Transition Finance: What's The (Transition) Plan?

The net zero transition requires investment that enables the decarbonization of the whole economy, including high-emitting and hard-to-abate sectors. The transition of those sectors has attracted especial attention from regulators, financiers, litigants and wider stakeholders.

This briefing highlights key developments in transition-themed financial instruments, their likely uptake, and how transition planning plays an increasingly central role in bolstering investor confidence in transition finance.

Financing the transition of high-emitting sectors

Vast volumes of capital are essential to decarbonize emission-intensive industries. One report estimates that around USD30 trillion of additional investment is needed for eight high-emission sectors to reach net zero by 2050: aviation, shipping, trucking, steel, cement, aluminum, primary chemicals, and oil and gas. Given that those sectors together represent nearly 40% of global greenhouse gas emissions, substantial progress towards the Paris Agreement goals may be expected through the timely transition of those sectors.

The importance and urgency of financing reduced emissions across those sectors has gained prominence, with investors becoming increasingly attuned to the substantial need. However, market appetite for transition investments have been historically dampened by challenges in classifying and assessing transition finance. Investors have noted that the concept of transition finance is "used interchangeably by different actors to denote a wide range of financial activities, each with different... impacts on the pace and scale of the transition", giving rise to transition-washing concerns.

Hence, while climate finance has hit new highs and investment in mature technologies is growing, global investment in emerging climate mitigation technologies suffered an overall decline of 23% in 2024 compared to 2023 (e.g. carbon capture and storage, nuclear, clean industry and clean shipping).

In 2026, it remains to be seen how resilient global investment into green and transition technologies will be, given political headwinds, tighter market conditions and other priorities competing for public and private investment (see our analysis for 2025 here).

Against this challenging backdrop, uptake of existing sustainable finance instruments has not sufficiently driven the capital needed to enable the timely transition of high-emitting and hard-to-abate sectors.

Transition-themed instruments

To catalyze the deployment of finance to support the transition of high-emitting and hard-to-abate sectors, a variety of guidelines, frameworks and regulations have emerged.

The growing range of transition-focused financial instruments include:

• use-of-proceeds focused Transition Loans and Climate Transition Bonds
• transition-themed sustainability-linked loans and bonds
• hybrid transition finance loan structures (when sustainability-linked loans and use-of-proceeds loan structures are used in combination)
• the transition product category in the European Commission's proposed amendments to the EU Sustainable Finance Disclosure Regulation (SFDR), which has parallels with the UK Financial Conduct Authority's (FCA) Sustainability Improvers category.

The emergence of guidance (particularly from the International Capital Market Association (ICMA), Loan Market Association (LMA) and others¹) and regulatory standards around the eligibility criteria for transition-themed labels is expected to foster greater coherence in demonstrating and assessing the transition of businesses in high-emitting sectors. In turn, those businesses may gain expanded access to capital from transition-oriented investors and lenders.

However, it remains to be seen whether (and to what extent, and at what pace) the above regulatory and market-led initiatives will drive significant investment towards the transition of high-emitting and hard-to-abate sectors.

It will likely take time for transition-themed financial instruments to achieve significant uptake, considering the following:

• It can be challenging to determine whether a project is a transition activity (as distinguished from a green activity).² Final determination of a project's classification as 'transition' often sits with the borrower/issuer, based on their own assessment and methodology.
• Variations in the eligibility requirements of different transition labels give rise to complexities. For instance, there are differences in whether, and under what circumstances, each transition-themed label can be applied to investments in companies generating significant revenues from coal or expanding their fossil fuel activities. There are also differences in the thresholds (%) of investments that are required to be channeled towards transition activities for the labels to apply. Lenders and investors may also set thresholds that exceed what is recommended/required.
• Use of the labels would entail ongoing obligations, such as: reporting periodically on the expected and achieved impacts and climate gains; re-reviewing transition project eligibility criteria; refreshing evaluations of the technical and/or economic feasibility of low carbon alternatives; and updating assessments of alignment with evolving decarbonization pathways. These will require dedicated resources, including to implement the necessary governance structures and accountability procedures.

The role of transition plans

Confidence in the use of transition-themed labels is expected to grow as the regulatory landscape continues to evolve and mature. In particular, the emergence of transition plan-related regulatory requirements is growingly seen as important for cementing investors' confidence in financing the transition of high-emitting and hard to abate sectors.³

In seeking transition finance, businesses in key sectors will increasingly need to answer to the questions of "what's your transition plan?" and "how credible is it?". We observe three key trends in that regard:

• A de facto requirement for transition planning is becoming more commonplace, with alignment to the 1.5°C goal of the Paris Agreement seen as most credible, reinforced by recent developments in climate litigation. There is growing market and stakeholder expectations of transition plan-related disclosure, or alternative indicators, as a pre-requisite for transition finance. Even for activity level transition finance, transparency will often be expected on how the activities/projects contribute towards an entity's overall progress towards the Paris Agreement goals.
• Regulatory requirements globally are crystalizing, having now been exceeded and outpaced by market and stakeholder expectations. Transition plan-related disclosure requirements continue to emerge across jurisdictions implementing the International Sustainability Standards Board (ISSB) sustainability reporting standards, despite transition plan adoption and implementation requirements being removed under the EU Corporate Sustainability Due Diligence Directive (CS3D) pursuant to the Omnibus process. Notably, the UK FCA will be consulting in January 2026 on transition plan-related requirements for listed companies.
• The quality of transition plans will need to be raised, with the help of clearer guidance around how the credibility of a transition plan can be demonstrated and assessed. A common, internationally applicable approach to credibility assessment is emerging via a set of guidelines proposed by the Transition Finance Council (TFC). The TFC guidelines are designed to be deployed across jurisdictions and asset classes, alongside existing frameworks and guidelines (e.g. the LMA and ICMA's respective guidelines discussed above, and the IFRS foundation's guidance on disclosures about transition plans). They are due to be finalized in March 2026.

Find out more

Transition finance and transition plans are fast-evolving, complex and interlinked areas that are critical for the net zero transition. Getting them right requires a broad spectrum of legal and non-legal expertise.

Should you have questions regarding the contents of this article, please get in touch with the authors Matt Townsend(partner), James Roe(partner), Greg Brown(partner) and Ying-Peng Chin(senior knowledge lawyer) or your usual contact at A&O Shearman.

Footnotes

1. See the Climate Transition Bond Guidelines (November 2025, published by ICMA) and the Guide to Transition Loans (October 2025, jointly launched by the Asia Pacific Loan Market Association (APLMA), LMA and Loan Syndications and Trading Association (LSTA)).

2. The ICMA acknowledged in the CTB Guidelines that it is "inherently difficult to draw a line between a CT Project and a Green Project", and final determination of a project's classification remains with the issuer based on its own assessment and methodology.

3.Other tools, such as transition taxonomies and sectoral decarbonization roadmaps, also have important roles to play in enabling the growth of the transition finance market, but are not the subject of this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.