, and progress measures for changing a company's strategy and business model toward a lower-carbon economy.

Sustainability-linked loan

A sustainability-linked loan ties its financial or structural terms to whether the borrower meets agreed, measurable sustainability performance targets for material key performance indicators within set testing periods.

Green loan

A green loan finances or refinances eligible environmental projects under deal-specific rules for project selection, proceeds tracking, allocation reporting, and impact reporting.

Climate finance

Climate finance is public or private capital directed to reducing greenhouse gas emissions, strengthening climate resilience, or supporting the activities and systems needed to deliver those outcomes.

Sources

Last verified 2026-08-21

Ready to start?

Tell us what you need.

Bring us the sustainability request, reporting deadline, or strategy question you are facing. We will read it and suggest a practical first step, and the first conversation is free.

Get in touch
Transition finance Definition | Keslio