What is transition finance?
Professor David Veredas explains what this concept involves
By David Veredas
Professor of Financial Markets
There does not seem to be a widely accepted definition of transition finance. The OECD defines it broadly as “finance raised or deployed by corporates to implement their net-zero transition”. But this is very broad. David Veredas, Professor of Finance & Sustainability, believes that a more targeted definition is needed to avoid the risk of becoming worthless.
How does transition finance differ from traditional finance and the funding of areas such as renewable energy?
The demand for energy is ever-increasing, and it will continue to increase in the future. Most of the new energy generation comes from renewables, which is good news. But energy generated from fossil fuels keeps increasing too. Hence, renewables complement fossil fuels, and therefore financing renewable energy is not transition finance. Transition finance entails that new renewable energy substitutes energy from fossil fuels. For this to happen, we need to accelerate the deployment of renewable energy. Its growth needs to be faster than the growth in the overall demand for energy.
What is transition finance?
Professor of Sustainable Finance David Veredas explains the difference between transition and traditional finance. He explains the challenges and he talks about the sectors where transition finance can make a difference.
What are the opportunities and challenges?
The main opportunity is profit maximisation. Sustainability is a business as such – and it creates many profitable opportunities. The challenge is twofold. On the one hand, profits from sustainability may not come immediately – as, by definition, sustainability is a long-term concept. On the other hand, there is a dire need for education and training on sustainability, especially among board members and executive committees. This is why many business schools, like Vlerick Business School, offer executive education on climate and its business opportunities. The aim is to make boards and exco members “climate competent”.
To which sectors is transition finance most relevant?
It is often mentioned that the industries hard-to-abate are those in need of transition finance. While this is true, any sector may benefit from transition finance – provided that the transition has a monitored and verifiable roadmap with KPIs and intermediate targets. Transition finance can also be used to reduce the demand for energy, such as in buildings, manufacturing plants, agriculture, and mobility.
Who are, or will be, the main players involved?
From the point of view of the supply of funding, the main players are large institutional investors: pension funds, insurance companies, foundations, university endowments, hedge funds and private equity funds. In Europe, and partly in the US, there is a clear push towards it. But it is not the case in many other regions, in particular South-East Asia, where awareness of global warming and its consequences is relatively low. Yet, this region has very large investors that can have a real impact.
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