Transition finance is fast becoming a critical tool in the fight against climate change. From Asia’s rapid industrialisation to Europe’s leadership in green finance and the growing importance of the Brics nations, ensuring a sustainable future is a matter of global economic significance.
The sustainable transformation goes beyond a purely environmental dimension. It has four interrelated dimensions that impact each other: economic, environmental, social and governance. To reduce emissions while achieving its development goals, the world needs to accelerate and scale up innovative financing solutions and instruments for its sustainable transformation.
Continental climate initiatives and investment
Asia, for instance – home to some of the world’s fastest growing economies and largest populations – faces significant challenges in transitioning away from carbon-intensive practices towards sustainable development. In the region’s climate efforts, transition finance stands to play a major role. Investments in solar, wind and hydroelectric power projects are crucial for not only reducing reliance on fossil fuels and decreasing emissions but also meeting growing energy demands. However, so too is the early coal phaseout, which accounts for nearly 60% of the continent’s power generation.
In Europe – which is further along in its journey of phasing out coal and transitioning to renewable energy sources – green finance has emerged as a cornerstone of the region’s efforts to combat climate change and achieve carbon neutrality. The European Union has been at the forefront of advancing sustainable finance policies, including the EU taxonomy and the Sustainable Finance Disclosure Regulation. These initiatives, along with others like the Southern Gas Corridor and the Mediterranean Solar Plan, channel investments at scale towards environmentally sustainable activities while harnessing the region’s renewable energy potential and enhance energy connectivity.
Similarly, the Brics nations represent a substantial – and growing – share of the global economy and carbon emissions. While these countries face distinct challenges, including resource constraints and socioeconomic disparities, they also present immense opportunities for innovation and investment. Despite varying levels of development and regulatory frameworks, they are increasingly prioritising climate action and integrating environmental considerations into their financial systems. By embracing transition finance principles and investing in low-carbon solutions, Brics nations can mitigate climate risks and build a more resilient future for generations to come.
Plugging the finance gap
COP28 showed that there is still a large climate finance gap, an even larger overall environmental finance gap and a huge sustainable development goals-related finance gap. Hence, the potential for growth in sustainable debt is vast. Although issuance has increased 25-fold over the past decade, the sustainable bond market is still a small but shining light. With only a few years left until 2030, there is confidence that the proportion of sustainable bonds in the new issuance volume of the overall market will further increase beyond 2024.
Nature-related risks can also be expected to move up the sustainability agenda. The  groundwork will be laid for more transactions focusing on biodiversity, marine economics and other nature-related issues. Biodiversity ‘competes’ with climate change as the most pressing environmental problem but it has so far only been partially considered in the context of responsible and sustainable investment decision-making.
Yet, ensuring that transition investments are genuinely sustainable requires robust due diligence and adherence to environmental, social and governance criteria. As demand for sustainable investments grows, so does the risk of misleading marketing practices. Investors must guard against greenwashing and transition-washing, which can undermine trust and credibility in sustainable finance.
To aid this, the International Capital Market Association plays a crucial role in setting standards, providing guidelines for issuers and investors alike and allaying fears by proposing the voluntary adoption of transition plans. These plans may become mandatory before too long with the introduction of the EU’s corporate sustainability directive, which proposes mandatory reporting requirements for large companies, including listed companies, banks, insurance companies and other companies designated as ‘public-interest entities.’
Leveraging innovation for sustainable transformation
There are more innovative ways to enhance financial inclusion, transparency and environmental stewardship. Through blockchain technology, issuers are able to provide real-time updates on project progress, financial performance and ESG metrics. This level of transparency fosters trust among investors and stakeholders, ensuring that bond proceeds are used effectively and in accordance with sustainability objectives. Blockchain’s immutable ledger also reduces the risk of fraud and corruption, further enhancing the integrity of sustainable finance initiatives.
Moreover, enhancements in digital bonds offer issuers and investors a powerful tool to catalyse positive social and environmental impact and enhance transparency and accountability in the issuance and management of funds. By democratising access to sustainable finance, digital bonds can also effectively empower local communities to mobilise capital towards sustainable development.
CBDCs can also play a transformative role in advancing transition finance goals. By integrating ESG principles into CBDC frameworks and fostering collaboration across stakeholders, central banks can harness the power of digital currency to encourage positive impact and sustainability outcomes for society and the planet.
Transition finance is a global imperative that is bound to be high on the agenda at COP29. Many have already dubbed COP29 ‘a finance COP’, where global stakeholders must work to mobilise capital towards SDGs. Many will also be cognisant that 2024 is a year of political reckoning. With key elections taking place across the globe and potential change to be affected in several countries, a sustainable future for all should be front of mind.
Frank Scheidig is Global Head of Senior Executive Banking at DZ Bank AG.
To join DZ BANK, in collaboration with KfW and OMFIF, for the International Capital Markets Conference 2024 in Berlin on 22-24 April, register here.
