Transition Finance in Germany and China

Frankfurt School of Finance and Management (FS) and the Institutes of Science and Development, Chinese Academy of Sciences (CASISD) conducted a Sino-German Joint Research on Transition Finance on behalf of the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ).

The study is a landmark report on Sino-German understanding of transition finance, and its findings hold multiple critical implications for public and private market actors. It provides policy recommendations that will pave the way for the development of a stronger transition finance market and accelerate a fair and inclusive transition to climate neutrality in the Chinese and German economies. To this end, the study seeks to develop a common understanding of transition finance in China and Germany under the G20 framework. Moreover, the report examines pressing challenges facing the development and implementation of transition finance as well as existing initiatives and current market practices aiming at accelerating the transition to a net-zero economy.

Green finance and transition finance – a definition

Green finance targets activities or entities that already have a positive impact on climate and the environment, whereas transition finance seeks to support the decarbonisation pathway of high-emitting and hard-to-abate sectors over time. Thus, it is important to understand and acknowledge, that transition finance may deal with dirty solutions today, if there is a robust and credible transition plan to transform these solutions in line with the global climate goals in the coming years and decades. For instance, natural gas in the heavy industry may be seen as transition technology to overcome business risks, while putting in parallel efforts in research and development in the use of green hydrogen as a substitute input energy source.

However, challenges in defining transition finance loom large: “Credible transition pathways are based on reliable and comparable data on environmental performance of transition finance projects with clear accountability of its impact. To this end, there remains further scope for knowledge exchange to shape evolving transition pathways”, explains lead author Sheryl Loh from Frankfurt School’s International Advisory Services (IAS). Michael König-Sykorova, Co-author from the Frankfurt School – UNEP Collaborating Centre for Climate & Sustainable Energy Finance, adds: “Understanding these urgent challenges is crucial to avoid transition washing, facilitate effective policy making and pave the way for deeper interaction between public and private market actors.”

Recommendations for policy makers and further actors

The insights provided in this study serve a wide variety of actors in two distinct ways. Firstly, the lack of a harmonised definition and the creation of appropriate standards, as stressed in this report, represents a call to action for national and international regulatory agencies. Secondly, the analysis conducted in this study may allow financial market participants and academic institutions to gain a deeper understanding of existing market instruments and the way in which these are being implemented in Germany and China.