This article first appeared in The Business Times on March 26, 2025.

The pathway to net zero is proving more complex and capital-intensive than initially anticipated. Since the adoption of the Paris Agreement in 2015, significant strides have been made to address the climate crisis. However, recent geopolitical shifts, protectionist policies and the weakening of sustainability commitments – particularly by the US – have introduced new uncertainties.

Now, more than ever, ASEAN+3 – the 10 members of the Association of Southeast Asian Nations, plus China, Japan and Korea – must rise to the challenge. The region’s diversity can be transformed into its greatest strength in leading the transition to a sustainable future.

Transition finance vs green finance

The road to net zero is not merely about expanding the green economy. The greater challenge lies in helping high-emission industries transition while safeguarding economic priorities. This is where transition finance plays a crucial role, bridging funding gaps and ensuring a steady shift toward sustainability.

Currently, financial markets are overwhelmed with overlapping terms – sustainable finance, green finance, climate finance and transition finance – without clear consensus. This ambiguity has led to inefficiencies in capital allocation.

Green finance supports projects that are already sustainable, such as renewable energy and energy-efficient infrastructure. Transition finance, on the other hand, targets high-emission industries, guiding them along a structured decarbonization path.

Distinguishing clearly between these two is more than just semantics. It ensures capital is strategically allocated to both immediate green projects and longer-term transition efforts.

A region with varying transition readiness

To assess transition potential, the ASEAN+3 Macroeconomic Research Office (AMRO) has developed a Transition Readiness Index for ASEAN+3 economies based on two key factors – fossil inertia (extent of fossil fuel reliance) and transition preparedness (financial market development and workforce capability needed to drive change).

The index highlights the region’s varying levels of readiness due to differences in economic structures and development stages. Yet, this diversity presents a strategic opportunity: ASEAN+3 economies and international financial centers can collaborate, leveraging each other’s strengths to accelerate decarbonization.

For investors, the index identifies economies with a favorable environment for transition-related investment opportunities. For policymakers, it serves as a benchmark to track national progress in decarbonization efforts and identify areas where policy interventions can improve access to transition finance.

Moreover, economies with lower transition readiness should adopt a proactive approach to international cooperation. This would enable them to access lower-cost financing, build domestic capacity, and establish a clear pathway toward a sustainable future.

What’s holding back transition finance?

Despite growing momentum, two critical barriers hinder the full potential of transition finance in ASEAN+3:

1. Existing information gap: Unclear regulatory guidelines create uncertainty among financial institutions, corporations and investors, undermining investor confidence. A clear and unified regulatory framework for transition finance is essential to build investor confidence, accelerate market adoption, and attract international capital flows.

Currently, differing ASEAN+3 taxonomies regarding scope and classification of high-emission sectors constrain international capital flow into the region. Standardization will provide clarity for firms seeking financing and for investors assessing project eligibility.

2. Insufficient financial incentives: Transition assets must be financially viable for both companies and investors. On the supply side, transition-oriented companies need stronger incentives, such as concessional loans, increased multilateral funding support, and clearer economic penalties for inaction. On the demand side, transition assets must offer competitive returns. A well-developed domestic capital market and a strong national commitment to transition are critical, especially in an environment where returns in traditional markets remain uncertain.

Time Now for ASEAN+3 to lead

To bridge the information gap, financial regulators must take the lead in establishing clear guidelines for transition finance activities. This will provide a primary reference point for market participants and prevent confusion with other forms of sustainable finance.

At the regional level, international organizations should coordinate and create a standardized framework for an effective transition taxonomy. This would serve as a benchmark for economies to tailor policies to national needs while ensuring cross border compatibility. With a common foundation, ASEAN+3 can more effectively tap into multilateral funding sources, paving the way for stronger financial incentives to drive market participation.

The journey to net zero is fraught with challenges, but it presents immense opportunities. By clearly distinguishing between green and transition finance, ASEAN+3 can strategically allocate capital to both immediate green projects and longer-term transition efforts. Through setting clear regulatory guidelines, strengthening financial incentives and fostering deeper collaboration, ASEAN+3 can position itself as a global leader in transition finance – driving the shift to a sustainable, net-zero future.