This section presents strategic perspectives on advancing sustainable growth in developing countries by encouraging stronger engagement with the private sector. It introduces practical approaches and partnerships that contribute to job creation, expanded access to infrastructure, and the development of future-oriented industries. Through knowledge sharing and collaboration, this section aims to highlight how inclusive engagement with private actors can complement national development goals and support resilient, self-sustaining economic progress.
Compiled by: Kyoungshin Kim, KGGTF Consultant
"Transition Finance: Enabling Sustainable and Transformative Development"
As the global community accelerates efforts to achieve sustainable development goals, a critical challenge arises: How can we support high-emission industries and developing economies in their transition toward more sustainable practices, without hindering economic growth or deepening social inequities?
Traditionally, green finance has focused exclusively on funding “pure” climate-positive projects, such as solar farms, wind energy, electric vehicle infrastructure, and other fully green technologies. However, this binary classification—labeling projects as either "green" or "non-green"—fails to account for an essential need: the financing of transitional activities. These are initiatives that may not yet be fully sustainable but serve as critical stepping-stones on the path to more climate-resilient development. This is precisely the role that transition finance is designed to fulfill.
According to the OECD Secretary-General’s Report to the G20 Finance Ministers (February 2025), transition finance refers to the provision of financial resources to companies, sectors, or countries that are not yet aligned with net-zero targets but have credible, time-bound plans to reduce emissions and adopt greener operations. As the report aptly states, “Transition finance is not about perfection; it is about direction.” (OECD, 2025)
Why Transition Finance Matters Now
There are three compelling reasons why transition finance has become a central theme in the 2025 global climate finance discourse.
1. The Limitations of Green-Only Capital Flows
While green finance remains vital, its scope is often too narrow to address the real-world decarbonization needs of many industries. Sectors such as steel, cement, shipping, and aviation cannot leap to clean energy overnight. These industries require capital to gradually upgrade technologies, shift to cleaner fuel sources, improve operational efficiency, and implement carbon capture or alternative production methods. Without financial support for these transitional phases, net-zero ambitions may remain aspirational rather than attainable.
2. Private Sector Hesitancy and the Role of Public Guarantees
Many private investors are reluctant to finance high-emission sectors due to reputational and regulatory risks. However, without the flow of capital into these areas, progress toward sustainability will stall. This hesitation underscores the importance of blended finance structures, in which public funds help de-risk early-stage investments, thereby attracting private capital to support scalable transition models.
An illustrative example can be found in Latin America. As reported by The Guardian (June 16, 2025), the Inter-American Development Bank (IADB) has launched a publicly backed green loan facility aimed at mobilizing trillions of dollars in private investment for renewable energy transitions. The mechanism uses public capital to guarantee commercial loans, enabling broader access to capital and more inclusive participation in transition efforts.
(Source: The Guardian, “Bank unveils green loans plan to unlock trillions for climate finance,” June 16, 2025)
3. Sectoral Inequities in Climate Finance
Agriculture contributes nearly one-third of global greenhouse gas emissions, yet it receives less than 5% of climate finance—a disproportionate and unsustainable gap. A recent Reuters article underscores the urgent need for climate finance to better support sustainable agriculture, particularly in developing countries. Innovative financial models—such as blended finance and transition-linked mechanisms—are crucial to help farmers adopt regenerative practices and climate-smart technologies.
(Source: Reuters, “Why sustainable agriculture has to be at the heart of climate funding,” June 23, 2025)
Global Trends in Transition Finance
Transition finance is also beginning to influence sovereign investment strategies. On June 26, 2025, Reuters reported that Poland had updated its national green bond framework for the first time in six years to align with International Capital Market Association (ICMA) guidelines. Importantly, the new framework allows for the financing of coal phase-out initiatives and broader energy transition projects. This marks a significant policy shift toward embedding transition finance in national fiscal instruments.
(Source: Reuters, “Poland updates green bond framework ahead of possible first issuance in six years,” June 26, 2025)
Meanwhile, the Climate Bonds Initiative (CBI) has released a draft Sovereign Transition Finance Framework, offering detailed guidance to countries seeking to issue transition-linked bonds. The framework includes tools for assessing credibility, setting measurable benchmarks, and aligning fiscal instruments with long-term climate goals. The final report is expected by Q4 2025.
(Source: Climate Bonds Initiative, Draft Framework, June 2025)
Toward a Practical Transition Framework
From a policy standpoint, the OECD further emphasizes the need to develop robust taxonomies that clearly differentiate among “green,” “transition,” and “brown” investments. Such classifications not only help investors manage risk but also reward meaningful progress, not just end-state outcomes. The OECD encourages multilateral development banks (MDBs) to integrate transition finance components into their project appraisal criteria and lending strategies.
For developing countries, this shift presents significant opportunities. Transition finance can facilitate:
- Adoption of cleaner technologies in energy-intensive industries,
- Modernization of aging infrastructure,
- Replacement of coal with natural gas or hydrogen alternatives, and
- Reskilling of workers in carbon-dependent regions.
Korea’s National Push for Transition Finance
South Korea has begun actively shaping its transition finance ecosystem to support decarbonization in hard-to-abate sectors. The government plans to mobilize over KRW 420 trillion (~USD 300 billion) in green and transition policy finance by 2030, with a focus on steel, petrochemicals, shipbuilding, and semiconductors. A draft “Low-Carbon Transition Finance Act” has been introduced to facilitate bond issuance and tax incentives for industries pursuing credible transition pathways. According to BCG, Korea’s total demand for transition finance could reach KRW 1,000 trillion by 2030. Public institutions, including the Bank of Korea and Korea Development Bank, are also exploring blended finance tools to reduce risks and encourage private sector participation.
(Sources: Reuters, Hankyung, KITA, BCG Korea, Yonhap News, June 2025)
From Ambition to Implementation
Transition finance is not a temporary workaround—it is a strategic imperative. It recognizes that sustainable development requires more than ambition; it requires realism, innovation, and inclusivity. Not all countries or sectors can transform overnight. But with credible planning, transparent reporting, and targeted financial support, every economy can move forward.
As the global development community continues to search for effective pathways to sustainable prosperity, KGGTF remains committed to championing transition finance as a practical, inclusive, and high-impact tool for climate-resilient growth.