The third pillar of the G20 Framework for Transition Finance is transition finance instruments, which calls for further enriching and improving the transition finance toolkit. The framework categorizes transition finance instruments into four types, namely debt-based financing instruments, equity-based financing instruments, risk mitigation instruments and other instruments. With low-carbon transition as their objective, these instruments feature high flexibility. They effectively scale up financial support for the low-carbon transition of traditional industries and help meet the capital needs of such transition initiatives.
1. Debt-based Financing Instruments
(1) Concept
Debt-based financing instruments include green/transition loans or bonds that support eligible transition activities, sustainability-linked loans (SLLs) or bonds (SLBs), time deposits, repayable loans and other debt financing vehicles, all designed to back appropriate transition initiatives. Among these, Sustainability-Linked Loans (SLLs) tie loan terms to predefined sustainability performance targets. Their proceeds can be deployed for a broad range of purposes, rather than being restricted to specific low-carbon transition projects. Similarly, Sustainability-Linked Bonds (SLBs) come with certain financial and/or structural features that adjust based on whether the issuer achieves its preset sustainability goals.
(2) Case 1 – Transition Loan
In January 2024, under the guidance of the Shanghai Municipal Financial Regulatory Bureau, the Shanghai Branch of the People's Bank of China and the Shanghai Office of the National Financial Regulatory Administration, Shanghai Pudong Development Bank (SPDB) completed the city's first transition finance loan in accordance with the standards set out in the Shanghai Transition Finance Catalogue (Trial). The bank took the lead in providing a RMB 310 million transition loan to Spring Airlines Co., Ltd., supporting the air transport enterprise in its low-carbon transition efforts. The implementation of this loan represents SPDB's concrete action to fulfill the national deployment for green and low-carbon transition as well as the "25 Measures on Financial Support for the Private Sector". It also serves as a valuable exploration for effectively integrating green finance and transition finance.
(3) Case 2 – Transition Bond
In October 2023, Bank of China (BOC) successfully issued the world's first steel transition finance bond via its Luxembourg Branch, with a total size of EUR 300 million and a 3-year tenor. This transaction marks an innovative initiative by BOC to support the green upgrading and transformation of the steel industry in Hebei Province. All proceeds raised from the bond issuance will be dedicated to funding low-carbon transition projects of Hebei's steel sector, helping steel enterprises achieve sustainable low-carbon development and shift from a "brown" to a "green" growth model.
2. Equity-based Financing Instruments
(1) Concept
Equity-based financing instruments cover equity investments such as transition-focused buyout funds, venture capital funds and subordinated financing. For highly leveraged enterprises and small and medium-sized enterprises (SMEs) that face difficulties in securing loans or issuing bonds, they can tap into equity financing channels – including stock issuance, rights issues and debt-to-equity swaps – or establish equity investment funds dedicated to supporting transition activities. These approaches help attract more institutional investors and expand the sources of green capital.
(2) Case – Equity Investment Fund
In July 2021, China Baowu Steel Group Corporation Limited, together with National Green Development Fund Co., Ltd. and other partners, jointly launched the Baowu Carbon Neutrality Equity Investment Fund. With a total target size of RMB 50 billion and an initial closing of RMB 10 billion, it ranks as the largest carbon neutrality-themed fund in the domestic market. The fund focuses its investments on sectors such as new energy, advanced materials, green technologies, energy conservation & environmental protection, and pollution control. Notably, no less than 50% of its capital is allocated to projects within China Baowu's carbon neutrality industrial chain. By investing in the carbon neutrality and emission reduction industrial chains of the steel sector and other industries, as well as in energy conservation and environmental protection fields, the fund continuously contributes to synergizing pollution reduction and carbon abatement, and drives the comprehensive green transition of economic and social development.
3. Risk Mitigation Instruments
(1) Concept
Risk mitigation instruments include tools like insurance and guarantees, which are used to reduce the risks associated with transition projects.
(2) Case – Shipping Decarbonization Insurance
In May 2024, China Pacific Insurance (CPIC) pioneered the EU Emission Trading System (ETS) Carbon Cost Price Index Insurance for the Shipping Industry (hereinafter referred to as "Shipping Decarbonization Insurance") and underwrote the first policy of its kind nationwide. The insurance product supports Shengrongze Shipping Co., Ltd. in managing the carbon price volatility risks faced by one of its vessels operating on Europe-bound routes. This innovative offering is China's first financial product tailored to help foreign trade enterprises address shipping decarbonization risks amid global climate change efforts. Targeting the core pain point of mismatches between current and long-term carbon costs for international shipping vessels, it uses insurance mechanisms to mitigate the operational uncertainties caused by intertemporal carbon cost fluctuations. The insurance effectively alleviates the risks posed by the inclusion of China's shipping industry in the EU ETS, provides robust support to domestic enterprises affected by relevant EU policies, and further enhances the industry's capacity to cope with international climate change-related risks.
4. Other Instruments
(1) Concept
Transition finance instruments also encompass, but are not limited to, asset-backed securities (ABS), real estate investment trusts (REITs), blended finance, and exchange-traded funds (ETFs) that either support transition activities or align investment portfolios with climate transition objectives. Among these, blended finance has emerged as a hot topic in the global climate governance arena in recent years. It primarily leverages catalytic capital from philanthropic, public or international development sources to mobilize private sector investment by reducing market risks, enhancing creditworthiness and improving project viability, thereby scaling up the overall capital pool for transition initiatives.
(2) Case – Blended Finance
The Shandong Green Development Fund stands as a representative and exemplary case of blended finance in China. In December 2020, the Asian Development Bank (ADB) officially approved the signing and entry into force of the Green Climate Fund (GCF) co-financed Shandong Green Development Fund project. With a loan amount of USD 100 million, a 20-year tenor and an interest rate of 1.25%, the project focuses on funding domestic sectors including energy conservation & emission reduction, clean energy and green manufacturing. As the first GCF-supported project in China, it not only contributes to air pollution control in key domestic regions but, more importantly, reaffirms China's status as a developing country and its right to reasonably access international climate finance mechanisms for addressing climate change.
HZGF