The Rise of Transition Investing

13 Aug

Shifting the focus of sustainable finance

For much of the past decade, sustainable investing has been associated with directing capital towards companies and activities that already demonstrate strong sustainability performance.

While this approach has played an important role in building sustainable investment markets, there is now a growing recognition that to achieve real-world decarbonisation, investment in a wider range of activities will be needed.

Enter “Transition” investing, which focuses on supporting sustainability progress, rather than simply investing in existing sustainability leaders. For example, this might include investing in a cement producer implementing carbon capture technology or a utility company transitioning from fossil fuels to renewable power generation. Other examples include real estate owners retrofitting inefficient buildings, steel producers investing in low-carbon production methods, transport companies shifting to cleaner fuels or more efficient fleets, and industrial businesses using electrification to reduce process emissions.

This shift is increasingly being reflected in both policy developments and investor behaviour. Recent reforms to the SFDR 2.0 will introduce a new "Article 7" category focused on transition-related investments, signalling a move towards demonstrable contributions to real-world decarbonisation. As a result, many current Article 8 funds may find themselves more naturally aligned with Article 7, while some Article 9 funds may conclude that a transition-focused classification better reflects their investment strategy.

Investing for real-world decarbonisation

One of the longstanding criticisms of sustainable investing is that it can incentivise investors to support sectors and companies that already exhibit strong sustainability credentials, while avoiding those industries that account for the greatest share of emissions, the so-called hard-to-abate sectors.

While investing in already sustainable companies can help reduce the carbon intensity of a portfolio, it does not necessarily accelerate decarbonisation in real terms. Real-world climate outcomes ultimately depend on reducing emissions across all sectors including, crucially, where they are highest.

Transition investing thus provides a way to remain invested in higher-emitting sectors where credible decarbonisation pathways exist, rather than excluding them altogether.

The scale of the opportunity is also significant. BloombergNEF estimates that global energy transition investment reached a record US$2.3 trillion in 2025, representing an 8% increase on the previous year.

Why Article 7 matters

The proposed SFDR Article 7 framework is important because it provides regulatory recognition of the principles underpinning transition investing. Rather than focusing solely on whether an investment is sustainable today, the new approach would place greater emphasis on how investments contribute to the transition towards a more sustainable economy.

The draft proposals recognise several categories of permitted investments including portfolios aligned to Climate Transition Benchmarks (CTBs) or Paris-Aligned Benchmarks (PABs), taxonomy-aligned activities, companies with credible transition plans or science-based targets, investments supported by structured engagement strategies, and portfolios with measurable transition objectives.

Importantly, where climate mitigation is the objective, transition plans, science-based targets, engagement activities and portfolio-level targets must be aligned with the Paris Agreement and broader EU climate goals. In practice, this suggests there will be a higher bar for transition claims and investors will need to demonstrate not just that an investment is labelled as transitional, but why its contribution to the transition is credible.

The credibility challenge

As transition investing grows, and regulatory frameworks increasingly seek to define what constitutes a credible transition strategy, a key challenge for asset managers may be evidencing transition claims. This could rely on several elements:

Clear transition plans. Companies may need to articulate how they intend to decarbonise, including defined actions, capital expenditure commitments, governance arrangements and implementation timelines.
Science-based targets. Targets should be grounded in recognised methodologies (e.g. SBTi) and aligned with credible pathways for achieving net zero or meaningful emissions reductions.
Measurable outcomes. Managers may increasingly need to demonstrate how portfolio companies are progressing against their stated objectives and whether transition milestones are being achieved.
Consistent reporting. Disclosure frameworks are becoming more sophisticated, but investors remain heavily reliant on the quality of underlying data. Reliable, transparent reporting may become more important in evidencing progress.

Stewardship rises in prominence

This is where stewardship becomes particularly important. Identifying companies with credible transition plans is only part of the challenge; managers must also demonstrate how their engagement activities are helping to support and accelerate progress.

The proposed Article 7 framework explicitly references engagement strategies with specific objectives, milestones and escalation mechanisms, suggesting that engagement may increasingly form part of the transition strategy itself, rather than sitting alongside it.

This trend is also consistent with wider developments across the responsible investment landscape. The PRI have increased their focus on evidencing stewardship effectiveness, while reforms to the UK Stewardship Code place greater emphasis on demonstrating outcomes rather than simply reporting activity.

Just transition

Transition investing also raises important social considerations. As companies move towards more sustainable business models, asset managers may need to consider not only the environmental impacts of that transition, but also how it is being managed for workers and communities. For example, if a utility company shifts from fossil fuels to renewables, investors may need to look at whether the company is supporting affected employees through reskilling, redeployment or other workforce planning approaches. This reinforces the importance of assessing transition strategies holistically, rather than viewing sustainability in purely environmental terms.

What this means for asset managers

For asset managers, the rise of transition investing creates a clear opportunity to demonstrate real-world support for sustainability. And a means of acknowledging the journey towards it as well as the destination. However, as the focus shifts towards transition and outcomes, expectations are likely to rise. Managers will increasingly need to show that transition claims are backed by credible plans, measurable targets, transparent reporting and tangible evidence of progress.

Ultimately, the debate is becoming less about whether an investment is sustainable today and more about whether it is helping to deliver a more sustainable economy tomorrow.

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