The road to green is paved with amber
As the urgency to reach net zero intensifies, sustainable finance is evolving. Once focused almost exclusively on low-carbon technologies like solar and wind, attention is now shifting to transition finance where capital directed at high-emitting sectors taking credible steps toward decarbonization. In resource-heavy economies like Australia, this approach isn’t just helpful but essential.
Sustainable finance is evolving. For much of the past decade, it has been synonymous with what is easily labelled “green”: solar and wind farms, electric vehicles, and other low-carbon technologies that align neatly with ESG screening frameworks. These projects are tangible, familiar, and relatively low risk.
But the next chapter of decarbonization demands something more. As net zero targets draw nearer and focus shifts to harder-to-abate sectors, a new asset class is emerging: transition-enabling infrastructure. These are investments that may not qualify as green under current taxonomies but are essential in the shift to a low-carbon economy.
This is the essence of transition finance. It refers to capital directed at assets and activities that facilitate emissions reductions over time, even if they are not low emission today. Examples include hydrogen-ready gas turbines, carbon capture-equipped cement plants, power grid updates that unlock new renewable energy zones, or industrial facilities converting from coal to biomass as an interim measure. These are not perfect assets, but they play a critical role in getting us from where we are to where we need to be.
Regulatory frameworks such as the ASEAN Taxonomy provide a more structured approach to categorizing such investments. Under its traffic light system, many transition projects are classified as amber, not fully aligned with net zero yet, but recognized as enabling progress when supported by credible transition plans and safeguards against lock-in. This formal recognition underscores the importance of financing activities that are on the pathway, even if not yet at the destination.
The rise in transition finance signals a significant mindset shift. It is moving from a focus on avoiding climate risk to actively enabling climate solutions. Investors, lenders, and regulators are increasingly asking whether an asset contributes meaningfully to the transition and whether there is a credible, science-aligned plan in place.
Across Asia Pacific, financial instruments are evolving to reflect this shift. Transition bonds, sustainability-linked loans, and hybrid structures are being used to fund projects that sit in the amber category. These may be high-emitting assets today, but they are backed by plans for measurable progress. Unlike traditional green bonds that restrict the use of proceeds to pre-approved categories, these instruments are performance-based. Borrowers must meet ambitious key performance indicators (KPIs) over time, and credibility is linked to outcomes.
Australia’s financial sector is beginning to reflect this approach. As a resource- and emissions-intensive economy, the country cannot rely on green investments alone. In June 2024, the Australian Office of Financial Management (AOFM) issued the nation’s inaugural Green Treasury Bond, raising AUD 7 billion to fund public projects under the Australian Government's Green Bond Framework. While this was a significant milestone, it also highlighted the need for strategies that go beyond clean technologies.
In parallel, the government has introduced tax incentives for critical minerals and hydrogen production. These policies are designed to draw capital into sectors that are essential for the country’s decarbonization efforts. Together, these developments show that meaningful change will require a combination of green and transition-focused finance.
For transition finance to work, credibility is everything. Investors need confidence that KPIs are grounded in science, emissions reductions are real, and transition plans are both technically and commercially sound.
This is where independent assurance becomes essential. At DNV, we provide second-party opinions and reviews that assess whether climate targets are ambitious, measurable, and aligned with net zero goals. In complex, high-emission sectors, we help ensure that strategies are not only credible but achievable.
Transition finance is not second-best. It is a strategic tool to cut emissions where the impact is greatest. Reaching net zero means backing credible progress, not just ideal end-states. What matters is whether an asset is moving in the right direction, with clear targets, accountability, and transparency.
Getting to net zero won’t come from waiting for perfect solutions. It will come from financing the imperfect steps that take us there.
8/4/2025 5:00:00 AM
