How does it differ from financing a green project?
A green loan pays for an eligible environmental project. Its use of proceeds means what the borrowed money is spent on. The Green Loan Principles, March 2025, cover eligible project uses, project selection, tracking the money and reporting.
Transition finance asks how the investment contributes to a credible move away from high emissions. It can involve changes to existing operations, replacement of equipment or the planned retirement of high-emitting assets.
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| What you want to explain | Where to start |
|---|---|
| “We want to fund an environmental project that meets the relevant green criteria.” | Establish project eligibility and the arrangements for spending and reporting. |
| “We need to change an emissions-intensive part of our business over time.” | Explain the wider transition plan, the investment's contribution and the emissions it could leave behind. |
The boundary depends on the applicable framework and project details. An energy-efficiency upgrade may meet green criteria in some circumstances. A business with higher-emitting operations may also have an eligible green project. The International Capital Market Association (ICMA) explains this context in its June 2026 transition-bond FAQs.
Our green-loans guide explains the project route in more detail.
Why “better than before” is only the beginning
Imagine a production line that uses less fuel per item after an upgrade. That is useful evidence. You still need to ask whether the change is large enough, whether it addresses the business's main emissions and whether total emissions will fall as production grows.
A transition pathway describes the emissions reductions needed over time for a sector or activity to move towards climate goals. A credible plan should explain how its targets compare with an appropriate pathway, rather than relying only on an improvement against last year's performance. This is one of the tests in the ASEAN transition guidance.
In Malaysia, banks use Bank Negara Malaysia's Climate Change and Principle-based Taxonomy (CCPT) to assess and classify activities. A taxonomy is a classification framework. CCPT considers climate contributions, wider environmental harm and remedial efforts. Its classification is separate from whether a particular financing product fits your proposal and whether your business can repay it.
Ask the financier which criteria and document versions it will use. A transition label needs evidence beyond a supplier's claim that a machine is more efficient.
The Joint Committee on Climate Change (JC3) gives Malaysian banks recommendations for assessing both the investment and the business in its published Sustainable and Transition Finance Guidance. It recommends discussing the wider strategy even when a plan is still being developed, and cautions that a promise to prepare a plan later is insufficient on its own. Ask how the bank applies that assessment to your proposal.
Put six things into your transition plan
A transition plan explains where your business is starting, where it aims to go and how it will get there. Your baseline is the starting measurement, with a stated period, against which you compare progress. Use these six questions to organise your plan:
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| Part of the plan | What to make clear |
|---|---|
| Starting position | Which sites and activities are included, the baseline year, emissions sources, records and data gaps. |
| Meaningful targets | What will fall, by how much and why the target is suitable for your sector and climate pathway. |
| Timelines | Near-term milestones alongside the longer-term goal, including equipment replacement or retirement dates. |
| Investment and funding | The actions, expected costs, your contribution, financing needs and money available for repayments. |
| Responsibilities | Who approves the plan, delivers each action, maintains the data and checks progress. |
| Progress reporting | What you will measure, when you will report, how results will be checked and how you will respond to delays. |
These preparation prompts draw on the CCPT due-diligence questions for starting evidence and remedial action, the Transition Strategy Toolkit for delivery, and ICMA's Climate Transition Finance Handbook, November 2025 for targets and disclosure. Your financier will specify the evidence it needs.
Explain the long-term goal of moving towards net zero: deeply reducing emissions and balancing any remaining emissions with removals from the atmosphere. Set measurable steps towards it. A distant pledge needs near-term action and a stated basis in climate science. The ICMA handbook recommends long-term and interim science-based targets aligned with the Paris Agreement's climate goals.
When discussing emissions, you may hear Scope 1 for emissions from sources your business owns or controls, Scope 2 for emissions associated with purchased electricity or other purchased energy, and Scope 3 for other emissions across your supply chain and the use of your products. Identify the significant sources and explain any exclusions or estimates. Capital Markets Malaysia's Transition Strategy Toolkit can help you work through these planning questions.
Keep absolute emissions, the total emitted, alongside any emissions intensity measure, such as emissions per tonne of output. The figures answer different questions. A lower figure per tonne can coincide with higher total emissions if output rises.
Check what the investment commits you to
Equipment can remain in use long after the loan is repaid. Carbon lock-in means an investment keeps the business dependent on high-emitting equipment or infrastructure and makes a later move to lower emissions harder.
Before ordering a major asset, discuss:
- How long will it operate, and what emissions could it produce over that life?
- Is a lower-emission alternative technically and financially workable?
- Will expansion increase total emissions despite better efficiency?
- Can it be converted, replaced or retired when the plan requires, and what would that cost?
- Does the plan depend on a future technology or fuel becoming available? What happens if it does not?
The loan-market associations' Guide to Transition Loans, October 2025 discusses these risks. Its proposed Transition Loan Principles are an exposure draft, meaning they are published for feedback and development, rather than final principles.
Consider other effects too: pollution, water use, biodiversity and the people affected by the change. A just transition considers impacts on workers and communities, including training and support as activities change. ICMA's transition handbook includes environmental and social considerations alongside implementation.
Malaysia's July 2026 CCPT Guidance Notes ask banks to assess time-bound remedial plans, monitoring and the customer's financial capacity, and to take care over long-term carbon lock-in. Fixing one issue should sit within a plan that addresses the significant harms identified.
Which financing structures could help?
The transition plan and the financing structure answer different questions. You may need several investments and more than one source of funding.
Loans and Islamic financing facilities can fund equipment or other permitted business costs, subject to the lender's terms and credit assessment. An eligible green investment within your plan may fit a green facility. For a proposed transition loan, ask which framework applies, which costs qualify and what tracking, review and reporting it requires.
Sustainability-linked financing ties financial or structural terms to agreed performance targets. A key performance indicator (KPI) is the measure used to track a result. Under the March 2025 Sustainability-Linked Loan Principles, measures must be relevant and targets ambitious, with reporting and independent external verification at the assessment dates that may affect terms. A credible emissions target can support a transition; a linked facility with an unrelated or narrow KPI does not establish the credibility of the whole transition plan. Read our sustainability-linked financing guide for the contract and cost questions.
Bonds and sukuk may also support a transition. Sukuk are Islamic capital-market instruments. Eligible green projects can be financed through the relevant project-based instruments; performance-linked instruments depend on agreed targets and terms. The Securities Commission Malaysia's SRI-linked sukuk FAQ, issued June 2022, explains the linked structure. ICMA's Climate Transition Bond Guidelines, November 2025 provide a separate voluntary framework for transition projects, with safeguards, proceeds management and reporting.
For issuance, an adviser or arranger needs to establish the current Malaysian requirements, instrument conditions, disclosures and review work. These international guidelines do not establish a Malaysian issuance approval. For an SME, compare the work and costs of each route with your funding need using how to choose a financing route.
Hypothetical Malaysian business example: a Johor food-processing SME
This is a made-up business and proposal, not an eligibility assessment or a financing offer.
Imagine a food processor that uses a fuel-fired boiler for process heat. Its team is considering heat recovery and improved insulation, and a supplier estimates lower fuel use. The business also expects production to grow.
Before seeking finance, the owner brings finance and operations together. They gather fuel bills, electricity records and production volumes for a baseline year. They ask a technical adviser to compare the proposed retrofit, changes to existing equipment, with electric heating and other feasible options, including installation costs, operating costs, supply requirements and equipment life.
Their draft plan gives the operations manager responsibility for delivery and the finance manager responsibility for the budget and records. It sets dated milestones for the first upgrades and for assessing the next heating investment. It measures both total emissions and emissions per tonne of finished product, so growth does not hide an increase in total emissions.
The bank conversation then becomes more specific: could any part meet green-project criteria, could a suitable linked facility support meaningful targets, and what evidence would be needed for a transition-finance assessment?
The retrofit's estimated saving alone cannot answer those questions. The business still needs a defensible pathway, realistic targets, a funded delivery plan and an assessment of whether keeping the boiler would delay deeper reductions. The bank must also assess repayment and its product conditions.
Take a practical first step
You can begin with a short working plan and clearly identified gaps. Gather available records, identify the biggest emissions sources, compare investment options and put dates, costs and names beside the next actions.
Build resilience into the discussion too. Climate adaptation means preparing for climate impacts, such as flooding, heat or water disruption. Record how these could affect the site, equipment and repayments. Adaptation and emissions reduction have different objectives; each proposed investment needs its own evidence. The Transition Strategy Toolkit includes physical climate risks and financial planning.
Short preparation checklist
- A clear funding request and repayment forecast.
- A baseline with sources, measurement boundaries and data gaps.
- Meaningful targets with dates and a stated pathway or benchmark.
- Actions, quotations, funding needs and named responsibilities.
- Equipment-life, future-emissions and alternative-technology questions.
- A plan for reporting progress and obtaining any required independent checks.
Take this to a financier and ask what is missing before a full application. Our financing-readiness guide covers the wider evidence pack. The SEDG guide for SMEs can help with disclosure preparation, and the incentives guide covers support routes to investigate separately.