Green Finance Alone Cannot Deliver Net Zero as BNP Paribas AM Calls for Urgent Scale-Up of Transition Finance

BNP Paribas Asset Management has published a policy analysis arguing that the rapid growth of green investing over the past decade has failed to reduce real-world emissions, with global greenhouse gas levels continuing to rise despite significant portfolio decarbonisation by institutional investors. Written by ESG Analyst and Sustainable Fixed Income Lead Malika Takhtayeva and Climate Change Lead Thibaud Clisson, the paper identifies the systematic exclusion of hard-to-abate sectors from responsible investment strategies as the central weakness of current sustainable finance frameworks. The authors argue that transition finance, directed at high-emitting industries such as steel, cement and heavy transport that need capital to reduce their environmental footprint, must now move to the forefront of the sustainable finance agenda.

 

The Structural Flaw in Current Sustainable Finance Approaches

 

The dominant approach to sustainable investing over the past decade has been to direct capital toward assets already aligned with a low-carbon economy, driven by regulatory frameworks such as the Sustainable Finance Disclosure Regulation and the EU Taxonomy. While this has mobilised significant capital into renewable energy and other green sectors, it has created a structural gap in which the sectors most in need of transition funding are systematically underrepresented in responsible investment portfolios. Hard-to-abate industries including steel, cement and heavy transport account for a substantial share of global emissions but receive limited attention from ESG-focused investors who prefer clean assets over complex transformation stories.

The paper raises a fundamental question about whether investors are truly contributing to decarbonisation or simply reallocating carbon-intensive assets to other owners without reducing overall emissions. When a responsible investor sells a coal or steel asset, the asset continues to operate under a different owner, and global emissions are unchanged. This portfolio-level decarbonisation without real-world impact represents a critical limitation of exclusion-based strategies that transition finance frameworks are specifically designed to address by staying engaged with emitting sectors and financing their transformation.

 

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Transition Finance as a Complement to Green Investing

 

Transition finance targets emission-intensive countries, companies and sectors to help them shift toward sustainable practices aligned with long-term climate and development goals. The paper identifies two complementary roles for transition finance that green finance alone cannot fulfil, covering the financing of hard-to-abate industrial sectors where clean technologies are not yet commercially available or cost-competitive, and the mobilisation of capital into emerging market and developing economies where the energy transition is most uneven. The global energy transition is currently adding clean energy on top of existing fossil infrastructure rather than replacing it, and transition finance is intended to accelerate the phase-out of the legacy systems.

BNPP AM has developed a proprietary framework to assess the robustness and credibility of investee companies' transition plans, providing analysts and portfolio managers with a structured approach to evaluate how well companies are prepared for their decarbonisation journey. The firm has also been active as a coordinator of the International Capital Markets Association's Climate Transition Bond working group, advocating for the transition label to become a standalone label separate from green bonds. This separation is intended both to protect the integrity of green bond standards and to make it easier for hard-to-abate issuers to access the sustainable finance market without being held to the same threshold as pure-play green assets.

 

Regulatory Developments and the Role of SFDR Article 7

 

The anticipated update of SFDR through a new Article 7 designation could play a pivotal role in scaling transition finance by improving transparency about real-world investment impacts and helping investors identify companies that need financing to decarbonise. By requiring disclosure of adverse impacts alongside transition efforts, Article 7 would enable investors to better assess which companies are credible candidates for improvement rather than excluding them on the basis of current emissions profiles. The authors warn, however, that Article 7 must not be drafted so narrowly that it excludes too many investments, as sufficient scope is needed to allow allocation across the full range of hard-to-abate sectors requiring transition capital.

In the United Kingdom, the Sustainability Disclosure Requirements have introduced an Improver label focused on financing companies that demonstrate environmental improvements over time, providing an early precedent for transition-focused regulatory frameworks. BNPP AM has adopted this label for five fixed income and equity funds with the goal of supporting the transition toward a decarbonised economy. The authors also emphasise the importance of project-level carbon footprint metrics in transition bond impact reporting, noting that clients require concrete data on actual emissions reductions rather than forward-looking avoided emissions figures that may never be achieved.

 

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Risks and Requirements for Effective Transition Finance

 

The paper identifies several risks associated with transition finance that require careful management by investors and standard setters. Poorly designed or weakly governed transition strategies could lead to carbon lock-in, in which capital continues to support emissions-intensive assets without credible decarbonisation pathways, exposing investors to reputational risk at a time of heightened regulatory and public scrutiny. Ensuring consistency between loan and bond markets is also identified as essential so that both instruments can effectively support issuers' transition strategies across different capital structures and investor bases.

The authors call for five specific actions to advance transition finance at scale, covering the expansion of sustainable finance scope to include hard-to-abate sectors, implementation of robust standards and transparency enforcement, alignment of global regulatory frameworks to support transition-focused strategies, a shift in investor focus from portfolio decarbonisation to real-world impact and consistency between debt market instruments. These requirements collectively describe a systemic transformation of sustainable finance frameworks rather than incremental adjustments to existing approaches, reflecting the authors' assessment that the scale of the challenge demands structural change.

 

Outlook for the Transition Finance Market

 

The BNPP AM analysis represents a significant institutional voice calling for a fundamental reorientation of sustainable finance toward transition rather than purely green investing. The argument that minimising global temperature increases depends on helping everything that is not yet green to transition, rather than only financing what is already green, aligns with growing consensus among climate economists and development finance institutions. As mandatory disclosure frameworks such as SFDR 2.0 and ISSB-aligned reporting expand, the pressure on investors to demonstrate real-world emissions impact rather than portfolio composition metrics is expected to intensify.

Whether the sustainable finance market can successfully pivot toward transition finance at scale will depend on regulatory clarity, robust transition plan assessment frameworks and the willingness of institutional investors to accept the additional complexity of engaging with hard-to-abate sectors. The development of credible transition bond markets, the emergence of proprietary transition assessment tools such as BNPP AM's own framework and the gradual convergence of global regulatory standards all represent positive developments in the direction the authors are advocating. The next phase of sustainable finance is likely to be defined by how effectively the market moves from portfolio decarbonisation to driving genuine emissions reductions in the real economy.

 

Source: BNP Paribas Asset Management