The Transition Finance Nexus

Transition finance has rapidly emerged as a key concept for banks seeking to reach their net-zero targets and support real-economy decarbonization. This has relied on and contributed to a growing ecosystem of transition-related processes and approaches. In this primer, we introduce the “transition finance nexus” as a new way of conceptualizing the connections among transition pathways, transition plans and planning, transition assessment, and transition finance (see infographic below).

While transition finance guidance often refers to these different elements, little attention has been paid to the interconnections between them. Here we address this gap and add nuance to the transition narratives in the banking sector. This includes highlighting key dependencies involved and demonstrating that improving individual parts of the system will strengthen the whole nexus. These insights are based on research and engagement across the transition finance nexus, including interviews and consultation with 15 organizations, including banks, industry alliances, and nongovernmental organizations (NGOs).

Key insights

• Transition pathways offer a critical starting point for informing plans/planning, assessment, and financing.
• Corporate transition plans are important, but the process of transition planning is the critical element. A published plan is not sufficient by itself or currently necessary for the allocation of transition finance, but it can offer helpful information for decision-making.
• Client transition assessment is the crucial intermediate step between plans/planning and deploying financing or advancing related offerings (e.g., client engagement, advisory services, etc.).
• Transition finance is enabled by other elements in the nexus and should, in turn, enable progress toward pathways, plans, and assessments over time. The nexus can therefore be a circular process for banks to deploy and scale transition finance.

Each section of the primer provides an overview of the key elements, how they fit in the nexus, and recommendations for further work. Collaboration among banks, policymakers, and industry leaders to enhance the feasibility and credibility of each element could rapidly scale the transition finance market, benefiting from a multiplier effect across the nexus.

Recommendations for strengthening the transition finance nexus

• Enhance transition pathway granularity with regional and sector-specific insights to improve corporate transition planning and assessments.
• Encourage corporate transition planning by developing clear guidance on decision-useful disclosures that support financing decisions.
• Standardize and streamline transition assessments to reduce cost and complexity for banks while ensuring credibility.
• Support transition finance deployment by developing clear, actionable solutions for barriers to implementation and questions of credibility.