This means channelling funds to: pivot business models for firms in economic sectors that are not so green to become greener; and invest in technologies with a lower carbon footprint or higher energy efficiency. Transition finance in turn needs credible transition plans – by both financial institutions and their customers – as well as good transition planning. Many financial institutions have made net-zero commitments and set decarbonisation targets. However, when they finance their customers' own transition to net zero through loans or investments in cleaner technologies, they may see a short-term increase in their financed emissions.This would particularly be the case in hard-to-abate sectors like steel, cement and chemical production. The increase in financed emissions will likely draw pressure and criticism from investors and stakeholders. Only with credible transition plans will financial institutions be able to explain how their transition financing is consistent with their net-zero commitments and decarbonisation targets. Financial regulators can set supervisory expectations for financial institutions on their transition plans in several ways. They can provide guidance to financial institutions on having a sound transition planning process that supports the credible transition efforts of their clients rather than divestment as the first choice. They can set expectations that financial institutions should engage their clients on climate risks and nudge them to draw up their own transition plans to mitigate these risks. They can signal to financial institutions the importance of referencing appropriate science-based sectoral pathways with meaningful intermediate targets for decarbonisation.

The next phase of the NGFS' work will develop guidance on transition planning to cater to different supervisors' mandates, toolkits, and prudential frameworks. Recognising that there is a spectrum of supervisory mandates, such guidance will be based on a building block approach to aid financial regulators with varying approaches in their review of financial institutions' transition plans or planning process. Scaling blended finance To move the needle on global emissions, we need to facilitate the decarbonisation of emerging markets and developing economies. Emerging markets and developing economies account for more than half of global greenhouse gas emissions. They are still heavily dependent on fossil fuels for their economic development and energy needs. Their energy needs are expected to grow significantly in the coming years alongside economic growth and development. It is not right to hold back their economic growth. Rather, we need transition finance to help decouple growth from emissions – through cleaner energy, greater energy efficiency, more electrification, and production processes with a lower carbon footprint. But emerging economies and developing countries face several challenges in mobilising the transition financing necessary for decarbonisation. First, they have fiscal constraints. Public debt remains the main source of funding for transition in these economies. But there are tight limits to how much debt these governments can sustainably raise, especially in foreign currencies. 3/5  BIS - Central bankers' speeches  Second, they have limited access to private capital. They lack depth in their domestic capital markets; they lack large corporations, and a broad investor base.