Everyone Wants Net Zero. Few Want Transition.
Why is sustainable finance better at funding what’s already green than financing the companies that still need to transition?
In 2025 the world is on course to spend a record $3.3 trillion on energy, and for the first time clean energy will attract roughly two dollars for every one that flows to oil, gas and coal — about $2.2 trillion against $1.1 trillion, according to the IEA’s World Energy Investment 2025. In the advanced economies, the same report puts combined investment in low-emissions generation and storage at roughly twelve times fossil generation.
These are extraordinary numbers. They are also the easy part. Announcing a net-zero target costs a press release; financing the transition costs a balance sheet. Markets have grown very good at funding things that are already green, and remain hesitant about the difficult, expensive process of things becoming green. Those are not the same problem, and we keep treating them as if they are.
Green finance is not transition finance
Consider two companies. The first builds solar farms: clean revenue, trivial emissions, an easy fit for a green bond framework or an ESG index. Capital finds it easily.
The second is a blast-furnace steelmaker that has committed billions to hydrogen-based direct reduction. For a decade it will remain, on paper, one of the dirtiest names an investor can hold — even though the marginal tonne of capital going into it may abate far more carbon than another solar panel in a country that already has plenty. The first company is green. The second is getting green. Our financial plumbing is built to reward the former and is unsure what to do with the latter.
Green-labelled bonds accounted for 64% of aligned sustainable debt in 2025, per the Climate Bonds Initiative, which recorded roughly $1.0 trillion of aligned issuance. Clearer is the market’s shape: instruments built specifically to finance transition are dwarfed by conventional green issuance. Aligned sustainability-linked bonds grew 46% in 2025, but from a base of just $14 billion, a rounding error beside the green-bond market. The capital meant to move companies through the transition remains much smaller — and harder to mobilise — than conventional green finance.
The transition is expensive — and sometimes the economics genuinely don’t work yet
It is tempting to read that reluctance as timidity or bad faith. Often it is neither — much transition investment simply does not pencil out today.
Take green hydrogen, on which much heavy-industry decarbonisation depends. In India, its levelised cost sits around $3.5–5 per kilogram, against roughly $2.3–2.5 for the grey hydrogen it is meant to replace. The government targets $2/kg by 2030; several analysts think true unsubsidised parity may not arrive until the early-to-mid 2030s. So a steelmaker weighing a hydrogen route is not being asked to make a good investment — it is being asked to make a loss-making one, on faith that policy, carbon pricing and scale eventually close the gap. Add technology risk, uncertain offtake and stranding risk, and delay looks less like cowardice than a rational response to real uncertainty. A management team can sincerely support decarbonisation and still, correctly, conclude the numbers aren’t ready. Transition finance has to solve for that — not for reluctance, but for economics that are real.
The numbers tell two stories at once
Here is where the data refuses to cooperate with a tidy thesis.
Ask “is clean energy winning?” and the answer is plainly yes. Solar alone will draw $450 billion in 2025; clean investment has climbed from 44% of the energy total a decade ago to two-thirds today. The aggregate gap between clean and fossil is narrowing, fast.
Ask “is capital reaching the hard parts of the transition?” and the picture darkens. To align with a net-zero pathway, the IEA reckons annual clean-energy investment must roughly double, to around $4.5 trillion by the early 2030s. In emerging economies outside China, it needs to rise something like sevenfold. Africa holds 20% of the world’s population and receives 2% of clean-energy investment; its debt-servicing costs in 2025 are equivalent to more than 85% of all the energy investment the continent makes. And grids attract barely $400 billion a year against more than $1 trillion for generation.
The more I looked at the numbers, the less the problem resembled a shortage of money and the more it resembled a sorting mechanism — capital pooling where deployment is easiest, and thinning where the transition is hardest.
The investor’s problem is real, not lazy
The sectors that sorting starves are the ones that most need to change — steel, cement, chemicals, shipping, aviation, industrial heat, the hard-to-abate quarter of global emissions. A cement plant retrofitting for carbon capture does not become an ESG darling; it becomes a high-emitter with elevated capex and compressed margins, a stock most mandates are built to avoid.
Blaming asset managers for that is easy and mostly wrong. Their incentives are structural. An investor judged quarterly, against a benchmark, cannot easily hold a high-emitting steelmaker whose transition thesis plays out over ten years and whose next three look like margin pressure and headline risk. Transition investing means accepting more risk and worseoptics today for a better outcome later — and later is not when performance is measured. Add reputational exposure and the fact that a credible transition is harder to underwrite than a solar farm, and the caution becomes legible.
Get Nidhi Bhat’s stories in your inbox
Join Medium for free to get updates from this writer.
Which is the central trap. A heavy emitter mid-transition can be too dirty for the green fund and too risky for the conventional one — stranded in the middle, unable to raise the very capital its transformation requires. The companies whose change would matter most are the ones our markets are least designed to fund.
The paradox of exclusion
Divestment is the intuitive response, and it does something measurable: it lowers the emissions attributed to yourportfolio. But portfolio decarbonisation and economic decarbonisation are not the same thing, and conflating them is a costly error. When a fund sells its stake in a coal-heavy utility, the utility’s emissions do not fall — the shares simply move to an owner who cares less. The carbon stays in the atmosphere; only its ownership changes.
This isn’t quite the whole story. Sustained, broad-based divestment can raise a company’s cost of capital and shift the incentives of the managers who remain. But those channels are slow and indirect, and none puts a single rupee of transition capital on the table. For a firm with no credible pathway, walking away is a fair allocation of risk. The point is narrower: exclusion and engagement are different instruments for different situations, and a market that reaches reflexively for exclusion will systematically underfund the transitions patient capital could finance.
The hardest question: who pays?
Underneath every financing structure sits a distributional problem no clever instrument dissolves. A transition can be net-beneficial over twenty years and painful over five, and someone absorbs that pain in the interim — consumers, shareholders, taxpayers, lenders, workers. Transition finance is usually discussed as a product-design puzzle — the right bond, taxonomy, blended vehicle. It is really an allocation-of-costs question, as much political as financial. Nowhere is that clearer than in the economies asked to carry the cost while they are still trying to grow.
India makes the tension impossible to ignore
No economy exposes this better than India, which must do everything at once: grow, industrialise, expand energy access and create jobs — and cut emissions, on a net-zero-by-2070 timeline.
The headline looks like triumph: India crossed 50% non-fossil installed capacity in 2025, five years early. But capacity and generation tell different stories — coal still produces roughly 73–75% of the electricity, because with demand surging and storage still short, dispatchable power commands a premium solar cannot yet match.
Industry is harder still. India is expanding steel capacity, much of it via blast furnaces fed by imported coal and run on captive coal generation, a parallel carbon-intensive grid insulated from utility-level greening. From January 2026, the EU’s Carbon Border Adjustment Mechanism entered its definitive regime. The European Commission subsequently published a Q1 2026 certificate price of €75.36 per tonne of CO₂; importers will purchase certificates from February 2027 to cover their 2026 imports. For an Indian exporter, carbon intensity is now a line item that decides how competitive a shipment looks in Europe. Green hydrogen was meant to bridge much of this, yet stays structurally more expensive than the grey hydrogen it replaces.
So India poses a precise, unforgiving question: how do you finance a transition that is economically necessary but not yet commercially attractive? Answer that, and you have confronted one of the central problems of transition finance. We haven’t.
The problem generalises. Where the cost of capital is high, currency risk significant and paybacks long, private money alone won’t show up at the price the economics require — which is why transition finance keeps colliding with development finance: concessional funding, blended structures, guarantees. The IEA estimates such concessional flows must reach $80–100 billion a year by the early 2030s just to catalyse private capital. Yet emerging markets make up only about 14% of labelled bond issuance, on World Bank data. The capital markets we built for the transition largely speak to the places that need them least.
Are markets rewarding the wrong thing?
Markets are demonstrably good at rewarding green: the LSEG green economy surpassed $10 trillion in market capitalisation for the first time, while green revenues grew 5.3% in 2025, and it has outperformed global equities by roughly 133% since 2008. What markets price far worse is the rate and credibility of improvement — a transition premium that would reward a heavy emitter for a plausible plan to halve its footprint over a utility with no plan at all. The difficulty is that a transition premium only works if investors can distinguish a credible transition from an attractive story about one.
The instinct is to say markets should reward improvement. But it deserves resistance, because improvement is exactly where greenwashing hides. A transition plan is a promise, and promises are cheap. There is a deeper measurement trap here, familiar from this series’ ESG-data arguments: the market risks judging its success by how much capital gets labelled transition rather than by how much emissions actually fall — the same substitution of proxy for substance that has dogged ESG scoring from the start. A market that optimises for the label rewards the companies best at producing transition narratives, not the companies that transition.
Increasingly this is industrial policy as much as climate policy: CBAM, the US Inflation Reduction Act, China’s clean-tech lead and Europe’s 2025 “Omnibus” rollback of its own sustainability rules are about competitiveness, trade and energy security as much as emissions.
Net zero is a destination. Transition is a balance-sheet problem.
The comfortable part of net zero is the target; agreeing on the destination costs nothing. The hard part is deciding who funds the assets, tolerates the inefficiencies and carries the risk of the journey — and there, the enthusiasm thins.
The evidence cuts both ways. Clean investment is at record highs and pulling ahead of fossil fuels; by that measure the system is working. But the transition-specific capital — for hard-to-abate industry, grids and emerging markets beyond China — is exactly where the money thins, the labels fail and the incentives point the wrong way. The market has become remarkably good at financing green assets. Whether it can finance the messy, uneconomic, decade-long business of companies becoming green remains an open question.
Which leaves a harder one than the piece began with. If everyone agrees the economy must transition, why are our capital markets still built to reward the destination more easily than the journey? Net zero will not be reached by financing only the companies that are already clean. It will be reached — if it is reached — by financing the ones that still have to get there.
