Defining transition
Confusion about terminology is not new in the sustainable finance market. As financing hard-to-abate transition becomes the focus, market participants are grappling with the issue of defining “transition”. The Transition Finance in the Debt Capital Market report from the International Capital Market Association (ICMA) tackles this by offering definitions of three types of transition.
Nicolas Pfaff, deputy CEO and head of sustainable finance at ICMA, identifies a recurring problem in sustainable finance: “a lot of fluidity around terminology”. In the context of transition finance, the recent ICMA report states: “There is often confusion around the use of terminology in sustainable finance which is compounded by genuine conceptual shifts affecting certain definitions over time.”
Acknowledging that this issue applies to defining “transition”, the report offers three overlapping definitions currently in general use for transition finance. “These can be differentiated from the wide to the narrow lens of what transition finance is understood to be achieving,” the authors write.
The first is economy-wide transition. This refers to transformation of the entire economy with the objective of meeting the goals of the Paris Agreement as well as wider sustainable objectives embedded in taxonomies – such as biodiversity or circular economy – or with reference to the UN Sustainable Development Goals.
Next is climate transition, which covers the goals of the Paris Agreement and the target of achieving net zero but typically with a narrower sectoral or industry focus, especially on the energy and high-emissions sectors.
The focus of the report is hard-to-abate transition. This emphasises the specific challenges of reducing the emissions of the fossil fuel and hard-to-abate sectors, or promoting more sustainable alternatives to their output.
