Many energy investments defy a simple binary classification between “clean” and “dirty”: there are also the “in-between” investments that can deliver material emissions reductions but that do not bring emissions to zero. These investments have historically been difficult to categorise due to differences in energy pathways and timeframes across regions and have been the subject of debate, including over whether and how they should be supported.

Transition finance refers to financial activities that can contribute to emissions reductions, particularly in hard-to-abate sectors as well as in emerging market and developing economies (EMDE) where finance needs are high but the support from green finance is limited. It is subject to an important process requirement, in that investments need to be grounded in transition plans, strategies or equivalents with mechanisms in place to enable tracking and follow-up.

Transition finance complements the role of green finance, which has grown rapidly in recent years, but which cannot deliver all aspects of energy system transformation, especially in hard-to-abate sectors and in EMDE.

For the moment, the volume of finance that can be labelled as transition finance is low, but International Energy Agency (IEA) scenarios provide some indicative guidance of the potential volume of investments that could be covered. Over the next decade, the amount of investment that can be supported by transition finance is approximately USD 5 trillion of cumulative investment in the Announced Policies Scenario (APS) and approximately USD 4 trillion in the Net Zero Emissions by 2050 (NZE) Scenario, or USD 400-500 billion per year. Over half of those investments would be in EMDE, spanning energy efficiency, selected low-emissions technology across different end-use sectors, and some investments in natural gas infrastructure, gas-fired power, critical minerals, and other areas.

The core of transition finance lies in its dynamic nature, shaped by the diversity of national energy pathways, the fact that types of investments needed evolve over time and the necessity of taking a view on the likely length of the transformation. However, this nature makes it difficult to define a uniform global framework, since investments essential in one region may be unnecessary in another.

These complexities have historically made transition finance less prominent than green finance in global discussions. However, transition finance remains an important way to scale up energy finance and emissions reductions over the next decade. With this in mind, this report discusses the current landscape and approaches to scale up the use of transition finance.