Transition Finance Is Moving into Hard-to-Abate Sectors, but Credibility Is the Constraint

China’s green-finance story is entering a more difficult phase. On April 27, China Securities Journal reported that listed banks had used their 2025 ESG reports to disclose transition-finance practices in hard-to-abate sectors, including coal power, shipping, steel, aviation and buildings. The examples were concrete: China Construction Bank’s Xinjiang branch provided a “carbon assets + coal-power transition finance” loan; Bank of Communications’ Guangdong branch offered RMB 82.54 million in transition-finance support for electric passenger vessels, including a first tranche of RMB 10.54 million; Ping An Bank provided RMB 1.72 billion to support HBIS Group’s relocation and green upgrade; Shanghai Rural Commercial Bank issued a RMB 145 million sustainability-linked loan to Juneyao Air, linking pricing to passenger aviation emissions performance; and Nanjing Bank’s Changzhou branch provided RMB 10 million for green-building industrial upgrading.

The thesis is that China cannot rely on pure green finance alone. Solar, wind, batteries and clean infrastructure matter, but the carbon challenge sits heavily in existing industrial assets. Coal power, steel, shipping, aviation, cement and buildings need capital to retrofit, electrify, improve efficiency, change fuels or restructure processes. If finance only supports already-green activities, it leaves the transition gap unresolved.

Transition finance fills that gap by funding credible movement from high-carbon to lower-carbon operations. In theory, it is one of the most important instruments for China’s ESG market. In practice, it is also one of the easiest instruments to abuse. A high-emission company can label ordinary capex as transition if the rules are weak. A bank can claim climate contribution without proving that financed activities reduce emissions beyond business as usual. This is why credibility is the constraint.

The China Securities Journal report quoted experts noting that transition finance still faces high certification costs, insufficient market incentives and concerns about greenwashing. That diagnosis is important. Banks may prefer pure-green projects because they are easier to classify and explain. A solar project looks green. A coal-power retrofit may reduce emissions but still involves a fossil asset. The analytical burden is higher, and so is the reputational risk.

The report also cited a useful credibility standard: successful transition-finance projects should include a reliable company-level transition plan, a financing project that strictly matches that plan, and third-party professional opinions aligned with international principles. This is the right direction. Transition finance should not evaluate a project in isolation. A single efficient vessel, boiler or production line is meaningful only if it fits into a broader decarbonization pathway.

For investors, the implication is that bank ESG reports should be read carefully. A bank that reports rising green or transition finance may still have weak climate-risk controls if it cannot explain client transition plans, sector pathways, emissions baselines, loan covenants and post-lending monitoring. The strongest banks will treat transition finance as credit-risk management, not just business development. They will ask whether a borrower’s capex plan, emissions data and market outlook make decarbonization economically plausible.

For borrowers, the message is equally clear. Access to transition finance will increasingly depend on data and planning. A company seeking lower-cost financing for a retrofit should be able to show baseline emissions, expected reductions, technology assumptions, implementation timetable, verification arrangements and alignment with national or local transition standards. Without that, the loan risks becoming a labelled product with weak substance.

This is a positive but cautious signal for China ESG. The move from green finance to transition finance is necessary because China’s economy still contains large hard-to-abate sectors. But the market must develop safeguards at the same time as it develops products. If transition finance becomes credible, it can lower the cost of real industrial decarbonization. If it becomes loose branding, it will damage investor trust. The difference will depend on transition plans, third-party review, data quality and lender discipline.

The most important borrower-side document will be the transition plan. A credible plan should describe the asset base, emissions baseline, technology route, interim targets, capital expenditure, governance responsibility and financial assumptions. It should also explain what happens if the technology underperforms or policy conditions change. Without that level of detail, transition finance can become a way to lower borrowing costs without changing business behavior.

There is a useful tension here. China needs transition finance because shutting off credit to high-emission sectors would be economically unrealistic and could harm energy security, employment and industrial stability. But providing cheap credit without transition discipline would delay decarbonization. The quality of the market will depend on whether banks price transition credibility rather than sector labels. A steel borrower with a measurable retrofit pathway should not be treated the same as a steel borrower with only slogans.