Sustainable finance, Transition planning
Ensuring long-term economic and environmental success
Achieving net zero requires the transformation of all industries across the economy. This is no small feat – and for carbon-intensive sectors, the transition process is all the more complex. Here, transition planning has emerged as a critical strategic priority – especially for those with the toughest targets.
Anja Sommerfeld, Debt Capital Markets, Bond Origination, and Wolfgang Vitzthum, Head of Sustainable & Transition Finance Advisory, explore the business case for transition planning, the evolving regulatory landscape that governs sustainable business practices and the central role of financial institutions in facilitating these transitions.
The business case for transition planning
In today's business landscape, investors, banks and business partners alike demand increasing levels of environmental and social consciousness from corporates. While decarbonisation targets have been relevant for a long time, businesses are now expected to do more than set ambitious targets. They must also 'walk the talk' through devising comprehensive and specific roadmaps for the achievement of these targets.
To realise these objectives, transition planning has emerged as a critical outlet through which businesses can demonstrate their commitment to sustainable operations, while also maintaining and even boosting their financial performance. This kind of planning exercise helps organisations pinpoint focus areas for transformation, while identifying potential threats to profitability and future opportunities.
Having a transition plan is also not just an exercise in regulatory compliance, but a way of proving to a company’s stakeholders that sustainability is integrated into its corporate strategy. Doing so can help signal to sustainability-conscious investors how the business intends to integrate their transition into existing operations, while maintaining or ideally increasing profitability. This, in turn, can help businesses secure the investment capital needed to make their transition a reality.
But what exactly does this look like in practice? Successful transition plans encompass commitment, measurability and integration: commitment to Paris-aligned net-zero pledges, measurable interim targets (aligned with reporting standards) and demonstration of technical viability integrated with financial planning. They must consider sector-specific decarbonisation pathways, regulatory requirements such as CO2 pricing and future viability surrounding technological innovations, new market entrants and future demand dynamics.
With the stakes higher than ever, businesses must commit to comprehensive detail if they want access to vital financing – though their ability to do so can vary depending on their sector and size.
Having a transition plan is also not just an exercise in regulatory compliance, but a way of proving to a company’s stakeholders that sustainability is integrated into its corporate strategy.Debt Capital Markets, Bond Origination
Making transition plans work for businesses across all sectors
Green finance has undeniably come far in recent years. But to succeed, global decarbonisation efforts will need to move beyond prioritising green projects, such as renewable energy initiatives. Sectors considered carbon-intensive or ‘hard-to-abate’, such as manufacturing, chemicals and steel production, are – and will continue to be – essential to the global economy. Transition planning is essential for businesses operating in these sectors, as it can be the key to unlocking access to sustainable and especially transition financing.
Current sustainable financing methodologies tend to oversimplify by dividing categories of economic activity into either green or brown, creating challenges for hard-to-abate industries to define sustainable finance-compliant activities. Transforming these sectors demands substantial investment in new production facilities and technologies. This is where banking partnerships are most useful, in helping raise the capital investment needed to enact large-scale change.
Financial solutions for these industries require transition standards that accurately assess company transition pathway ambition and suitability. These solutions need innovative approaches, such as focusing on additional metrics like EU-Taxonomy-aligned capex-KPIs. They might also tie into applications for subsidies or other kinds of state support.
Transition planning must also account for the priorities and operations of different-sized businesses: a company’s size influences its long-term priorities just as much as the sector it operates in. Mid-caps and family-owned enterprises, for example, put less emphasis on green finance classification methodologies and reporting and much more focus on achieving a return on equity. In any case it is paramount that any transition plan needs to give evidence on how profitability is at least maintained and ideally improved through a solid transition.
Although facing fewer transparency requirements than large corporations, these companies must still comply with sustainability standards in their supply chains, despite more limited resources for monitoring and oversight. In some cases, there is a risk that smaller businesses are burdened by over-prescriptive reporting requirements.
Successful transition plans encompass commitment, measurability and integration: commitment to Paris-aligned net-zero pledges, measurable interim targets (aligned with reporting standards) and demonstration of technical viability integrated with financial planning.Head of Sustainable & Transition Finance Advisory
Financial institutions’ importance in supporting corporates
Banks are valued partners for corporates of all sizes aiming to successfully balance profitability and transformation. Financial institutions can leverage both sector-specific expertise and in-depth knowledge of the capital markets to deliver innovative financing models. They can advise on how ESG data can be leveraged for strategic planning purposes. They also help businesses navigate evolving reporting requirements, which still vary from one market to another.
What’s more, financial institutions understand investor priorities and recognise that an issuer's sustainability strategy is integral to investor credit analysis. Today’s institutional investors seek detailed strategies that outline how meeting decarbonisation targets will impact business models and debt servicing. Banks can also offer solutions to help mitigate any short-term dips in profitability.
In hard-to-abate sectors, the capital-intensive nature of large transition financing projects means that many would be impossible without flexible financing solutions provided by banks. In 2024, for example, German steel manufacturer Salzgitter launched its SALCOS® program which aims to gradually reduce CO2 emissions in their steel production by 95% by 2033 by gradually replacing the blast furnaces currently in use with direct reduction plants and electric arc furnaces. Initially based on natural gas, green hydrogen will replace the coal currently used in conventional blast furnace process.
The first stage of the Salcos program that will take place in several steps involves an investment volume of approximately €2.3 billion. It was made possible by a €1.03 billion syndicated loan agreement and two ECA-covered Export Credits amounting to €500 million, arranged by selected financial institutions including Commerzbank.
The regulatory landscape, once an obstacle, is becoming more supportive
Despite – or perhaps due to – the growing corporate interest in transition planning, many businesses have highlighted the limitations of the current regulatory landscape. Standards may vary greatly across markets and unfortunately can be difficult to navigate or use inappropriate metrics – creating a barrier for banks and corporates alike. A major reason for transition finance’s struggle to gain traction in bond markets, for example, is the lack of standardised international frameworks for assessing decarbonisation targets.
A company’s sustainable responsibilities extend beyond internal operations to their full supply chains, requiring international standardisation that accounts for cross-border nuances. But progress is being made. While reporting standards across jurisdictions can appear complex, interoperability is growing, and various regulators have taken strides in addressing pain points.
The introduction of the EU taxonomy in June 2020, for example, attracted criticism for its focus on financing green efforts to the exclusion of hard-to-abate sectors. In response, the Corporate Sustainability Reporting Directive (CSRD), implemented in 2023, offers a more pragmatic approach allowing businesses more strategic autonomy.
By harmonising transition key performance indicators (KPIs), the CSRD may provide the standardisation needed to unlock the potential of transition finance in capital markets. Indeed, while Asian issuers are already pioneering the transition bond space, we expect Europe to follow suit during 2025.
Meanwhile, the International Sustainability Standards Board (ISSB), Global Reporting Initiative (GRI) and European Financial Reporting Advisory Group (EFRAG) are working to harmonise frameworks. By encouraging dataset harmonisation, these reporting frameworks support value chain visibility – especially as data transparency is a major obstacle to assessing supplier sustainability performance.
The bottom line: Transition plans need to outline the business case for sustainability
The market is also supportive of efforts to promote interoperability. The automotive sector, for example, has seen improved reporting harmonisation spearheaded by investor and Original Equipment Manufacturer (OEM) information requirements (e.g. Task Force on Climate-related Financial Disclosures (TCFD)), including transition plans (e.g. ISSB Transition Plan, UK Transition Plan Taskforce).
Robust transition planning will remain a key strategic focus for business leaders across a wide spread of economic sectors. Evidence indicates most OEMs internationally maintain sustainable commitments and expect the same from their suppliers. Similarly, banks across the EU, US and Asia recognise this and continue expanding their advisory and financing services. The handful of banks that withdrew from the Net Zero Banking Alliance at the start of 2025 did so primarily to avoid legal risks (e.g. anti-trust), not due to strategy shifts.
Looking ahead, standard-setters would be best served by avoiding overregulation, focusing on positive incentives rewarding progress and establishing stable framework conditions.
The emphasis must be on regulation quality and its ability to streamline complex processes. Climate change is a global issue and businesses’ supply chains typically span several countries; but while harmonisation is the end goal, an acknowledgement of regional nuance is also needed. The sustainable transition is being adopted at different speeds across the world, with distinct regional – or even national – characteristics.
Ultimately, the sustainable transition has now gathered enough momentum to make stopping it both impossible and undesirable. Sustainability is an investment opportunity and, in many cases, a positive business case for corporates. Planning for this transition will continue to be an increasingly major component of corporate strategy across all industries and business sizes.
The path forward is clear and by developing financing solutions or serving as trusted advisors, banks are helping corporates move in the right direction.