Countries, companies and industries are all trying to reduce their emissions and transition finance can play a role in mobilising the capital that projects need to support these ambitions.
Currently, finance is being channelled to green assets and activities such as renewable power projects, but this alone is not going to deliver all the changes needed to cut global emissions, especially in places where clean technologies are not yet commercially available or cost-competitive.
This is where transition finance could help. Transition financing is the financial investment and instructions that can support a shift from a high-carbon or environmentally harmful business model to a more sustainable, low-carbon, climate-resilient operation.
A new IEA report examines the potential for expanding transition finance on a global scale. The Agency’s research finds that when complemented by credible government and corporate strategies, transition finance can help unlock investment for projects that fall outside the green finance label but are still essential to a sustainable transition.
Rather than limiting finance based on rigid alignment criteria, the goal should be to enable and accelerate financing for credible, local-grounded transition efforts
Currently, transition finance flows globally are modest, according to the Scaling Up Transition Finance report. However, scenarios in line with national or global emission reduction targets suggest that around $400 billion to $500 billion a year in transition finance could be mobilised over the next decade. This is comparable in scale to the current global green bond market.
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Moving transition finance off the page into reality
Attempts to define how transition finance relates to green finance and to long-term climate goals are hard to harmonise globally. National circumstances differ widely, and what is unnecessary in one country may be essential in another.
But at its core, the IEA says transition finance requires:
- credible transition strategies,
- transparent and sector-specific Key Performance Indicators (KPIs) to track progress, and
- robust mechanisms for follow-up.
Transitions unfold over many years, so strategies must be regularly reviewed and adapted as technologies, markets and policies evolve.
The Scaling Up Transition Finance report builds on analysis in the World Energy Investment 2025 report and identifies the core foundations of transition finance, unpacking its possible application across critical minerals, natural gas and the steel & cement sectors.
Of reference New investment challenges for energy projects in Africa
The report emphasises that for transition finance to deliver a meaningful result, it must be deployed in sectors where emissions are hard to abate, in emerging and developing economies (EMDEs) and be tailored towards small and medium-sized businesses as well as large corporations.
The IEA points out that if that isn’t the focus, then financial institutions may end up cutting their emissions on paper by reducing exposure to emission-intensive sectors and countries rather than reducing emissions in the real economy.
But the report notes that with the right supporting structures in place, transition finance can move from “second tier” of green finance to “second pillar” of global financing for emissions reductions.
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Natural gas use in the global energy system
The global energy system is evolving rapidly, but natural gas will remain part of the mix for many decades to come. In the IEA’s Announced Policies Scenario (APS), gas demand is set to rise in several regions that currently rely heavily on coal and face rapid growth in energy demand, before plateauing or even declining as cleaner alternatives expand.
“This trend is most evident in EMDE, including India and countries in Southeast Asia and Africa. In other countries, natural gas demand falls in the APS but it continues to support a diversified energy mix and energy security.
“In both cases, maintaining and upgrading gas equipment and infrastructure is important to strengthen supply resilience and diversify import routes while helping to reduce emissions in line with announced pledges,” said the IEA.
Investment in upstream oil and gas projects
The World Bank decided in 2017 to stop new investments in upstream oil and gas projects after 2019, with the exception considered only in extraordinary circumstances for upstream natural gas projects that enhance energy access in poorer countries.
The World Bank says it can support midstream and downstream natural gas investment in transport, distribution and power generation, and methane and flaring reductions. Recently at the Mission 300 Africa Energy Summit, the World Bank President stated they would support investment in natural gas that supports the just energy transition.
Of interest Operating with gas as an energy transition resource
Multilateral development banks such as the Asian Development Bank, EBRD and AfDB have taken a conditional approach, emphasising “that any gas financing should be explicitly tied to plans for emissions peaking and subsequent decline.”
Changing the mindset around the value of transition finance
The IEA, though, says that in order to shift from a stance of selectively permitted finance in EMDE towards actively expanding financing, transition finance must be treated as a distinct contribution within the landscape of international capital flows.
To resolve this issue, they suggest reframing the value of transition finance. “Rather than evaluating transition finance solely based on emissions levels, the focus should be on recognising proactive efforts in regions and sectors where decarbonisation is most challenging, such as in Southeast Asia, Africa and other EMDE and in hard-to-abate sectors such as iron and steel and cement.
“This will require supportive policy measures that allow such capital flows to be recognised and encouraged, particularly by investors and financial institutions in advanced economies, without imposing excessive constraints on recipient countries.
“Rather than limiting finance based on rigid alignment criteria, the goal should be to enable and accelerate financing for credible, local-grounded transition efforts.”
Critical minerals, cement and steel
Together, cement and steel account for around 14% of direct energy and process CO2 emissions globally. A large part of the steel and cement capacity will face a re-investment decision by 2035, making the next decade crucial for accelerating emissions cuts.
Public support to scale up near-zero emissions technologies may be vital, but it is scarce on the ground and transition finance could support interim steps such as gas-based direct reduction iron, energy efficient investments, waste heat recovery and biofuel blending.
On the critical minerals side, mining and refining underpin the energy supply chain for EVs, batteries, renewable energy project and electricity grid expansion.
“Scaling production is vital, but extraction and processing can have major impacts beyond emissions, including water use, biodiversity loss and land degradation.”
Transition finance could unlock high-impact projects that both reduce emissions and mitigate these broader risks, guided by sector-specific KPIs.
Find out more about Scaling Up Transition Finance
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