A new report from the International Energy Agency (IEA) emphasizes that scaling up transition finance could play a crucial role in tackling emissions across key sectors and economies worldwide. The study, Scaling Up Transition Finance, explores how this emerging financial mechanism can mobilise the capital required to support cleaner energy projects, especially in industries that are difficult to decarbonise.

According to the report, transition finance has the potential to unlock significant investment in projects that, while not classified as “green finance,” are essential for advancing sustainable transitions. The IEA finds that when supported by credible government and corporate strategies, this type of financing can help bridge funding gaps and accelerate progress toward global climate goals.

Although current flows of transition finance remain modest, the report estimates that between USD 400 billion and USD 500 billion per year could be mobilised over the next decade, a total of USD 4 trillion to USD 5 trillion. This would make it comparable in scale to today’s global green bond market.

The report, requested by IEA member governments during the Agency’s 2024 Ministerial Meeting, was launched at the Asia Zero Emission Community (AZEC) Business Forum in Kuala Lumpur by Keisuke Sadamori, the IEA’s Director of Energy Markets and Security. It builds on insights from the World Energy Investment 2025 report, highlighting how transition finance could be applied across three major sectors: steel and cement, critical minerals, and natural gas.

For transition finance to deliver meaningful global results, the IEA stresses that it must be directed toward hard-to-abate sectors and emerging or developing economies. The mechanism should also be designed to support both small and medium-sized enterprises (SMEs) and large corporations, ensuring broad access to capital and impact.

The Agency warns that without such targeted deployment, financial institutions might reduce their reported emissions simply by cutting exposure to high-emission sectors, rather than achieving real-world reductions.

With appropriate policy and institutional frameworks in place, the report concludes, transition finance could evolve from being viewed as a “second tier” of green finance into a “second pillar” of global financing for emissions reduction, a critical step toward a low-carbon economy.