As new global guidelines formalise a distinct transition label for bonds and loans, Sustainable Fitch experts discuss how credibility, carbon lock-in risk and entity-level transition plans will shape the next phase of climate finance — and why 2026 could mark a pivotal shift for hard-to-abate sectors and emerging markets
Environmental Finance: How will the recent guidelines and introduction of a separate transition label impact sustainable bond issuances in 2026?
Maria Bazhanova: With clearer definitions of climate transition projects, we expect labelled instruments to diversify beyond traditional green, social and sustainability bonds in 2026, although growth may be gradual as issuers will need to enhance disclosures and build familiarity with transition frameworks, roadmaps and taxonomies.
While in Europe green bonds have been an established label for some time, we expect the transition label to be used particularly by entities in jurisdictions where technology, policy and/or market conditions do not yet support green activities at scale, or where overall project size is too small to justify large green bond issuances. This applies to emerging markets with large fossil fuel exposure.
Several jurisdictions already have building blocks for transition-labelled finance, either through taxonomies that include transition categories or through sectoral roadmaps and pathways.
Regional and national taxonomies, such as the ASEAN and Singapore-Asia taxonomies, include amber categories, while Indonesia’s green taxonomy has transition and enabling elements, providing a basis for classifying transition activities. In the Middle East, the UAE and Saudi Arabia have published net-zero strategies and sector decarbonisation programmes that function as transition pathways, even where taxonomies are still evolving. Because these markets already have definitions and established decarbonisation pathways, we are likely to see faster uptake in transition-labelled bonds there.
We have already seen interest in transition finance from financial institutions, as they aim to provide funding to support the transition of their corporate customers.
EF: What are the additional requirements for issuers and where do you see potential challenges?
MB: Both the International Capital Market Association’s (ICMA) Climate Transition Bond (CTB) Guidelines and the Transition Loan Principles (TLP), jointly published by the Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA), and Loan Syndications & Trading Association (LSTA), require an entity-level transition strategy or disclosure of a set of indicators of transition to show how the financed projects support the issuer’s overall emissions-reduction strategy and real-economy decarbonisation. Companies without an established strategy may need to develop one or demonstrate their commitment to transition by disclosing a set of indicators, requiring additional time and resources, and often board-level commitment.
In practice, this may include disclosure of transition governance and targets, capex alignment, implementation milestones, and sector-specific KPIs and performance thresholds demonstrating performance beyond business as usual. Issuers may also need to justify technology choices against best-available technologies and provide technical benchmarks, including how they will avoid lock-in and manage residual emissions.
Best-available technologies definitions and thresholds may vary due to contextual factors such as the sector, jurisdiction and market where the entities operate. The contextual factors are important considerations during the assessment of the transition projects’ eligibility.
EF: How do the new transition label guidelines overlap with the existing market standards?
MB: Generally, transition-labelled instruments follow the same core principles as other labelled instruments to support transparency and integrity in debt markets, especially around proceeds management and reporting. However, the new guidelines impose additional requirements on issuers, particularly related to transition projects, the project evaluation and selection process, and contribution to the issuer’s decarbonisation strategy.
The transition to a low-carbon economy can be financed through various existing instruments, such as green, sustainability, and sustainability-linked bonds or loans. Both ICMA and the loan associations note that ‘transition’ is a separate, distinctive label. In terms of eligible projects, as it currently states in the CTB Guidelines, if projects are financed by transition bonds, ICMA leaves the classification between green and transition projects to the issuer’s discretion. This allows some transition projects to be financed through green bonds, provided there are clear environmental benefits.
Under the TLP, however, the distinction is clear: unlike green loans, which fund activities that are already low-carbon or environmentally beneficial, transition loans support investments and projects that are not yet aligned with the Paris Agreement but enable a shift from a high-emissions baseline toward longer-term net-zero compatibility.
Transition plans: recommendations included in selected frameworks and guidance
EF: What is Sustainable Fitch’s approach towards transition finance instruments?
Daniela Sedlakova: Sustainable Fitch assesses transition finance instruments on the basis that they are designed to support decarbonisation in high-emitting and hard-to-abate sectors. Accordingly, assessments move beyond whether financed activities meet fixed environmental thresholds at present and instead focus on their alignment with a credible, forward-looking transition pathway.
Transition instruments are evaluated against relevant market guidance, including the CTB Guidelines and the TLP. Sustainable Fitch analysis outcomes are expressed on an “aligned” or “not aligned” basis, with key strengths and areas to watch disclosed on the first page of the second-party opinion (SPO).
In addition to assessing the entity’s transition strategy, eligible transition projects are also assessed against predefined safeguards, including their contribution to greenhouse gas (GHG) emissions reductions, consistency with the entity’s transition strategy, prioritisation of lower-carbon alternatives, and avoidance of carbon lock-in. Where relevant, alignment with recognised taxonomies, decarbonisation pathways or roadmaps is considered.
Together, these elements aim to provide investors with greater assurance that transition-labelled instruments support genuine decarbonisation outcomes.
EF: How will Sustainable Fitch evaluate transition projects and how does this differ from green bonds?
DS: Our approach to transition use of proceeds (UoPs) is grounded in the industry guidelines. Compared with green UoP assessments, the transition approach is more contextual and forward-looking.
For green UoPs, financed activities should demonstrate a positive environmental impact at the time of issuance and alignment with the relevant green finance principles. In contrast, transition UoPs are assessed against a set of safeguards derived from the CTB Guidelines and the TLPs.
These safeguards evaluate the extent of GHG emissions reduction, the contribution of projects to a credible transition strategy, the availability of lower-carbon alternatives, carbon lock-in risks, and, where applicable, alignment with science-based taxonomies, decarbonisation pathways and roadmaps. As such, the assessment of transition UoPs is inherently forward-looking and focuses on the extent to which financed activities support a long-term transition aligned with the goals of the Paris Agreement.
EF: How does Sustainable Fitch assess carbon lock-in and best-available alternatives?
DS: Assessment of carbon lock-in risks and the availability of low-carbon alternatives are core components of our approach. When assessing eligible transition projects, we view investments in lower-carbon alternatives positively, while also considering the entity’s specific operating realities, including sectoral characteristics, regional context and prevailing market practices. Investments in lower-carbon alternatives may not always be feasible, particularly for activities related to existing fossil-fuel assets and infrastructure. Investments in these activities are therefore not automatically excluded. However, to be considered aligned with relevant guidelines, they should be linked to a credible asset-level transition plan. This plan should include defined sunset dates and/or a plan to switch to a low-carbon alternative over time, in line with recognised decarbonisation pathways and roadmaps, alongside other applicable safeguards. By contrast, long-lived fossil-fuel expansion projects that lack abatement measures, credible transition pathways and viable low-carbon alternatives would be assessed as presenting a high risk of carbon lock-in.
EF: What does the industry guidance require regarding transition plans? What does the requirement mean for smaller entities?
William Attwell: Entity-level transition plans are integral to both sets of guidance. They are the conceptual anchor linking the transition-labelled debt instruments to broader entity-level decarbonisation. The purpose is to provide investors and other market stakeholders with confidence that, although the entities and/or projects being financed are not necessarily green at present, they are committed to a credible trajectory that is aligned or compatible with the Paris Agreement.
For transition bonds, the transition plan, or set of targets and indicators, this is the first of five safeguards within the use-of-proceeds component of the ICMA guidance and aims to ensure the integrity of the transition projects. Where projects relate specifically to fossil fuel infrastructure and activities, ICMA also proposes asset-level transition plans to provide an additional layer of credibility. Transition plans play a similar role in the guidance for transition loans, but here the loans associations make the requirement the first of five core components within the Transition Loan Principles exposure draft.
The guidance is somewhat flexible with regards to what the transition plans, planning process or indicators should cover. The ICMA guidance recommends alignment on a “best effort” basis with its Climate Transition Finance Handbook, which sets out recommendations on science-based targets, governance and reporting, among others.
For transition loans, the guidance emphasises that robust transition plans are typically science-based. Where a transition plan is unavailable, it says relevant indicators may serve as a proxy. The guidance highlights the core elements of the UK Transition Plan Taskforce’s framework, but notes that entities can adopt other recognised international frameworks. While details of these vary somewhat, these transition planning frameworks and guidelines tend to consistently recommend disclosure of targets, implementation actions, and relevant governance and reporting (see table).
The loans association guidance makes special mention of smaller entities, emphasising their transition plans/equivalent indicators are tailored to their context, setting out targets and actions that are credible and feasible given their context and stage of development.
EF: What approach does Sustainable Fitch take in its Transition Assessment (TA) and how does the TA relate to Transition Finance SPOs?
WA: The Sustainable Fitch TA is a separate assessment to the Transition Finance SPO and is focused at the entity-level. The outcome of the assessment positions entities on a scale ranging from “Minimal Transition” to “Transition Leader” and reflects entities’ performance under our proprietary methodology for evaluating transition ambition and progress in high-emitting and hard-to-abate sectors.
TAs can complement SPOs related to transition and/or green frameworks by providing a further layer of independent scrutiny on the issuer/borrower. Our approach to evaluating the transition plan in our Transition Finance SPOs builds on our TA approach and draws on our climate transition expertise and track record assessing entities in high-emitting and hard-to-abate sectors.
In the TA, we evaluate entities’ emissions-related targets, scoring the level of ambition set out in their targets against thresholds where top scores are consistent with emissions reductions we view as consistent with Paris-aligned pathways for the relevant industry. We also assess the credibility and completeness of emissions reductions targets, for instance, the GHGs covered and any notable exclusions from the organisational boundary.
Progress on implementation of an entity’s transition strategy is a major focus for the TA. In addition to evaluating the entity’s performance on decarbonisation, across both its operational and value chain emissions, we assess its transition-related capital and operational expenditures and the extent to which it is already generating revenues from low and lower-carbon activities.
Further adjustments can be made to the interim grading, reflecting factors such as high-impact decarbonisation levers, carbon lock-in, governance, carbon reporting and notable over-or underperformance versus industry benchmarks.
Maria Bazhanova is EMEA co-head for ratings and opinions team, Daniela Sedlakova is an associate director, in the ratings and opinions team and William Attwell is director, research at Sustainable Fitch.
For more information, see: