Actions by the world’s most emissions-intensive sectors, companies, and countries are crucial to placing the world on a sustainable pathway. Yet, investments that could deliver meaningful reductions in their environmental footprint often do not receive sufficient financial support. Currently, finance is drawn heavily to certain “green” assets and activities—most prominently renewable power. While vital, these investments alone cannot deliver all the changes needed to cut global emissions, especially in areas where clean technologies are not yet commercially available or cost competitive. This is where transition finance comes in: it can help emissions-intensive countries, companies, and sectors shift over time towards sustainable practices aligned with long-term climate and development goals.

Transition finance faces complex definitional challenges, which have slowed its adoption. Nonetheless, it could play an essential role in global energy investments. Today, transition finance flows remain modest, but scenarios consistent with national or global emissions reduction targets suggest that USD 400-500 billion per year in transition finance could be mobilised over the next decade—equivalent to USD 4-5 trillion cumulatively. This is comparable in scale to the current global green bond market.

With its focus on sectors where emissions are hard-to-abate and on emerging market and developing economies (EMDE), transition finance can play a vital, complementary role to green finance. The central challenge is to ensure that it drives ambitious and credible change, while reflecting diverse national and regional circumstances. This IEA report does not attempt to resolve every complexity but instead maps the landscape for transition finance, explains why it matters, and highlights approaches that could move the debate forward.

Transition finance channels capital into hard-to-abate areas, grounded in strategies and ongoing monitoring. It rests on a practical partnership between corporates, financiers, and governments. This partnership can unlock investment in projects that fall outside the “green finance” label but are nonetheless essential for a sustainable transition.

• Corporates set out asset- or entity-level transition strategies and commitments, demonstrating their direction of travel to maintain access to finance and other benefits.

• Governments provide credibility and investor confidence by publishing national decarbonisation strategies, underpinned by regulations and incentives to support transition activities.

• Financial institutions act both as financiers and as quality controllers, engaging with and monitoring clients to ensure that financing remains aligned with climate goals.

Attempts to define these activities more precisely—including how transition finance relates to green finance and to long-term climate goals—are difficult to harmonise globally. National circumstances differ widely, and what is unnecessary in one country may be essential in another. At its core, transition finance requires:

• credible transition strategies,

• transparent and sector-specific Key Performance Indicators (KPIs) to track progress, and

• robust mechanisms for follow-up.

Because transitions unfold over many years, strategies need to be regularly reviewed and adapted as technologies, markets, and policies evolve. National and regional roadmaps are critical for anchoring this process. Guidance such as Japan’s transition finance follow-up framework—emphasising disclosure checkpoints, strengthened targets, and regular revisions—illustrates how finance can remain credible over time.

The scope of transition finance is broad, but this report dives into three sectors where it can be applicable: steel and cement, critical minerals, and natural gas.

• Cement and steel. Together these sectors account for about 14% of direct energy and process CO₂ emissions. A large part of steel and cement capacity will face re-investment decisions by 2035, making this decade crucial for accelerating emissions cuts. Public support for scaling up near-zero emissions technologies is vital, but scarce, and transition finance can support interim steps such as gas-based direct reduction iron, energy efficiency investments, waste heat recovery, and biofuel blending.

• Critical minerals. Mining and refining underpin energy supply chains for electric vehicles, batteries, renewables, and grids. Scaling production is vital, but extraction and processing can have major impacts beyond emissions, including water use, biodiversity loss, and land degradation. Transition finance can unlock high-impact projects that both reduce emissions and mitigate these broader risks, guided by sector-specific KPIs.

• Natural gas. Gas is set remain in the global energy mix for decades, and gas-fired generation capacity plays an important role in transition pathways to ensure security of supply, especially in countries with large seasonal swings in demand. The role of transition finance varies by country and sector, and changes over time. Priorities include cutting methane emissions, lowering the carbon footprint of LNG liquefaction, providing infrastructure for low-emissions gases, and helping, alongside other technology options, to ensure system flexibility and electricity security. All should be pursued under transparent, time-bound plans aligned with national decarbonisation strategies.

For transition finance to deliver meaningful results, financial flows from advanced economies to EMDE need to expand and currently excluded groups need to be brought on board. An IEA survey of 23 financial institutions found that differences in taxonomies and frameworks complicate cross-border financing for activities that could benefit from transition finance. EMDE face disproportionate investment needs but often have underdeveloped capital markets making external finance essential. Clear requirements for transition strategies are appropriate for large corporations but can become barriers for SMEs and capacity-constrained actors. Expanding participation therefore requires supportive frameworks for actors that are currently “left-out” (e.g. EMDE and SMEs) and those that “opt-out” because they have limited incentive to participate.

Failure to tackle these constraints raises the risk that financial institutions cut their emissions on paper, by reducing their exposure to emissions-intensive sectors and countries, rather than reducing real-economy emissions. This “financial carbon leakage” —as financial institutions simply shift emissions off their balance sheets—is no solution, as it avoids the hard questions that need to be answered if the world is to tackle the rise in global average temperatures.

With the right supporting structures in place, transition finance can move from being seen as a “second tier” of green finance to stand as a “second pillar” of global financing for emissions reductions—especially in sectors where emissions are hard-to-abate and EMDE. Achieving this requires public and private actors to design supportive frameworks, with safeguards to ensure credibility and inclusion. Governments play a central role, not only in setting national roadmaps but also in enabling participation by actors without the capacity for detailed strategy planning. Simplified, roadmap-based frameworks can provide a path forward. At the same time, recognising equivalence across taxonomies and broadening the focus beyond short-term financed emissions will be essential to mobilising capital. With these steps, transition finance can evolve into a disciplined yet flexible tool: one that supports the global scale-up of energy investment, strengthens energy security, and delivers meaningful emissions reductions.