To transition the global economy to a 1.5-degree world, more investments in zero-emission solutions are urgently needed, while investments in high-emission assets and infrastructures need to be phased out. Green and sustainable finance has had a tremendous impact on shifting the focus of financial institutions and investors towards clean technologies like renewable energy. However, to achieve the goals of the Paris Agreement, financial markets must also help high-carbon, energy-intensive, and hard-to-abate companies transition to net-zero emission trajectories.

To achieve the Paris Agreement goals, all sectors of the global economy, and in particular hard-to-abate industries, must rapidly decarbonise. Recognising the contribution of finance to these goals, the Paris Agreement calls for “making finance flows consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development”. This has given rise to several tools and initiatives in sustainable finance, and more recently, in transition finance.

This chapter provides an overview of the OECD Guidance on Transition Finance: Ensuring Credibility of Corporate Climate Transition Plans. The Guidance is a response to the growing trend among market actors and policymakers to develop transition finance approaches to broaden the perceived niche of sustainable finance. The chapter sets out the purpose, scope, and audience of the Guidance and concludes by identifying areas for future work with respect to transition finance.

This chapter provides an overview of existing approaches to transition finance and financial instruments commonly associated with transition finance, notably, sustainability-linked bonds and loans, and transition bonds. Within existing approaches, this chapter first identifies those that do not explicitly rely on corporate transition plans and are predominantly based on specific tools like national or regional taxonomies or national sectoral pathways and roadmaps. The chapter then separately identifies the growing field of transition finance approaches that revolve around corporate transition plans, including initiatives by non-governmental organisations and industry, the public sector, as well as transnational bodies. As set out in Chapter 1, in the context of this Guidance, transition finance is understood as finance raised or deployed by corporates to implement their net-zero transition, in line with the temperature goal of the Paris Agreement and based on a credible corporate climate transition plan.

This chapter identifies key challenges in transition finance, drawing on insights gathered through the OECD Industry Survey on Transition Finance, bilateral stakeholder consultations, and literature review. Scaling up financing for the transition across all sectors globally requires transition finance approaches to consider and respond to the current challenges and barriers that are encountered by market actors in this space. In this context, the challenges of corporates in emerging markets and developing economies (EMDEs) and micro, small and medium-sized enterprises (MSMEs) deserve special attention. The chapter concludes that credible corporate climate transition plans and increased transparency by corporates can address some key challenges, while others have additional, broader implications for policymakers and would require the use of complementary tools, including through the involvement of multilateral development banks (MDBs).

This chapter presents ten elements of credible corporate transition plans, building on the review of existing approaches to transition plans in Chapter 2 and the challenges encountered by market actors that are identified in Chapter 3. Most existing transition plan approaches cover the following elements: net-zero and interim targets; performance metrics and Key Performance Indicators (KPIs); carbon credits and offsets; actions towards implementation; internal coherence with the company’s business plan; governance and accountability; and transparency and verification. Other elements are largely underdeveloped in existing approaches but are elaborated in this Guidance. They include: consideration of non-climate-related sustainability impacts; integration of corporate transition plans with other sustainable finance tools and tools for Responsible Business Conduct (RBC); just transition aspects; information on prevention of carbon-intensive lock-in; and, where appropriate, tailored approaches for micro, small and medium-sized enterprises (MSMEs) and certain companies in emerging markets and developing economies (EMDEs).