Delivering on climate targets requires the mobilization of capital across entire financial systems. While leading carbon-intensive companies have developed plans to transition their businesses, these plans often require transition financing to be successfully executed.
The first version of ASEAN Transition Finance Guidance addressed how entities may develop a credible transition plan to obtain financing from capital markets. A credible transition plan is achieved through two elements: the sufficiency of the plan’s climate ambition and the robustness of an organization’s ability to deliver on that ambition.
Together with the ASEAN Capital Markets Forum, we developed the ASEAN Transition Finance Guidance Version 2 to enhance further the understanding and application of transition finance in the region. Following our consultation with key stakeholders on the initial guidance, Version 2 fills in some gaps by providing additional depth in two practical areas:
- Clarification on different applications of the term “transition finance” to ensure market participants are using it to mean the same thing
- Provision of guidance and case studies on potential pathways to ensure their relevance to companies in this region
Aligning ASEAN stakeholders on the true meaning of transition finance
Discussions on energy transition with ASEAN members revealed that the term "transition finance" is not consistently interpreted across stakeholders. To facilitate convergence, it is essential to distinguish between three primary applications of this term, all of which may be referred to as “transition finance” in different contexts:
- Green finance: Finance provided to specific green activities or assets with low to zero emissions, in alignment with the 2015 Paris Agreement
- Asset-level transition finance: Finance provided to specific transitionary assets or activities that contribute toward decarbonization over the short term but are not fully green or long-term climate solutions
- Entity-level transition finance: General-use finance provided to entities undergoing ambitious and credible transitions aligned with the Paris Agreement
Version 2 of the ASEAN Transition Finance Guidance focuses primarily on finance extended to entity-level companies to facilitate companywide transitions.
Augmenting transition pathways to reflect entities’ climate ambitions better
Demonstrating sufficient climate ambition requires a company to be either already aligned to, or aligning to, a science-based pathway, similar to those established by the Science Based Targets initiative. In application, the current reference pathways may not always be appropriate for entities with different geographical or operational coverages. This points to a need for an augmentation of reference pathways to reflect ASEAN businesses more accurately.
For instance, adjustments may be needed to ensure the pathway covers the material greenhouse gas (GHG) emissions relevant to the entity, comprises key sectors representing the entity’s main business activities, or covers the right emission scopes.
To address this, Version 2 builds on the earlier guidance by including a list of science-based reference pathways and case studies across different sectors demonstrating how such adjustments could be made. As real economy companies evaluate potential pathways, it is helpful to note that several major financial institutions in ASEAN have augmented reference pathways to ensure that decarbonization targets better reflect the realities of the companies in their portfolios.
ASEAN Transition Finance Guidance Version 2 is a valuable resource in creating a deeper market for transition finance in ASEAN. The intention is for the guidance to be equally valuable to financial institutions and investors seeking to ensure the finance they provide promotes credible transitions and real economy companies. For the enterprises, the guidance helps provide the measure against which their transition plans are being benchmarked.
