For most of its existence as a concept, sustainable finance has been heavily focused on directing capital towards ‘green’ assets and already low carbon businesses. This approach has helped scale renewable energy, clean technology and sustainable infrastructure. However, only financing companies and assets that are already green will not be enough to achieve Net Zero.
The greater challenge, and potentially an overlooked opportunity, lies in financing companies in emission-intensive sectors that can deliver substantial near-term decarbonisation, even if their long-term role in low carbon economy remains uncertain.
The core rationale for transition finance is to deploy capital at scale to support the economy-wide shift to Net Zero. This includes transforming high-emitting sectors, implementing corporate transition plans, and scaling emerging technologies needed for decarbonisation.
The reality is that emissions are concentrated in a small number of sectors and companies.
Heavy industries such as steel, cement, chemicals, aviation, shipping, and fossil fuels produce a substantial share of global emissions, yet they also underpin modern economies. Reaching climate goals therefore requires these sectors to decarbonise rather than simply divest them from investment portfolios. Both the move to a low carbon economy and a just transition depend on it.
This distinction highlights an important principle: cutting emissions in the real world is not the same as decarbonising investment portfolios. Investors can reduce the carbon intensity of their portfolios by selling high-emitting assets, but this does little if those assets continue operating under different ownership. By contrast, providing capital to support credible transition plans will reduce emissions in the real economy. And this will certainly involve high-emitting sectors.
Financing ‘imperfect’ companies can have a greater impact than only backing perfect ones. A renewable energy developer may already be on a low carbon pathway, whereas a steel manufacturer investing in green hydrogen technology or low carbon production methods could achieve far larger absolute emission reductions. The challenge is that these businesses often face higher technological, operational and financing risks, which make access to capital more difficult. Improving this in a way that accelerates decarbonisation is critical for the finance sector, and where it can achieve the most material results.
Credibility matters
Ongoing debates around how to define transition finance are risking a slowdown in capital deployment just when rapid investment is needed. Rather than seeking perfect definitions, markets should focus on directing finance to activities that credibly support the transition and align with long-term decarbonisation pathways.
Of course, financing imperfect companies does not mean financing every high-emitting business unconditionally. Credibility matters. Investors increasingly expect robust transition plans, science-based targets, transparent governance and measurable progress. Frameworks developed by organisations such as the International Capital Market Association (ICMA) and Climate Bonds Initiative emphasise that transition finance should support companies demonstrating genuine commitment and accountability, rather than those using sustainability claims to justify business-as-usual activities.
Through transition planning, climate strategy, target setting and sector-specific decarbonisation pathways, investors and lenders can help ensure that capital is directed towards emissions reductions that are both credible and impactful. The focus moves beyond simply identifying today's sustainability leaders and towards supporting tomorrow's transition leaders.
For banks, it’s a fantastic opportunity to rediscover the craft of capital allocation. By strategically tilting portfolios toward companies with credible transition plans, the manager does not abandon prudence; rather, they position themselves at the point where regulatory foresight, market sentiment and technological progress intersect. Here, climate risk is progressively converted into competitive advantage and managing the potential for asset stranding in sectors exposed to transition pressures becomes an exercise in prudent portfolio stewardship.
Ultimately, the low carbon transition will not be delivered solely by financing the already-green corners of the economy, but by transforming the sectors that generate the majority of emissions today. This means financing change, not just rewarding perfection. Recognising that the most important climate outcomes may come from helping imperfect companies become better is the most significant prospect for investors looking at sustainable finance opportunities.
The low carbon transition will not be delivered solely by financing the already-green corners of the economy, but by transforming the sectors that generate the majority of emissions today.
This article was originally published in Sustainability Magazine, September 2026. The Carbon Trust: Why We Should Finance Imperfect Companies.
