Transition finance rests on a practical partnership between corporates and financiers. Successful transitions need finance that goes where the emissions are; this means moving beyond the top performers and working with corporates with material environmental footprints that commit to transition strategies. A common alternative strategy, in which financial institutions simply shift emissions off their balance sheets, creates “financial carbon leakage” and does not reduce real-economy emissions.

An IEA survey of financial institutions revealed that differences in regional taxonomies and frameworks pose challenges for cross-border financing. At the same time, it highlighted the important role financial institutions already play through transition finance in engaging with clients to support transition efforts. The immediate challenges facing transition finance essentially break down into two issues: expanding financial flows and clearly establishing the distinguishing “transition” characteristic.

Scaling financial flows requires a broader conception of value. Emerging market and developing economies face outsized investment needs but have relatively shallow capital markets, necessitating cross-border finance that respects region-specific pathways. Two participation gaps must be addressed: “left-out” actors (e.g. small and medium enterprises and capacity-constrained firms) that need supportive access, and “opt-out” actors with capacity but limited incentives to participate. Equivalence across taxonomies and recognition of transition finance’s contribution, rather than a narrow, near-term focus on financed emissions, are essential to unlock capital.

The distinguishing “transition” characteristic hinges on strategies and robust follow-up. Sector-appropriate key performance indicators, retrofit-ready design and periodic reviews maintain integrity as technologies and policies evolve. A two-speed approach can balance rigour with inclusion, offering high-quality detail for large issuers and pragmatic pathways for smaller corporates and developing economies. Governments have a critical role in facilitating alignment for actors lacking detailed transition plans or strategies, including through national roadmaps, simplified frameworks and enabling mechanisms that support credible action even without full planning capacity.

The role of transition finance could be reaffirmed to enable progress where decarbonisation is most difficult and urgent, engaging with real-world constraints rather than avoiding them. This implies the possibility of moving away from viewing transition finance as a “second tier” of green finance and positioning it as an equal “second pillar” of global financing for emissions reductions. Public and private actors could design supportive frameworks to scale transition investments, including the safeguards that can ensure that they make a lasting contribution to strengthen energy security and deliver meaningful emissions reductions.