Transition Finance: A Guide for Companies in the Energy Sector
As global efforts to curb carbon emissions intensify, the energy sector remains at the forefront of discussions among policymakers, investors, and industry leaders. While renewables are gaining traction, many businesses still operate within high-emitting frameworks, especially in regions reliant on fossil fuels.
Suppose any of these companies wants to commit to cleaner practices. In that case, they’ll need to rely on more than technological advancements, but also on strategic financial backing to support a measured and viable transition.
Across Asia, particularly in Singapore, financial mechanisms are emerging to help businesses decarbonise while preserving their operational stability. Recognising that progress unfolds in phases, these tools offer energy companies a crucial opportunity to invest in sustainable transformation without abruptly dismantling their core functions.
Building on this phased approach, transition financing is crucial in helping companies reduce their emissions over time. This article examines how energy businesses can effectively and responsibly leverage this process, with a focus on Singapore’s evolving business environment.
Understanding Transition Finance and Its Relevance to the Energy Sector
The energy sector is one of the largest contributors to global greenhouse gas emissions, yet it is also among the most challenging to decarbonise. Some can adopt clean technologies with minimal disruption, but in most circumstances, energy companies must navigate complex operational, regulatory, and financial constraints when transitioning to lower-emission models. This makes access to appropriate financing not just beneficial, but essential to this goal.
To bridge this financial gap, transition finance provides targeted funding to help high-emitting industries move toward long-term decarbonization. Unlike green finance, which strictly backs projects already aligned with sustainability standards, transition finance acknowledges that many businesses are still in the early or intermediate stages of transitioning to sustainability. This mechanism is specifically structured to fund credible plans that drive emissions reductions over time.
For energy companies, this means capital can be allocated to cleaner technologies, equipment upgrades, and shifts in fuel sources, even before full alignment with net-zero targets. Because it enables action today rather than delaying until complete readiness, transition finance allows more businesses to move forward responsibly and without disruption.
Navigating the Transition Finance Landscape in Singapore
Singapore has positioned itself as a leading hub for sustainable finance in Asia, and its approach to transition finance reflects this broader ambition. With knowledge of the unique needs of carbon-intensive industries, regulators and policymakers have introduced frameworks to guide financial institutions and businesses toward more transparent and responsible practices.
A pivotal development is the Singapore-Asia Taxonomy for Sustainable Finance, launched by the Monetary Authority of Singapore (MAS) in December 2023.
Among global taxonomies, it stands out for including a dedicated category for transition activities, defining “green,” “transition,” and “ineligible” activities based on science-based thresholds. By setting clear parameters for emissions reductions, the taxonomy provides much-needed clarity for investors and businesses while mitigating greenwashing risks.
Further reinforcing this commitment, MAS introduced the Finance for Net Zero (FiNZ) Action Plan in April 2023. Expanding on the Green Finance Action Plan from 2019, FiNZ focuses on strengthening climate-related financial disclosures, fostering a climate-resilient financial sector, and promoting credible transition plans. It aims to mobilise capital towards decarbonisation while encouraging financial innovation and capacity-building for climate risk management.
Together, these initiatives demonstrate Singapore’s dedication to practical, science-aligned transitions. For energy companies, they signal that the local financial ecosystem is evolving to support meaningful climate action, backed by both policy and capital.
Practical Steps for Energy Companies to Access Transition Finance
That being said, securing transition finance is not a one-size-fits-all process. For energy companies, the path forward depends on having a well-defined roadmap, credible emissions targets, and a willingness to engage with evolving financial instruments. Even as opportunities grow, access hinges on clarity and commitment.
To begin, companies should take the following practical steps:
> Identify eligible activities that align with transition pathways as outlined in the Singapore-Asia Taxonomy. This could include fuel-switching initiatives, equipment upgrades, or emissions reduction technologies that meet the criteria for transition activities.
> Develop a science-based transition plan that provides for measurable emissions reduction targets, interim milestones, and clear timelines. The credibility of this plan is central to attracting financial support.
> Understand the available instruments, such as sustainability-linked loans and transition bonds, which tie financial terms to environmental performance metrics. These tools provide both funding and incentives for meeting climate goals.
> Engage early with credible financial institutions that are actively structuring products to support transition finance. Clear communication and transparency around plans will help build trust with lenders and investors.
Beyond these steps, companies can explore new mechanisms, such as MAS’s Transition Credits Coalition (TRACTION). Launched in December 2023, this initiative supports the development of high-integrity transition credits to facilitate the early retirement of coal-fired power plants across the region.
Upon combining financial discipline with environmental ambition, energy companies can position themselves for long-term success in a carbon-constrained future.
Case Studies and Best Practices
Transition finance is gaining traction not only among large energy firms but also with adjacent industries. In Singapore, Sembcorp Industries has leveraged transition finance to accelerate its shift toward renewables. In June 2021, the company issued a SGD 400 million green bond, the first certified green bond by a Singapore-based energy company under the Climate Bonds Standard.
The proceeds were allocated to renewable energy projects, supporting its long-term goal of reducing reliance on fossil fuels. This demonstrates how financial instruments can be structured to directly enable emissions reduction.
Looking abroad, Odfjell, a Norwegian shipping company, introduced a Transition Finance Framework to fund decarbonisation projects. These include vessel retrofits, research and development for cleaner technologies, wind-assisted ship propulsion (WASP), and zero-emission capable new builds.
Although not Singapore-based, Odfjell’s approach offers relevant lessons for maritime actors operating out of Singapore, another carbon-intensive industry that is also targeted for reform.
Across these cases, a few best practices stand out: (1) working with experienced partners, (2) aligning projects to credible targets, and (3) structuring financing around transparent climate outcomes. Energy companies that apply these principles will be better positioned to secure support and navigate the shift to a low-carbon economy.
Transition finance offers a practical bridge between current realities and future low-carbon goals. For energy companies, especially those operating in or through Singapore, the necessary tools and frameworks are already in place. What matters now is a business’s commitment to taking credible action.