A transition dog is still a dog

18 oct 2024

The transition finance market review is in many ways excellent, but I still don’t really know what “transition finance” is

I've just finished my first read through the Transition Finance Market Review. Congratulations to Vanessa Harvard-Williams and the team. It's an impressive piece of work. I particularly welcomed the persistent emphasis placed on the importance of appropriate government policy and incentives in order to achieve the transition. The last sentence of the executive summary makes the point pithily:

"Finance will ultimately flow to where markets believe future profitability, and therefore returns, will be generated: the UK must be clear-eyed about that reality."

Chapters 2, 3, and 6 set out a very impressive and detailed description of what it looks like for business and investors to collaborate with government to ensure the right policy signals are sent to enable investment flows. I need to reread it as there is a lot in there, but my impression from a first read is that it is really excellent work.

I remain more puzzled about Chatpers 1, 4, and 5. This may just be my inability to see something obvious, but I still don't really know what "transition finance" as a label really means and why we would want to set up a huge bureaucratic edifice to determine which assets qualify.

There are of course projects we need to stop that are currently being funded and projects we need to start that aren't. Presumably the idea is that by giving some things the "transition" label, it makes it more likely that they will happen. But as the report lays out clearly in several places, profitable projects tend to find finance, unprofitable ones don't. Putting the word "transition" in front of something uninvestible doesn't make it investible. A transition dog is still a dog.

So what is the point of it? I'm genuinely curious. Because there will be quite a lot of effort involved in defining and assuring all this transition finance stuff. Lots of money for the growing number of sustainability "helpers" in the system: lawyers, accountants, data providers and so on. The sustainable finance complex will be rubbing its hands in glee. These costs all create a tax on finance which will ultimately be paid for by consumers. What's the return going to be in terms of improved progress on our net zero goals? I imagine not a lot. But there will be lots of opportunity for those so inclined to release their inner central planner in producing, and trying to impose, flawed visions of what the economic transition will look like over the next 20 years.

Surely when we set the right economic incentives and clear policy we don't need investments labelled as transition finance - it's all just finance. We need to set the incentives and let the market decide, rather than try to create a machine with 10,000 slots into which we tell investors to put their coins. Do we really think that these transition finance roadmaps and designations are going to help smart investors figure out where to make money?

One can't avoid the suspicion that this is being done to meet the needs of a powerful investment industry that has come to like selling products that they can claim are sustainable and finds it annoying when ill-advised commitments they made in the past on financed emissions prevent them from participating in profitable opportunities. But should we care about this? There will be plenty of other investors to step in.

My question is this: what is the mechanism by which the "transition" label results in any additional finance flowing where it needs to flow in order to support the net zero transition? Until I get a credible answer to that, the “transition finance” label will continue to be meaningless to me.

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