Transition Finance Emerges as a Crucial Tool in Asia’s Climate Change Battle

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Transition finance, which supports emission reduction projects in carbon-intensive industries, is poised to become increasingly vital in Asia’s fight against climate change, experts say. Despite facing reputational risks, issuers are expected to embrace these instruments due to a substantial funding gap and growing regulatory support in the region.

According to a recent report by Moody’s Ratings, the region’s decarbonization efforts face a significant funding shortfall. However, transition finance, facilitated through sustainable debt markets, is anticipated to gain momentum with governments’ backing. This will enable companies in carbon-intensive sectors to access capital for adopting green technologies and reducing their environmental footprint.

The International Renewable Energy Agency estimated a staggering $4 trillion funding gap compared to the $5 trillion annual investment required globally by 2030 to achieve the Paris Agreement’s target of limiting global warming to 1.5 degrees Celsius and attaining net zero carbon emissions by 2050.

Despite the exponential growth of the global sustainable finance market over the past decade, the majority of investments have been directed towards renewable energy and electric vehicles. Ma Jun, Chairman of the Hong Kong Green Finance Association, highlighted that in China, transition finance meeting international standards represented only 1% of total green finance transactions in 2023.

Ma emphasized the need to create an ecosystem conducive to encouraging banks and insurance companies to invest in transition projects without fear of being labeled as “transition-washing.” Regulatory support is essential to mitigate risks associated with nascent and commercially unproven technologies, such as hydrogen use in shipping and aviation, which are crucial for transitioning to low-emission alternatives.

In summary, as Asia confronts the challenges posed by climate change, transition finance emerges as a crucial tool to bridge the funding gap and accelerate the transition to a more sustainable future