The Loan Market Association (LMA) , along with its partners at the Loan Syndications and Trading Association Inc (LSTA) and the Asia Pacific Loan Market Association (APLMA), published its “Guide to Transition Loans” in October 2025. The Guide seeks to provide much-needed clarity and a practical framework for scaling up transition finance.

 

With the global economy on a journey toward net zero, the technical and engineering challenges which lie ahead of us in trying to deliver that net zero future should not be underestimated. The deployment of new low carbon technologies, retrofitting and upgrading existing assets and phasing out high-emitting technologies will require extensive financing solutions to fund research and development budgets, the implementation of science-based transition plans and industrial commissioning of plant assets and infrastructure. These improvements undoubtedly come with financing concerns for implementing businesses. Innovative financial instruments will be one of the key components of achieving this green transition.

 

Transition Loans

Transition loans are labelled financial instruments designed to support climate-aligned activities, particularly in hard-to-abate and high-emitting sectors.

The Guide distinguishes “transition loans” from “green loans”. Green loans are loans which fund activities already aligned with low-carbon objectives, whereas transition loans enable companies to invest in decarbonisation pathways, even if their starting point is not yet “green”.

Achieving net-zero greenhouse gas emissions by 2050 will require unprecedented investment; the private sector will need to play a leading role in funding that journey. Transition finance should bridge the gap for sectors facing unique decarbonisation challenges, supporting real-world emissions reduction and helping lenders manage climate-related risks.

The Guide distinguishes between “financing the transition” (all capital mobilised for decarbonisation) and “labelled transition finance” (specific instruments like transition loans and sustainability-linked loans).

 

Key Components of transition finance

 

The Guide identifies six components to transition finance:

1. Objective-Aligned: Transition loans should support an economy-wide transition to net zero, in line with the Paris Agreement.
2. Avoids Lock-In: They should avoid/prevent investments that would delay or obstruct long-term decarbonisation.
3. Science-Based: Benchmarks progress against recognised, science-based pathways.
4. Do No Significant Harm: Key consideration is to ensure climate action does not undermine other environmental or social goals.
5. Impact-Oriented: They should demonstrate tangible emissions reductions.
6. No Low-Carbon Alternatives: Focus on activities where lower-carbon options are not yet feasible.

 

Transition loans function similarly to other corporate loans. So, for example:

• general corporate financing (e.g., sustainability-linked loans with ambitious, science-based targets); or
• use-of-proceeds financing for specific assets or projects that enable decarbonisation.

The Guide emphasises that there are clear expectations for transition strategies, governance, reporting, and impact measurement: transparency, accountability and alignment with international frameworks.

 

Next steps

The Guide sets out an exposure draft of transition loan principles, a suggested series of loan principles which are published for market participants’ feedback.  The goal is to test the practicality, clarity, and market acceptance of the principles before they are formally adopted.

As the market for transition finance evolves, robust standards and cross-border cooperation will be essential to scaling up investment and driving meaningful climate action.  Transition finance is no longer a fringe concept; it’s central to achieving global net zero. The Guide offers a framework for financing the transformation of carbon-intensive sectors. The legal challenge now is to embed this into enforceable, transparent loan documentation.

This should be a reminder that the legal and finance community must help shape what ‘credible transition’ means in practice.

 

For legal guidance and advice regarding Financial Law queries, please contact Fearghal O’Loan or a member of our Finance team for more information.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.