In 2025, global investment into the energy transition hit a record $2.3 trillion (an 8% increase from 2024)¹ but in pursuit of net zero, there is more to be done. “It is estimated that USD30 trillion of additional capital, including corporate and infrastructure investments, is needed to decarbonise eight high-emission sectors representing 40% of global GHG emissions by 2050”.² Those high emission sectors³ are under the spotlight and there are a number of compelling transition-eligible investment opportunities in carbon emissions mitigation, associated enabling technologies and the broader movement to transition away from fossil fuel dependence (including decommissioning). These activities include electrification, carbon capture, use of hydrogen and biofuels and more. Industry organisations such as the LMA and ICMA are seeking to support the market for transition finance with new guidelines for bonds and loans – we will take a further look at those below.

In addition, broader planning and reporting trends are supporting the growth of opportunity in this area. The proposed revisions to the EU Sustainable Finance Disclosure Regulation (“SFDR 2.0”) framework specifically include a new Transition category alongside Sustainable and ESG Basics categories. The International Sustainability Standards Board (“ISSB”) corporate reporting standards do not require entities to have transition plans but they do require “an entity to provide material information about the sustainability-related risks and opportunities that could reasonably be expected to affect its prospects. This includes information about its climate-related transition because it relates to how the entity mitigates and adapts to climate-related transition and physical risks”.⁴

The relatively new proliferation of transition planning frameworks, often published by financial institutions, help borrowers and issuers match their capital expenditure needs with transition plans and line up labelled funding accordingly. And widespread and consistent reporting standards support longer term debt product reporting obligations and performance tracking during the life of a loan or bond.

There is an intense focus on achieving robust standards in the transition finance space. In addition to clear Paris Agreement-aligned transition targets and pathways, other safeguards are also required to be built into these product labels and standards. Safeguards are needed to ensure that products meet the expectations of investors by contributing to decarbonisation and avoiding other negative impacts. There is a concerted effort to ensure that transition finance products do not simply end up funding “business as usual” and considerable work has gone into mitigating the risks of greenwashing or transition-washing. The ICMA and LMA transition labels described below address these concerns by introducing a framework with stringent requirements around transition planning, acceptable projects, safeguards and reporting, introducing granular standards, which step-up to provide additional safeguards in financing contexts which are considered potentially more risky, so that capital providers understand what they are investing in.

Developments in all of these areas: transition plans, international agreements to increase financing, labelled standards and sustainability reporting come together to support and scale finance for the transition to net zero.

Although use-of-proceeds products, such as green loans and green bonds, and broader sustainability-linked products, have been in use for the last decade, market participants have struggled to make them work for climate transition applications, in some part due to the greenwashing risks mentioned above and also due to transition activities potentially being much wider than green projects and activities.

The last few years have seen real effort to define transition-related activities in order to mobilise financing, using taxonomies and eligibility criteria. Though there are a number of national and wider taxonomies available, international trade associations for debt markets identified the need for product-specific guidelines to plug the gap. The International Capital Markets Association (“ICMA”)’s Climate Transition Bond Guidelines (the Climate Transition Bond Guidelines) and the Asia Pacific Loan Market Association (“APLMA”), Loan Market Association (“LMA”) and LSTA Inc’s Transition Loan Guidelines (the Transition Loan Guidelines) represent the latest thinking in this area and build on previous work. The Climate Transition Finance Handbook (entity-level guidance for transition bond markets) was originally published in 2020 (and was updated in 2023 and 2025) and the Transition Loan Guidelines adapt features from the existing green and sustainability-linked loans offerings but with additional safeguards and enhanced requirements included for these transition purposes. These updates are intended to help increase market confidence in transition products and ultimately to support wider uptake.

The Climate Transition Bond Guidelines were published in November 2025 and introduce a standalone Climate Transition Bond (“CTB”) label which is designed to help issuers in high-emitting sectors and/or with high emitting activities. The CTB label sits alongside ICMA’s other sustainable bond labels, including green bonds and sustainability-linked bonds and builds upon the structure already set out to meet those standards. Both use-of-proceeds and KPI-linked structures are possible under the CTB label.

Although green and sustainability-linked bonds have been used at scale to finance components of the climate transition, they have not sufficiently contributed to financing within the fossil fuel and hard-to-abate sectors. The CTB label is intended to be used when all or a “meaningful portion” of the proceeds are intended to be allocated to Climate Transition (“CT”) Projects⁵ and they are specifically adapted to be able to apply to CT Projects in those more challenging sectors. The activities complement and in some cases will overlap with Green Projects under the ICMA Green Bond Principles (“GBP”) but the sectoral context of the issuer can be much wider with a CTB.

As with the GBP, there are four core components: Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds and Reporting (allocation and impact reporting) and two key recommendations on Bond Frameworks and External Reviews.

The Climate Transition Bond Guidelines supplement the existing entity-level practices, actions and disclosures set out in the Climate Transition Finance Handbook (November 2025) and set out a preliminary and non-exhaustive list of eligible CT Project categories in the Appendix.

The key difference in the CTB label is the guidance given on indicative climate transition project categories for issuers to reference and five safeguards to maintain the integrity of the instrument as well as additional safeguards for fossil fuel related projects.

The Five Safeguards – issuers have to meet or explain how they aim to meet the following:

1. Existence of an issuer-level sustainability and/or climate transition strategy (aligning with the Climate Transition Finance Handbook)
2. Analysis supporting the technological and/or economic unfeasibility of low-carbon alternatives for the issuer (considering local context)
3. Alignment or compatibility with official sector and market-based taxonomies, decarbonisation pathways and roadmaps, and/or other international and national decarbonisation policy frameworks
4. Mitigation of substantial and quantifiable GHG emissions beyond business-as-usual (BAU)
5. Identification, analysis, best-efforts mitigation, and disclosure of carbon-lock in risks.

Additional Safeguards for CT Projects relating to fossil fuel infrastructure or activities – if not already addressed by alignment with a taxonomy, pathway, roadmap or policy framework as required above, additional safeguards such as some or all of the following may be required:

• activity/asset level transition plans;
• commitment to decommission/phase-out assets or switch to a low-carbon alternative within a certain timeframe consistent with credible scenarios;
• annual reporting on forward-looking metrics such as key milestones, sunset dates, and external verification thereof;
• implementation of accompanying investments and flanking measures to enable low-carbon alternatives in the future;
• limitations to fossil fuel capacity expansion or assets’ lifetime extension as a result of or in the context of a CT Project’s implementation;
• limitation of CT Project eligibility to assets already in existence as of a certain date (i.e. brownfield investments); and/or
• commitment to implement carbon capture, utilisation and storage for further abatement.

There are also recommendations for sustainability-linked bonds for high-emission issuers: the guidance suggests that one or more of the key performance indicators should monitor greenhouse gas reductions.

Although transition was previously seen as a theme under green bonds or sustainability-linked bonds, the reality was that they were predominantly used for “clean” green such as renewable energy, solar or transportation. The new guidelines support the effort to ensure that capital market instruments support investment in transition and transition-enabling projects. It is intended to deal with concerns that the sustainable bond market was not really contributing towards transitioning hard-to-abate sectors and also to mitigate greenwashing and reputational risk.

The APLMA, LMA and LSTA jointly released the Guide to Transition Loans (“Transition Loan Guidelines”) on 16 October 2025. At launch, the press release stated that it “provides a foundation for financing credible transition strategies, particularly within sectors that are not yet considered "green" but are essential to the global net-zero transition”.

The Guidelines acknowledge that within the transition finance market there have been challenges, for example fragmented transition taxonomies (often limited in scope of geographic availability), sectoral and regional differences in approach, different and conflicting definitions, verification and reporting difficulties and uncertainty around scalability and life-cycle impacts of certain technologies.

The Guidelines clarify the difference between “transition finance” and “financing the transition”, give clear parameters as to what qualifies as transition finance and set out “a voluntary, cross-jurisdictional framework for activity-level, use of proceeds transition loans”.

• “Financing the transition” refers to mobilising capital across the economy to support decarbonisation (including investments in sectors already aligned with low-carbon objectives).
• “Labelled transition finance” however, refers to a subset of this broader effort to finance the transition, with products that are specifically designed to help companies in high-emitting or hard-to-abate sectors, to decarbonise over time.

Borrowers of Transition Loans (“TLs”) are required to have (i) a credible transition plan or planning process (science-based and aligned with international or national frameworks) or (ii) (where there is no public transition plan) robust indicators showing alignment with recognised transition themes and decarbonisation pathways as a core requirement. The Transition Loan Guidance gives examples of documentation which could form evidence for such indicators (and multiple indicators should be evidenced), such as publication of climate-related disclosures, expected GHG emissions reductions in line which nationally determined contributions, sector-specific pathways, investment in research and development for low carbon technologies, technology adoption timescales, etc.

At an asset/project level, transition finance should support the borrower’s broader transition strategy and contribute meaningfully to decarbonisation objectives.

In the bigger picture, as mentioned in our introduction, it is therefore important that standards in relation to transition planning and reporting keep pace alongside these products. The combination of standards is needed to continue to support confidence for scaling in this space.

Transition finance may be structured as general corporate financing of entities or a financing for specific financing assets/projects. The Transition Loan Guidance focuses on Sustainability-Linked Loans (“SLLs”) in the context of general corporate financing and use-of-proceeds loans for asset/project financing but recognises that the choice of instrument depends on the strategy and is not prescribed. In addition to the requirements set out above, the selection of eligible Transition Projects includes:

• environmental and social risk management including a concept that decarbonisation should not come at the expense of nature and biodiversity or social equity or just transition principles. Any environmental or social trade-offs should be transparently assessed, minimised and, where necessary, mitigated; and
• carbon lock-in risk assessment – ultimately this means that the financed activities support, rather than delay, the pathway to net zero emissions and avoid term structural barriers to decarbonisation.

One difference between CTBs and TLs is that although the safeguards are generally aligned, TLs are less prescriptive, especially for fossil fuel related projects.

In line with the differences between the loan and bond markets, external reviews are encouraged but not mandated for TLs, whereas they are expected for CTBs.

As the sustainability and transition markets mature, we have seen definitions of what “transition” means become more concrete. We have also seen companies using transition plans to determine capital allocation and risk management . And the scope of transition loans and bonds is widening to include activities such as decommissioning in industries such as nuclear, energy, industry, waste, renewables and shipping, recognising possible acceleration of decommissioning timetables due to net zero, financial shortfalls and planning for regeneration and redevelopment of sites in a way which meets the needs of nature and society. Read here for more on decommissioning planning.

Our global Sustainable Finance & Investment group brings together a multidisciplinary global team that provides clients with best-in-market support. We are following developments relating to ESG regulation, so please get in touch if you would like to discuss.

Stay ahead with timely curated developments, insights and thought leadership on ESG regulation with our ESG Regulatory Alerts tool.

This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Emily Julier and Bryony Widdup.