Consultation on Transition Finance Guidelines: financing decarbonisation beyond ‘green’

Insight

09.09.2025

The Transition Finance Council (TFC) was launched by the City of London Corporation and the Government to drive forward the recommendations of the Transition Finance Market Review (October 2024)[1] (TFMR) and to establish the UK as the global hub for raising and deploying transition finance.

The TFC recently issued a consultation on entity-level Transition Finance Guidelines[2]. It addresses a key barrier to transition finance identified by the TFMR – hiding behind the arguably slightly nerdy title is a consultation on a critical tool for unlocking capital to abate high emitting sectors in the short to medium term. Dealing with terminology upfront, entity-level financing means “investment in or general-purpose financing of any non-financial, natural or legal person engaged in economic activities” – in other words lending to or investing in businesses operating in the real economy[3].

The TFMR looked at what the UK needs to do to become a leading centre for transition financial and professional services. A key message was that we need an economy-wide approach – stop thinking 'green' (with its focus on financial regulation around sustainability disclosures etc. and renewables regulation) and start thinking 'transition' where we have a financial system which supports the decarbonisation of all sectors with a 'pragmatic' focus on the highest emitting ones first (including the built environment). The TFMR heard that the current landscape was stultifying transition finance; for example, a sole focus on 'financed emissions' discourages the financing of high-emitting businesses where there is a real opportunity to decarbonise in the medium term. Similarly, concerns about reputational risk in financing high-emitters and the perceived or actual risks of greenwashing were an impediment to getting the capital to those who need it to decarbonise. It also observed that reducing financed emissions solely through divestment runs the risk of 'paper decarbonisation' – where the investor's balance sheet decarbonises without contributing to decarbonisation in the economy.

A key theme underlying these concerns is that there is no common definition of what constitutes transition finance. This is not an idle academic argument about semantics; the TFMR identified that for the transition finance market to grow it needs a framework in which to operate with credibility and integrity. Whilst this would not unlock capital on its own, this was a 'necessary pillar' for the market. To address this issue, the TFMR developed an illustrative Transition Finance Classification System and proposed a set of voluntary principle-based Guidelines for Credible Transition Finance to support institutions in developing their own frameworks. A principle-based approach was chosen to give flexibility as different companies and countries will have different starting points and pathways, and the decarbonisation landscape (for example technology, policy and regulation) will be evolving.

The TFMR classification system distinguishes between financing transition activities (which targets specific projects, assets, or technologies that contribute to emissions reductions), financing companies whose business is climate solutions[4] and financing transitioning entities (financing directed toward a company or other legal entity based on its overall transition planning and alignment with credible transition pathways[5]). The TFMR heard that the biggest opportunity for scaling up transition finance is at the entity-level[6], and there is a need for such finance to enable high-emitting sectors to decarbonise. However, to date there had been little such 'transition-themed' finance; the feedback was that outside financing green solutions businesses there was insufficient policy and data to support the classification of entity-level transition finance. Accordingly, the consultation concerns Guidelines for financing transitioning entities particularly those with high or hard to abate emissions. The focus is on short- and medium-term delivery.

The Guidelines take a two-pronged approach to tackling the conundrum of 'credibility'. The proposed framework consists of:

Principles – setting out four dimensions of credibility relating to an entity’s transition planning – 'what must be true' for the finance to be credible. These are Credible Ambition, Action into Progress (an entity is reasonably capable of implementing its plan in line with its Credible Ambition and interim milestones etc), Transparent Accountability and Addressing Dependencies (briefly, internal and external circumstances that could impact targets and implementation etc).
Factors – the proof points: 'what you assess against' to determine whether the Principles are met. These comprise six Universal Factors (including factors for implementation, financial viability and disclosure), and Contextual Factors (there is no exhaustive list, but essentially whether there are any other circumstances, for example climate resilience issues, which could affect an entity’s ability to deliver a 'credible transition'.).

The Guidelines are tethered to the Paris Agreement. The Credible Ambition Principle requires the use of 'Credible Pathways' which are compatible with the goal of “holding the increase in the global average temperature to well below 2 degrees above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 degrees above pre-industrial levels”. 'Pathways' refers to pathways, scenarios, or other models or methodologies that are used to plan an entity’s transition that are published by a recognised third party. This includes compatible system, sector or technology roadmaps. That said, the Guidelines acknowledge that there may be circumstances where an entity’s Credible Pathway is not aligned with the temperature goal (for example because of the jurisdiction in which it operates) in which case it needs to explain the pathway to which it is aligned.

This is about getting things done in the real economy; in this context the TFMR identified that a key requirement for scaling finance is to develop sufficiently granular sectoral pathways (with flexibility to deal with technological change) allied with Government developing demand-side policy. Further, earlier in the year the TFC also issued a Call for Evidence focussed on those working in the real economy in relation to the use of sector transition roadmaps to support transition solutions and to inform financing decisions and access finance. The intention is that the TFC will publish guidance later in the year to assist in the development of sector transition roadmaps.

Also, encompassed within the notion of Credible Ambition is the need to tackle 'carbon lock-in'; entities need to adopt a strategy which avoids or minimises investment in high-emitting assets or activities whose operational life will exceed the timeline set in the Credible Pathway.

There is no space here to discuss the framework further; however, the Guidelines contain detailed tables setting out how the Universal Factors are to be applied to each dimension of credibility. The critical bedrock is sturdy and dynamic transition plans and a robust assessment process. Further, delivering credible transition finance is an iterative process – requiring regular review of the suitability and deliverability of transition plans and implementation.

There is inevitably a tension between making guidelines sufficiently flexible to cover the different scenarios which will require transition finance recognising that decarbonisation pathways will vary between different industries and places and proceed at varying paces, but simultaneously making them sufficiently prescriptive to provide the necessary credibility to drive transition, whilst giving users of the guidelines sufficient building blocks to navigate this complex area and to mitigate against greenwashing risks. The consultation seeks feedback on whether the Guidelines 'appropriately balance the requirements for ambition with proportionality for entities in different contexts'. Implementing any such guidelines will also require businesses and capital providers to have the necessary skills to develop, implement and assess the transition plans underpinning the provision of credible transition finance and to monitor progress and respond to changing circumstances.

The consultation closes at 12pm on 19 September 2025. It is intended for a wide audience (not just capital providers and their regulators) including real economy corporates, asset owners and managers. The TFC is looking to develop guidelines which will work internationally, and this consultation will be followed by a second round (early November 2025 to early January 2026) to fit in with COP30 with the plan to publish the Guidelines in March 2026. The consultation is seeking transition finance case studies (successes and failures) which could be used on an anonymised basis in its next consultation and feedback on asset classes or financing structures where it would be useful to have additional implementation guidance.

A theme running through climate change commentary is the need for transition advocacy. A Universal Factor in the Guidelines is 'engagement' where entities are required to engage with others (for example regulators, civil society, the supply chain and industry peers) to support implementation of their transition activities and to avoid messaging which undermines their transition plan. The Government is also consulting[7] (closes on 17 September 2025) on the design of Transition Plans for financial institutions and large companies including on the TPT framework which includes the requirement to disclose an engagement strategy. Similarly, the TFMR recommended that a key aspect of 'stewardship' for investors was the need to advocate for the policy framework required to support their stated transition plans.

Earlier, I used the words 'nerdy' and 'semantics'. Topic-specific terminology helps to examine complex issues and capture new concepts; however, having worked my way through a small thicket of 'transition finance speak' the issue of how policymakers and the market communicates more broadly about transition remains a live one. Moreover, transition advocacy presents a two-pronged challenge. In terms of the 'anti brigade', there is, for example, Chris Stark’s view that the politicisation of the term 'Net Zero' means that it is not necessarily helpful in encouraging public buy-in to transition[8].Then, as we heard from the TFMR, there were concerns around financing high-emitters due to risks of greenwashing allegations. Consequently, in terms of the 'pro brigade', finding compelling language to explain the position where transition finance is provided to support medium term goals with no visible short-term emission reductions may be particularly important for transitioning entities and their capital providers. The approach to classifying transition finance needs to get more sophisticated to deliver real change in the economy but allied with that approach there may need to be a talent in explaining things simply.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

[1] Scaling Transition Finance Report

[2] Transition Finance Council

[3] That said, it is anticipated the Guidelines may not be applicable to many SMEs as they are likely to be less advanced in their transition planning.

[4] Category 2 in the Transition Finance Classification System.

[5] Category 4 in the Transition Finance Classification System. See page 27 of the TFMR for a table setting out the Transition Finance Classification System and page 6 of the Consultation.

[6] Establishing credibility and integrity in transition finance

[8] Net zero has become unhelpful slogan, says outgoing head of UK climate watchdog | Climate crisis | The Guardian