Christina Ng & Tung Anh Nguyen | December 2025
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Key Takeaways
Asian markets diverge in how they classify power generation as a “transition” towards net-zero goals. An activity that is labelled “transition” in one country is treated as high-emitting in another. The disparities pose cross-border risks to global banks and asset managers through their transition finance products and services, which are meant to support net zero. Because of the uneven baselines, investors cannot assume “transition” means the same thing across markets.
Several transition finance frameworks (Indonesia, Japan, Malaysia, China) allow coal optimisation, ammonia co-firing or unconstrained gas activities under a “transition” label, leading to a mispricing of transition risk or endorsing high-emitting activities. Gas-dominated systems (Singapore, Thailand) are trying to enforce discipline. But fossil fuel loopholes elsewhere in Asia, couched under the umbrella of energy transition, weaken regional credibility.
Asia’s transition credibility will determine regional investment flows. It is not enough that financing frameworks simply exist, as investors seek not labels but a credible decrease in emissions. Countries with clear, science-oriented transition criteria (Singapore, Thailand and Australia) are better placed to attract quality capital.
Energy security and economic realities explain why some Asian countries are soft on fossil fuels. Although these are national priorities, they expose investors to higher lock-in risk, stranded assets and misalignment with global low-carbon and climate funds. The solution for policymakers is to balance constraints with credible emission cuts.
Executive Summary
Asia’s transition taxonomies were intended to direct capital towards decarbonisation. Instead, they have revealed a more fundamental problem: countries in the region do not share a common view of “transition”.
Diversity in approach is inevitable. Energy systems in Asia are diverse to begin with. However, the scale of divergence – across thresholds, sunset clauses and fossil fuel eligibility – creates risks. It distorts capital allocation, weakens the credibility of transition-labelled finance and complicates operations across markets. At risk are not only banks forming cross-border deals, but also foreign capital investors, companies and policymakers.
Most importantly, when “transition” is bandied about for political ends, the label loses its usefulness. Ironically, such “transition” deepens the status quo of fossil fuel dominance, delays renewable energy usage and undermines the region’s long-term energy security and competitiveness.
The Energy Shift Institute’s new analysis maps this disparity across seven jurisdictions onto a Taxonomy Divergence Risk Map (Figure 1) that includes Australia for comparative purposes. It shows how far some markets stray from science-based guardrails and highlights three transition-washing avenues: “transition” with no downward trajectory in emission thresholds; weak or non-existent sunset clauses; and permissive fossil fuel eligibility. They shape the credibility – and limits – of transition finance frameworks in Asia.
Three findings stand out from the analysis.
First, few transition finance frameworks line up meaningfully with climate science benchmarks, while most do not. Only Singapore and Thailand embed declining emission trajectories and sunset clauses for existing gas power within their respective transition pathways. No new gas or coal power is permitted under their transition frameworks, demonstrating how gas-heavy economies can go about executing a transition without losing sight of consistency with the 2015 Paris Agreement’s 1.5°C goal. In contrast, Indonesia, Malaysia, Japan and China rely heavily on principles or industrial policy logic that provides flexibility but weak guardrails, effectively tolerating transition-washing and moving away from 1.5°C power-sector pathways. Australia takes a green-first approach and excludes fossil power from transition eligibility altogether.
Second, market context matters, but only up to a point. Countries interpret “transition” based on their energy security realities, rapid power demand growth and industrial priorities, especially when they are coal or gas-dependent. In some markets, gas may serve near-term needs. In others, younger coal fleets and state-owned utilities make early retirement politically and fiscally difficult. Even so, these structural constraints do not justify open-ended gas expansion or continued coal optimisation.
For transition frameworks to be credible to investors, they must balance local realities with a clear expectation of declining power emissions over time. Without this balance, transition labels could well act as tools to manage energy security or industrial objectives, rather than to guide capital towards 1.5°C-oriented decarbonisation.
Third, weak interoperability across borders creates friction for capital flows. A gas project labelled “transition” in one market may not qualify as such elsewhere. Coal-related infrastructural upgrades in Indonesia, China and Japan will fail transition screens in most other markets. And principles-based definitions hinder cross-border deals. Without translation tools and clearer regional equivalence, financial institutions run the risk of misalignment when structuring loans and bonds in multiple markets. These problems can deter or delay capital investment.
The message for policymakers. Transition finance frameworks should focus the market on what truly lowers emissions and not cover up business-as-usual attempts. A credible framework must specify thresholds, sunset logic and enforceable consequences – not just principles or policy intentions.
For financial institutions, a taxonomy-aligned investment cannot be assumed to align automatically with global 1.5°C expectations. Banks and investors still need their own transition credibility screens that independently test an asset or a company’s emission profile, lock-in risks and phase-down pathway, especially when operating across markets with divergent standards.
Energy Shift concludes from its findings that transition finance can accelerate decarbonisation only if “transition” is grounded in measurable, time-bound emission reduction requirements. A transition finance framework is credible not because it exists. It is credible because it changes real-world outcomes.
Christina Ng is a Managing Director of the Energy Shift Institute. Her work focuses on strengthening the role of financial markets in Asia’s decarbonisation, drawing on over two decades of experience in financial reporting standard-setting, financial risk analysis, and sustainable finance research in the energy sector.
Tung Anh Nguyen is a contributing analyst to the Energy Shift Institute, focusing on sustainable finance and transition policy developments across Southeast Asia. He worked in sustainable finance advisory, supporting the evaluation of green and transition-labelled financing and the assessment of ESG and taxonomies.
The Energy Shift Institute is an independent non-profit energy finance think-tank driving context, clarity and credibility for Asia’s energy transition pathways.