Unlocking the Transition: Bridging the Gap with Public-Private Collaboration

The global transition to a low-carbon economy is a critical challenge, and the eagerly anticipated report from the UK's Transition Finance Market Review (TFMR) is set to bring renewed urgency to the discussion on how this can be best achieved. As the finance sector works closely with clients to enable progress, the post-TFMR debate must focus on the reality that the most effective way to deliver greater investment in the transition is to ensure that the required technological solutions present appropriate risk-return rewards for investors.

Unlocking the Potential of Transition Finance

Addressing Economic Barriers to the Transition

Many transition-related technologies in harder-to-abate sectors are not currently commercially viable, as the technology is not yet cost-competitive, demand for these solutions remains nascent, and the risk-return trade-off is unattractive. This is not a lack of capital preventing greater deployment of transition finance, but rather an issue with the underlying project economics. Well-designed public policy can step in to help make project economics viable for providers of private capital, as demonstrated by the success of the US Inflation Reduction Act (IRA).

Bridging the "Missing Middle" Funding Gap

The "missing middle" funding gap for lab-proven projects and companies that have matured out of early-stage financing but have not yet reached the maturity required to attract other forms of capital and investment is a key challenge preventing the scaling of early-stage transition technologies. To close this gap, public and private finance will need to think differently about risk and about how capital is deployed, with catalytic public capital playing an essential role in many first-of-its-kind projects and nascent technologies.

The Limitations of Transition Plans Alone

Corporate transition plans can provide useful information to the market on the risks and opportunities of corporate decarbonization strategies, but on their own, they will not unlock transition finance at the speed and scale required. Enabling policy is essential to create the economic conditions required to attract and scale up the capital needed to turn ambitions into reality. Public support for the technologies required for the transition is crucial, as these become increasingly commercially viable and mature over time, they will be able to compete against existing technologies even in the absence of public incentives.

Fostering Public-Private Collaboration

As policymakers around the globe consider how to support transition financing, it will be vital to recognize that public-private collaboration focusing on cost-competitive routes for established companies to profitably evolve and for new disruptors to access the "missing" capital is the key to accelerating progress. By working together, the public and private sectors can create the conditions necessary to unlock the full potential of transition finance and drive the global transition to a low-carbon economy.