Via the Transition Finance Markets Review (TFMR), the UK Government is the latest political entity to commission a review into the growing transition finance sector, exploring how best to establish itself as a global hub for transition finance.   

Despite the growing acceptance of the concept amongst political and financial audiences, there is still a lack of clarity around the application and scope of transition finance, challenging its deployment and credibility [1].

However, the term is broadly used to describe finance, investment, insurance and related products and services developed, and according to the OECD, it is designed to “decarbonise entities or economic activities that:

  1. are emissions-intensive, 
  2. may not currently have a low- or zero-emission substitute that is economically available or credible in all relevant contexts, 
  3. but, are important for future socio-economic development.” [2]  

Transition finance is required for sectors using fossil fuels such as cement, steel, aviation, construction, to enable them to remove combustion/fossil fuels from industrial processes.

High-emitting companies and hard-to-abate industries are priority targets for transition finance due to the precedent set by green finance products supporting Paris-alignment and clean technology solutions.  

There is an urgent need to ramp up finance for the green transition, with an estimated $3-4 trillion alone needed by 2030 to support emerging markets and developing economies (EMDEs) [3].

Economic and financial policymakers have a responsibility fully to grip the major industrial revolution unfolding in front of us where the old energy system is being replaced by a new clean energy complex – and appreciate the crucial role that transition finance can play to support and drive it.

A step change in their approach would help navigate the businesses and sectors where transition finance should be applied, providing an accountable and practical way for financial institutions to help make their climate pledges real.   

In spite of this, however, the way that many entities tackle transition finance continues to fall short of the systems change approach that Carbon Tracker research has consistently highlighted over the past decade.

Accordingly, the market review should address the following: that many activities and businesses might be considered viable for transition finance and funding sectors that need to decline (e.g. fossil fuel producers) shouldn’t be considered transition finance. 

The lack of standardisation around the definition of transition finance – and the failure to recognise that decarbonisation doesn’t apply to all companies, for example fossil fuel companies – has led to its misapplication, such as UK company Wood Group receiving a £430 million green transition government-backed loan and using it to expand its oil and gas business [4].

This is problematic as transition finance should not be used to perpetuate companies and activities that are not Paris-aligned (e.g. fossil fuel expansion) or could exacerbate the likelihood of a disorderly transition.   

We challenge the framing that all companies inherently need to transition as fossil fuel companies, conducting fossil-fuel based activities, . cannot be “decarbonised” in the same way as other sectors.

Moreover, carbon capture and storage (CCS) has been promoted as a solution to abate emissions from fossil fuel extraction and utilisation, yet despite the estimated $83 billion in investments targeting the technology since the early 1990’s, carbon capture has not delivered results at a significant scale [5].

The focus should instead be on reducing the consumption of fossil fuels globally and not financing CCS and other technologies tied to the continued production of fossil fuels when alternatives energy sources are widely available e.g. battery storage, renewables.

Specifically on oil and gas producers, our recent report Paris Maligned II reinforces the risks to the sector of demand destruction caused by the rise of renewables and the increasingly decarbonised global economy [6].

It may therefore be better for these producers to pursue a cash-out strategy, as outlined in our report Navigating Peak Demand [7] 

What constitutes transition finance is important because some investments may have a perverse effect of extending the life of fossil intensive assets rather than accelerating retirement.

This underscores the need to prevent carbon lock-in – which occurs when fossil fuel infrastructure and/or assets continue to be used despite the availability of low-carbon alternatives [8].

This could delay or potentially prevent the transition to net zero emissions by 2050 [9]. Once new fossil fuel infrastructure, e.g. LNG terminals, have been built, there is a stronger economic incentive to use the assets until the end of their economic life, which results in countries ‘locking in’ decades of climate-warming emissions [10] 

This misallocation of resources and decision to divert funds away from companies who will play a more significant role in decarbonising the global economy has huge implications, as dominant industries are incentivised to lobby and ramp up other business strategies to protect the value of their assets against measures perceived as “stranding” them [11].

The TFMR should consider the lifetime of the assets and activities, as well as the businesses in scope of transition finance when producing its recommendations to the next UK Government.  

As we have made clear, financing the green transition is urgent and this will be the decisive decade for climate action. While clarity on an industrial strategy with net zero investment at its heart (as is being pursued in their own ways by the US Government and the EU; witness also the astonishing growth of renewables in China), the financial community need to establish their own guardrails for transition finance.  

The TFMR should decide upon a preferred definition and recommend set strict parameters and requirements for companies receiving transition finance, ensuring they undertake credible, time-bound emissions reduction efforts and align with a science-based pathway towards a net-zero economy. This approach would reinforce the primacy of climate science and the carbon budget. ‘ 

Key considerations for a credible transition plan:  

  • A time-bound implementation (transition) plan setting out how the company will align its governance structures, operations, business strategies, capital allocation and assets with achieving net zero emissions by 2050/Paris Agreement, thereby limiting global warming to 1.5C [12] 
  • Commit to verifiable and quantifiable key performance indicators, including short- and long-term targets, drawing on existing standards and frameworks that can be measured and tracked.  

For oil and gas companies, our Paris Maligned II report identifies the following key alignment metrics: capex alignment, planned oil/gas production levels, emissions targets and executive remuneration [13].

For other carbon-intensive sectors, further metrics include prioritising emissions reductions, action plans that involve fuel substitution or improving efficiency and using CCS for unavoidable process emissions (e.g. cement) or as a last resort for sectors without alternatives. 

Transition plans of companies capable of aligning should show rapid decarbonisation strategies and convergence by 2030 or sooner – in line with the growing urgency of the climate science set out unmistakeably in the IPCC AR6 Synthesis Report published in 2023 [14].

To avoid the misallocation of finance, reputational damage and accusations of greenwashing, the Review should implement guardrails on transition finance to:  

  • Ensure “additionality”, e.g. guaranteeing that this finance facilitates activity that wouldn’t otherwise happen. Companies could end up effectively using this (cheaper) finance for “dirty”/non-transition activities,  
  • Make transition finance standards binding,  
  • Clearly distinguish between companies that are exiting from fossil fuel production, from those companies still dependent on their use, where transition finance is needed to replace old combustion related technologies or processes with, typically, electrification, 
  • Distinguish between ‘green finance’ and ‘transition finance’ as companies receiving transition finance won’t necessarily deploy this money to develop green assets, which would encourage market participants to financing both transitioning companies and pure-play green companies separately.  

Through the TFMR, the UK could become a leading destination for transition finance. To achieve this, the government would need to:  

  • provide clarity on its definition and use,  
  • establish clear market signals through designated time horizons and policy tools to support economy-wide change, including mandatory transition plans, climate targets and sector specific decarbonisation roadmaps, 
  • underpinning this with an industrial strategy. In this context, we note the Great British Energy initiative now being promoted by the Labour Party in the General Election campaign now underway.  

Such a policy approach would support financial institutions who want to navigate this developing market. To a global audience and overseas investors, establishing a strong set of policies and guardrails for transition finance would demonstrate the UK’s commitment to making financial flows consistent with a Paris-aligned emissions reductions pathway [15] 

Equipping investors and other financial institutions with these resources would be timely, given the significant carbon intensive debt refinancing in corporate fixed income on the horizon.

The London Stock Exchange recently published a report which found that over half of outstanding carbon intensive debt is set to mature before 2030 and global fixed income markets will need to refinance approximately US$600 billion annually [16]. The report also finds that around $3.2 trillion of debt from issuers in high-carbon commodities and utilities is due to be refinanced in the coming years [17].

How and whether all of these companies and projects should receive transition finance should be considered as part of the market review.  

Over time, an international approach to transition finance and alignment will be fundamental, building upon the COP28 focus on transition finance to unlock capital and align with commitments set out in the Paris Agreement.

An agreed set of principles, cross-jurisdictional reporting framework, means of measuring and tracking the financial flows would help galvanise the international market for transition finance products.   



[1] RMI, Defining Transition Finance: Exploring Its Purpose, Scope, and Credibility,

[2] OECD, Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans,

[3] LSE Grantham Institute, What does Article 2.1c of the Paris Agreement mean for central banks?

[4] The Guardian, UK firm given £430m green transition loan then expanded oil and gas business, Jun 2023,

[5] Carbon Tracker Initiative, Curb Your Enthusiasm: Bridging the gap between the UK’s CCUS targets and reality,

[6] Carbon Tracker Initiative, Paris Maligned II,

[7] Carbon Tracker Initiative, Navigating Peak Demand,

[8] OECD, Mechanisms to Prevent Carbon Lock-in in Transition Finance,,zero%20or%20zero%2Demission%20alternatives

[9] We agree with the UN’s decision to define “Net Zero” as reducing carbon emissions to a small amount of residual emissions that can be absorbed and firmly stored by nature or other carbon dioxide removal measures, leaving zero emissions in the atmosphere. Pledges to get to net zero emissions by 2050 should be robust and aligned with climate science.,leaving%20zero%20in%20the%20atmosphere.

[10] Centre for Climate Finance and Investment, Imperial College London, Net Zero Finance Report Card: Recognizing Ambition,

[11] IMF, Energy Transition and Geoeconomic Fragmentation: Implications for Climate Scenario Design,

[12] CDP, Climate Transition Plans,

[13] Carbon Tracker Initiative, Paris Maligned II,

[14] IPCC, AR6 Synthesis Report,

[15] See UNFCCC, Adoption of the Paris Agreement,, page 3.


[17] Bloomberg, A $3.2 Trillion Refinancing Wall Looms for High-Carbon Issuers, March 2024,