Transition Finance boom: product evolution and contractual challenges for hard-to-abate sectors

​In 2025, global investments in the energy transition reached a record $2.3 trillion, marking an 8% increase compared to the previous year. Despite this acceleration, the path toward the net-zero target is estimated to require approximately $30 trillion in additional capital, encompassing corporate investments and infrastructure, to decarbonize the eight high-emitting industrial sectors that alone generate 40% of global greenhouse gas emissions by 2050.

The first wave of ESG finance, characterized by "pure green" labels intended exclusively for natively eco-friendly projects, is giving way to transition finance. This sub-category specifically targets enterprises operating in hard-to-abate sectors such as cement, steel, chemicals, and heavy transport by offering structured financial solutions to support their progressive industrial conversion.

Product evolution

The market is introducing specifically designated instruments such as Transition Loans and Transition Bonds. Although traditional products based on the restriction of use-of-proceeds such as green bonds or green loans have been in use for over a decade, market practice has highlighted structural limitations in making them effective for complex climate transition applications. Indeed, reconversion activities are inherently broader and more cross-cutting than isolated green projects.

To bridge this gap, the legal architecture of transition finance is shifting toward a holistic, entity-level approach. This flexibility is primarily achieved through Sustainability-Linked Bonds (SLBs) and Sustainability-Linked Loans (SLLs). Under these contractual frameworks, proceeds can be utilized for general corporate purposes, but the cost of capital is directly indexed to the achievement of specific Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs) tied to the issuer's overall decarbonization plan. Eligible investment opportunities now include structural carbon mitigation interventions, enabling technologies, electrification, carbon capture (CCUS), the use of hydrogen and biofuels, as well as the decommissioning processes of fossil-fuel-dependent plants.

The role of international guidelines

In the absence of a global and unified statutory definition within the relevant jurisdictions, the market has found a benchmark in self-regulatory standards developed by leading industry associations. A central role is currently played by ICMA’s (International Capital Market Association) Climate Transition Bond Guidelines and Climate Transition Finance Handbook, the latter recently updated. Concurrently, within the credit market, the new Transition Loan Guidelines—jointly drafted by LMA, APLMA, and LSTA—have adapted the features of current sustainability-linked lending offerings, introducing supplementary guarantees and enhanced requirements to safeguard market integrity.

These international frameworks are incorporated into contractual documentation and disclosure prospectuses. The legal challenge resides in translating these guidelines into binding contractual covenants. Consequently, it becomes a priority to govern the interest rate step-up or step-down mechanisms, defining with utmost precision the calculation criteria for KPIs, reporting timelines, and external verification procedures (second-party opinions), in order to prevent disputes between issuers and investors.

SFDR 2.0, ISSB, and Transition Reporting

The growth of these instruments is further accelerated by global trends in non-financial planning and reporting. Under the European regulatory profile, the proposed revisions to the transparency framework (SFDR 2.0) aim to introduce a classification category specifically dedicated to "Transition," positioning it alongside the "Sustainable" and "ESG Basics" classes to enhance capital flows directed toward gradual decarbonization.

In parallel, at an international level, the corporate reporting standards of the ISSB (International Sustainability Standards Board), while not formally mandating the adoption of a transition plan, require entities to provide material information on sustainability-related risks and opportunities that could reasonably affect their prospects. This includes the obligation to detail how the enterprise intends to mitigate and adapt to climate-related physical and transition risks. The proliferation of these planning models enables companies to align capital expenditure (CapEx) plans with decarbonization trajectories, ensuring rigorous standards throughout the entire tenor of the debt.

The risk of "Transition Washing" and board liabilities

The adoption of transition-related labels exposes companies to a legal and reputational risk symmetrical to that of greenwashing, termed transition washing. This phenomenon occurs when a company raises capital without having a credible, transparent, and science-based decarbonization strategy.

Within an increasingly stringent European regulatory context, characterized by the application of the CSRD and the CSDDD, transition plans constitute an integral part of formal corporate disclosures. The failure to implement the emission reduction trajectories declared in issuance prospectuses may constitute grounds for liability for misleading information, exposing Boards of Directors to damages claims brought by investors and to sanctions by market supervisory authorities.

Conclusions

Transition finance offers indispensable flexibility for the industrial survival of energy-intensive sectors. The alignment between the milestones of the decarbonization plan, corporate reporting, and financing agreements represents the sole safeguard capable of mitigating systemic legal risks.

van Berings provides strategic legal solutions to assist clients in structuring sustainable debt instruments and managing compliance risks within the evolving regulatory landscape.