Transition finance is an essential factor in the fight against climate change. Why is it not enough to simply focus on supporting activities that are already green?
Despite two weeks of intense negotiations, the declaration put forward at the recent UN Climate Change Conference (COP27), held in Sharm el-Sheikh in November 2022, did not contain many specifics regarding the reduction of greenhouse gas emissions. It is true that participating countries once again confirmed their commitment to the 1.5-degree global warming goal laid out in the Paris Agreement. But it is also true that they are (very) unlikely to achieve that goal. Not only that, if participating countries only fulfil their current commitments, the average global temperature will rise by 2.4 degrees Celsius by the year 2100 (calculations from Climate Action Tracker).
Preventing climate change as laid out in the Paris Agreement thus requires immediate action, and above all significant investment. For the EU alone, the European Commission has estimated a need to invest an additional 390 billion euros each year in order to ensure that the European economy achieves a sufficient reduction in carbon emissions. However, simply providing funding for industries that are already green will not be enough. Every economic sector must transition to a greener way of doing business. This applies in particular to industries such as steel, cement and aluminium. And yet in these cases, greenhouse gasses emitted as part of industry processes are considered hard to abate because the companies in question either do not (yet) have the necessary technologies or because the costs are very high.
How will transition finance help us to reach our climate goals?
This is precisely where transition finance comes in. Instead of selectively focusing on activities that are already sustainable, transition finance focuses on promoting activities that are moving towards more sustainability. Transition finance thus allows for a comprehensive treatment of entire economic sectors. Even more crucially, it includes companies that are currently emitting large amounts of CO2 and supports them on their journey towards more sustainability based on specific, scientifically sound transition plans. Because of this, transition finance is an important instrument within the larger toolbox of sustainable finance. This instrument can and should be implemented in order to bring our economic activities in line with the climate goals set out within the Paris agreement....
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