It takes about 20 years for a blast furnace to reach the end of its life. The money needed to convert that facility into an electric arc furnace comes from banks, and banks attach the name "transition" to that money. The moment the name is attached, the loan becomes part of a green portfolio. But if the blast furnace is still standing 20 years later, what will that name mean?
Transition finance is a way of putting money into high-emitting brown assets rather than into assets classified as green. Cutting emissions from steel, cement and petrochemicals contributes more to the total reduction than investing in renewable power plants. The discussion is now getting under way in Korea as well, and the United Kingdom's release of criteria for identifying transition finance investments has added one more piece of material to the debate. It is hard to take issue with the intent.
The problem is the link that binds the name to the results. If transition finance does not come with the locks of climate disclosure and a reduction roadmap, it becomes a channel through which emitting companies buy a green label. That single line is what this column means to say.
The substance of the lock is simple. The company receiving the money discloses its emissions within a set scope and cycle, produces a plan containing annual reduction targets and the timing of facility replacement, and sees its interest rate or terms change when it fails to keep that plan. If even one of the three is missing, verification does not hold. Without disclosure there is nothing to check, without a plan there is no standard for comparison, and without penalties the plan remains a document.
The counterargument is not to be brushed aside. It holds that if disclosure burdens and roadmap requirements are imposed strictly, the mid-sized emitters that most need to cut emissions will be pushed out of financing. If the transition itself is delayed while waiting for perfect verification, emissions keep accumulating in the meantime. It is a valid concern.
Even so, the conclusion does not change. The diagnosis that the verification burden is excessive should be answered by applying different items and timelines according to company size rather than by removing verification. Items of high difficulty such as supply chain emissions accounting can be given a grace period, but the minimum framework of disclosing a company's own emissions and setting annual targets has to be imposed without exception. If even the minimum framework is waived, transition finance and ordinary loans become products that differ only in name.
The longer the design of the system is delayed, the losses do not accumulate on only one side. If the label alone runs ahead, companies that actually replace their facilities borrow money on the same terms as companies that only attach the label. The side that loses out then is the company that spent money on replacing its facilities.
The point to watch is whether, when Korea's transition finance criteria are released, they contain a clause on what happens when reduction targets are missed. If there is only a list of emitting companies and target industries with no clause on shortfalls, that standard is merely a rule for allocating funds and cannot become a rule for cutting emissions. A single clause will decide the fate of the blast furnace 20 years from now.
