Transition finance

Green finance mostly funds things that are already clean, such as solar farms, metro rail and efficient buildings. But a large share of emissions comes from industries that cannot become clean overnight: steel, cement, aluminium, chemicals, fertilisers, power, shipping and aviation.

These industries need money to change how they work. They need to upgrade furnaces, switch fuels, use more scrap, capture carbon, and test new processes such as green hydrogen. That money is called transition finance.

The idea is sensible, but it carries a real risk. If the rules are loose, almost any spending by a polluting company can be called "transition", including spending that keeps high-carbon assets running for decades. Critics call this transition-washing. So the whole field depends on one question: is the company's plan to cut emissions credible?

The main instruments

• Transition bonds: use-of-proceeds bonds that fund specific emission-cutting projects in high-emitting activities.
• Sustainability-linked bonds and loans with transition targets: general-purpose debt whose cost depends on hitting emissions targets for the whole company.
• Transition loans: bank loans for the same kinds of projects.
• Blended and concessional finance: public money that lowers the cost or risk of early-stage transition projects.

ICMA's guidance

• The Climate Transition Finance Handbook, first published in 2020, sets out what an issuer should disclose: its climate transition strategy and governance, how material the environmental issues are to its business, a science-based strategy with targets and pathways, and transparency on how it will carry out the plan.
• A revised edition in November 2025 added an annex on transition plan frameworks and on tools for judging whether a plan is credible.
• On 6 November 2025, ICMA's Executive Committee also released the Climate Transition Bond Guidelines. These create a standalone label for use-of-proceeds bonds that fund defined climate transition projects, with safeguards. They include a preliminary list of project categories and recommendations for high-emitting issuers of transition-themed sustainability-linked bonds.

SEBI's rules for transition bonds (May 2023)

In February 2023, SEBI made transition bonds a sub-category of green debt securities. A circular on 4 May 2023 added extra requirements:

• The bond must be marked "GB-T" on the cover page of the offer document and in the term sheet.
• The offer document must set out the issuer's transition plan, with interim emission targets, an indicative timeline, an implementation strategy, details of the technology to be used, and a way of checking how the money is used.
• Any change to the plan while the project is running must be disclosed to the stock exchanges, with reasons.
• The annual report must include a short update on how the transition is going.
• Stock exchanges monitor these disclosures.

Japan's sovereign transition bonds

Japan issued the world's first sovereign Climate Transition Bonds in February 2024. The government plans to provide about ¥20 trillion of support for its Green Transformation (GX) programme through these bonds over ten years. The money goes to 22 fields, including clean hydrogen and ammonia, advanced nuclear reactors, next-generation solar cells and energy-efficient equipment. The Climate Bonds Initiative certified the first tranche. The inclusion of nuclear power and ammonia shows how much transition definitions differ from country to country.

India's approach

• India's draft Climate Finance Taxonomy (May 2025) has a separate transition supportive category. It covers activities where no technically and economically feasible low-emission alternative exists in India yet. Such activities must not create stranded assets and must match stated government policy.
• The first hard-to-abate sectors in the draft are iron and steel and cement. Fertilisers and aluminium are expected to be added later.
• India's Carbon Credit Trading Scheme sets emissions intensity targets for these same sectors, which gives transition finance a measurable yardstick.
• The CFA Society India report of March 2026 found that no transition bonds or loans had been issued in India yet. Globally, it put transition bonds at about $39 billion and transition loans at about $3 billion, as of 2024.

Tests of a credible transition plan

1. Targets: short, medium and long-term targets, ideally science-based, covering Scopes 1 and 2 and the material parts of Scope 3.
2. Capital spending: the capex plan matches the targets. Watch for new long-lived high-carbon capacity.
3. Interim milestones: dated steps that can be checked, not just a 2070 end point.
4. Governance: board oversight, and management pay linked to the targets.
5. Dependencies: honest disclosure of what the plan relies on, such as policy support, technology costs or carbon prices.
6. Progress reports: yearly reporting against the plan, with explanations when targets are missed.