New guidance from industry standard setters and a new methodology from second-party opinion provider ISS-Corporate have set the stage for transition finance to flow. Marie-Bénédicte Beaudoin, Marta Farina and Claudia Muñoz Carmona explain
Environmental Finance: What is the current state of the market for transition finance?
Marie-Bénédicte Beaudoin: There have been efforts to integrate transition finance within the labelled bond market since the early 2010s. It began with Japan emerging as the leading jurisdiction in terms of issuance volumes – Environmental Finance Data shows that there have been 96 transition-labelled bonds from Japan since 2017. The strong momentum there can be attributed to the development of domestic guidelines on climate transition finance, published in the early 2020s and updated at the start of 2025.
The narrative around transition finance shifted following COP28 in Dubai in 2023. From that point, transition became a central theme in global climate finance discussions. Market participants increasingly came to recognise that existing frameworks – notably the Climate Transition Finance Handbook from the International Capital Market Association (ICMA) – did not sufficiently capture the complexity of transition financing, particularly as it focused at the level of the issuer’s transition strategy, rather than at the activity level.
Since COP28, market participants have engaged in the topic with greater intensity. At ISS-Corporate, we have developed our own methodology to assess transition-related frameworks, which we released in November 2024. We welcomed the publication, a year later, of ICMA’s new Climate Transition Bond Guidelines and the loan market associations’ Guide to Transition Loans. These two documents now provide the cornerstone of the transition finance labelled market.
EF: What methodology does ISS-Corporate apply to assess transition finance?
MBB: Our methodology is very much aligned with the principles established by ICMA and the loan associations. It looks at the approach taken at both the entity and activity level.
At the entity level, we consider the issuer’s transition strategy, its action plan, the milestones it has set, and the commitment to 1.5°C it has in place. Then we look in depth at the activity itself, what frameworks or benchmarks the issuer is leveraging, what alternative activities exist and how the entity is managing the risk that the activity will lock-in future carbon emissions.
There are two layers, but they are very much interconnected – our approach is to understand how the activity feeds into the issuer’s transition strategy.
For financial institutions, we can also review the classification systems they are using to categorise their transition-related financing, analogous to those they are using to demonstrate how they are meeting sustainable investment financing goals. That review process is not issuance based, but it looks at the robustness of those classification systems, examining how they identify the financing products that are relevant to transition finance and the criteria they use.
We marked a milestone here last November, when we published our first publicly available external review, of Deutsche Bank’s transition finance framework. Among other things, that review benchmarked the framework against market practice, assessed the soundness of its eligibility criteria, and the consistency of the framework with its sustainability strategy.
Transition-labelled debt since 2017
EF: How have ICMA and the loan associations approached transition finance with their new guidelines?
Claudia Muñoz Carmona: We have been very active in helping ICMA, in particular, as participants in the working group creating its new climate transition guidelines. Both ICMA and the LMA have maintained the dual focus on the assessment required – assessing the issuer’s transition strategy as well as the safeguards in place at the project level.
ICMA, for example, decided to complement its Climate Transition Finance Handbook by creating a framework for issuers, specifically in hard-to-abate sectors that are seeking to finance a credible transition strategy with transition projects that are not entirely green.
So ICMA has kept the four pillars that underpin its Green Bond Principles. It sets out requirements on: the use of proceeds; the process for project evaluation and selection; the management of proceeds; and reporting. In addition, the guidelines also include specific safeguards under the use of proceeds section.
The loan associations’ guidance has followed a similar structure to its existing guidance, but it includes an additional pillar – the entity-level approach to transition. Unlike ICMA, which retains its four pillars, the loans associations’ guidance has included an introductory fifth pillar, covering the entity-level transition strategy.
Both types of industry guidance consider their new transition labels to be complementary to existing green, social and sustainability labels. They see them as additional tools to bring companies that have been largely left out into green financing markets.
EF: What makes specific transition activities both credible and eligible under the industry guidelines?
CMC: Both sets of guidelines put safeguards in place to try to ensure environmental integrity. For an activity to be credible and eligible, the issuer must demonstrate that the activity leads to quantifiable and sustainable greenhouse gas (GHG) emission reductions, that it is aligned with relevant taxonomies and sectoral decarbonisation pathways, and that it avoids locking in emissions. The entity must also provide evidence that there are no low-carbon alternatives to the project that it is financing.
EF: What are the challenges for issuers seeking to align with the new guidelines?
Marta Farina: This new label will really show which companies have laid the groundwork over recent years and which have not. Its requirements are quite ambitious and it is a very complex structure. The first companies that will be able to seize opportunities and issue in this space will be the ones that have prepared and done their homework on their transition plans and that have really integrated sustainability into their businesses and operations. Others will need to take a bit of time, work and investment to get to the point where they could issue.
CMC: A particular challenge is that it will be difficult to provide sources, such as credible studies, that demonstrate that the activity will not lead to carbon lock-in, because the information is not very clear and it changes constantly. It’s the same with low-carbon alternatives. New studies are regularly produced that show the viability of an alternative technology that might not have been viable 12 months ago. So, for issuers, it will require them to regularly review their assumptions.
MF: The fact that both the transition finance market and the technology that it is financing are evolving so fast means that second-party opinions will provide investors with a lot of value. By their very nature, they enable greater transparency and disclosure, and this will be very important for investors as things change.
EF: How does the industry guidance address climate resilience and adaptation efforts?
MF: There’s not a great deal in either the ICMA or loans associations’ guidance on adaptation and resilience as such. However, we are seeing growing interest in adaptation in the market, especially given the focus on it at COP30 in Belem.
We think there are connections between transition and adaptation, because some climate adaptation solutions also have a transition component – such as an adaptation project that also entails a reduction of GHG emissions and that is able to meet all the additional safeguards that are required to qualify for transition-labelled issuance.
More broadly, companies working on transition plans naturally touch upon climate adaptation and resilience, because these three things are interconnected. We see from events we attend and from contacts we talk to that the market is increasingly seeing the need for a holistic approach to the topic, which will present intertwined opportunities to address transition and adaptation at the same time.
EF: How do you expect the new transition label to develop in the near future?
MF: There is significant interest from financial institutions, because we’ve seen green, sustainability and social issuances reaching something of a plateau. Banks have set sustainable financing targets and they need more projects to finance to meet these targets. They know that there is a lot of untapped potential and that there are many sectors that have struggled to access financing, but which could have significant positive climate impacts if they have a proper transition plan in place and the necessary funding.
It seems that there is indeed interest, and that these guidances could be a big boost to the transition finance market, which has until now been held back by uncertainty and the complexity of the topic.
MBB: We expect emerging market issuers to be the main driver for these types of transactions. But within developed economies, hard-to-abate sectors such as steel and manufacturing could also leverage this new label.
And using the new label will also enable financial institutions to demonstrate how they are engaged in their own transitions, notably vis-a-vis their financed emissions: issuing transition finance bonds could allow them to reduce the financed emissions they are reporting.
EF: Do you expect labelled transition bonds and loans to replace sustainability-linked bonds (SLBs) and loans (SLLs)?
MBB: In the past, issuers in hard-to-abate sectors have relied on sustainability-linked instruments, given that it’s been difficult for them to access the green bond market. But these instruments have faced a lot of scrutiny and criticism in recent years, leading to a marked decline in transaction volumes. The transition label clearly offers an opportunity for hard-to-abate sectors to enter the labelled market.
However, I think there will be continued interest in issuing sustainability-linked instruments. The two labels will exist side-by-side because they serve different purposes. SLBs and SLLs are for financing issuers’ general corporate purposes, while transition labelled instruments will be used to finance specific activities.
Investors will also have their say. If they are prepared to pay a ‘greenium’ for one or the other instrument, then issuers will naturally prefer that. The proposed creation of Article 7 funds under the Sustainable Finance Disclosure Regulation – specifically for investments that are focused on a credible climate transition – could also create demand for transition finance labelled debt.
Marie-Bénédicte Beaudoin is executive director and global head of sustainable finance business development, and Marta Farina is an associate vice president in sustainable finance research for ISS-Corporate, based in Paris. Claudia Muñoz Carmona is a senior associate, based in Stockholm, also for ISS-Corporate.
For more information about the second-party opinion services provided by ISS-Corporate, see: https://www.iss-corporate. com/solutions/sustainable-finance/