Transition finance offers transparency but risks muddying the water of responsible finance

Blake Goud
4 min readDec 15, 2020


  • ICMA’s climate transition framework sets out the base-level guidance on transition strategies, disclosure and assurances
  • Without sector-specific guidance and taxonomies linking specific types of transition strategies to science-based targets, the sector will remain opaque
  • Financial institutions offering or receiving transition finance need clear strategies to avoid enabling greenwashing, which presents reputational risk as climate rises on the global agenda

ICMA has released its “Climate Transition Framework Handbook” for issuers considering transition bond issuance. These types of issuers are generally excluded from green bond issuance as high greenhouse gas-emitting companies. They include fossil fuel companies and other heavy emitters, although no specific sectors are targeted in the guide.

The clear distinction of transition bonds is that they can either be used for specific or general purposes, even uses that are not ‘green’. The reason for guidance and a framework, which doesn’t propose a specific taxonomy for permitted uses, is to address the purpose, assurance and disclosure to make it credible for facilitating a transition to Paris Agreement alignment, including social investment to produce a Just Transition.

ICMA uses the definition for a Just Transition being one which “seeks to ensure that the substantial benefits of a green economy transition are shared widely, while also supporting those who stand to lose economically — be they countries, regions, industries, communities, workers or consumers”. This has attracted some criticism of transition bonds in general on the grounds that companies shouldn’t have access to dedicated and labeled funding for unsustainable activities.

By directing funds towards reducing the negative emissions impact of their unsustainable activities, it is argued that this diverts funding that is needed for investment in the transition itself. This fear is accentuated by the challenge associated with making long-term commitments credible when in the short-run they produce investment for unsustainable activities.

All of the concerns about climate transition finance are applicable in equal or greater measure to financial institutions, which have much greater ability to shift their financing activity in a shorter amount of time than do non-financial corporates. The guidance provided by ICMA “can be applied by financiers extending debt to underlying projects”, which opens up risks to those financial institutions unless they can manage the process transparently on their own and with customers.

The ICMA guidance can be broken down into four issues:

  • What is the transition strategy, how is it governed internally, and what external review is it subjected to in order to demonstrate it is credible?
  • How does a company determine the most material environmental issues to focus its strategy on?
  • What climate targets and pathways does it align its strategy to and how does it demonstrate that they are ‘science-based?
  • How does a company approach transparency about its implementation and progress with independent review and assurance?

In addition to these four key elements, the ICMA framework also makes recommendations about disclosing both interim and long-term targets, the levers it sees available for it to decarbonize, and how it plans to contribute towards other Sustainable Development Goals that are also affected during its transition.

A serious challenge in the framework, especially in situations where a financial institution is developing transition financing ambitions, is that the framework is loose, and lacks a taxonomy and sector-specific guidance. It also leaves gaps that could allow for greenwashing because for market disclosures relating to financing instruments, and by extension financial institutions with a ‘transition finance’ strategy, the transparency guidance is qualified “to the extent practicable”.

Transition finance is a difficult issue for responsible finance because there is a balance needed between new ‘green’ investments and the social and economic challenges that would result if assets were left on an unsustainable path. Science provides a long-term guide about what is required to avoid the catastrophic impacts of temperature change above 2° C.

But economic decisions are made on a much shorter time-frame, which results in a lot of dynamic inconsistency where short-term profit maximization is out of line with long-term economic, social and environmental outcomes. The transition finance framework aims to provide a consistent and transparent way to work through the inconsistency while at the same time recognizing the process will evolve over time.

In the absence of a carbon pricing regime that would provide the market with clarity about the policy response to enable climate transition, greater transparency will be more beneficial rather than less. However, the guidance provided by ICMA offers a way to limit disclosures that are inaccurate or unrealistic that would enable wide-scale greenwashing.

Even with robust application of ICMA’s guidance, there will still be significant work, especially for financial institutions, in how they combine disclosures of various quality from customers into their own disclosures, and if they plan to make use of or offer transition finance, they should prepare their strategy now or risk getting swamped with hugely heterogeneous transition finance requests from their customers.

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Blake Goud

Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.