Transition finance can contribute up to one trillion dollars per year to the economy as companies in hard-to-abate sectors raise capital and use proceeds for activities that help them reduce carbon footprint, S&P Global Ratings said on Wednesday.
As the transition to a net-zero economy gains traction, new sectors and issuers will enter the market, expanding the pool of investable sustainable financing and allowing investors to diversify their contribution to sustainability objectives, S&P said in a report titled ‘Transition Finance: Finding A Path To Carbon Neutrality Via The Capital Markets.’
“It has become clear that issuer and investor appetite for financing climate response and other environmental objectives is strong and accelerating,” said Sustainable Finance Analyst Lori Shapiro.
“But achieving the objectives of the Paris Climate Agreement and 2050 climate-neutrality goals will require significant capital investment in new processes and technologies that enable the decarbonisation of high-carbon industries,” she said.
Transition finance provides a potential solution by enabling the largest carbon-emitting industries and companies to raise capital and use the proceeds for activities that help them reduce their carbon footprint.
“We expect transition finance will extend beyond the use-of-proceeds bond model to include sustainability-linked and other financial products, helping companies and countries scale up capital allocation to meet their net-zero emissions commitments,” said Shapiro.
S&P said the transition label is expected to take on a much wider scope and used across various sectors and activities, ranging from entities making efficiency improvements to potential overhauls of entire business models.
Ultimately, the transition label will expand across a range of financial products that help scale up capital allocation for companies and countries able to demonstrate rigorous and achievable climate transition strategies.
The challenge remains how this can be done quickly and efficiently while avoiding key downside risks, including green- or transition-washing.