Middle East war could slow transition investment
While the US-led war in Iran is reinforcing the importance of energy security and strengthening the strategic rationale for the energy transition, implementation could be delayed by governments' changing spending priorities and strategic sustainable finance deals could be postponed in the short-term.
Increasing geopolitical risk is pushing energy prices higher. Although the conflict is expected to be relatively short-lived and unlikely to result in a meaningful deterioration in global credit conditions, net-zero spending is putting pressure on fiscal deficits and public debt as governments ramp up defence spending.
This means that the energy transition will not be uniform, smooth or linear, according to Barclays' white paper "Transition Realism", which says the transition is entering a more complex phase shaped by engineering, economic and geopolitical constraints, and will require unprecedented capital investment in infrastructure.
Gwen Safa, Barclays' global head of sustainable and transition finance advisory, said the intensifying conflict in the Middle East "doesn't change our thesis, if anything it supports it".
The white paper takes a long-term view of energy systems and reframes the energy transition as a messy, multi-layered, system-wide build-out that will stack new energy sources on top of legacy systems rather than a clean swap from fossil fuels to renewables.
Financing the transition is a capital-intensive restructuring of the physical economy that will require more investment in grids, mining and minerals, system integration and reliable baseload generation to remove infrastructure bottlenecks.
"A lot of work is going on at the moment in that industrial infrastructure super cycle that is emerging from the net-zero and climate adaptation conversation and also AI and defence," Safa said.
"All of that is converging in the same direction around infrastructure, material and industrials, so that is where we're having most conversations with our clients across both equity and debt solutions."
Barclays' findings were echoed by a GCC-based sustainable finance banker, who confirmed that private market ESG-labelled deals, such as private placements, are still proceeding in the Middle East, despite the conflict.
"This is more of a risk-premium shock and not a structural change in the energy transition trajectory," he said.
Although governments are facing difficult fiscal choices as the war in the Middle East is likely to increase the cost of the energy transition in the short-term by driving up fossil fuel prices, straining supply chains and raising financing costs, delaying the long-term benefits of transition investment may not be an option.
The net cost of the UK achieving net-zero greenhouse gas emissions by 2050 will likely average around 0.2% of GDP per year between 2025 and 2050, most of which will need to be front-loaded and the public sector will account for roughly a quarter of costs, according to the UK Climate Change Committee.
"A timely transition would be fiscally prudent over the longer term and also generate additional transition benefits including enhanced energy security and continued green technology leadership," said Rahul Ghosh, global head of sustainable finance at Moody's.
Transition pipeline
Moody's is forecasting global sustainable bond issuance of around US$900bn in 2026 – broadly flat on 2025 levels – as addressing climate mitigation and adaptation gaps is balanced against geopolitical headwinds and competing spending priorities.
However, the ratings agency said any lengthy disruption to the Strait of Hormuz would drive a sustained rise in oil prices, deepen global risk aversion and likely generate wider credit-spread volatility.
"Such a risk-off scenario would likely weigh on global sustainable bond activity, as debt issuers prioritise liquidity management and balance sheet fortification over long-term capex in sustainable infrastructure," Ghosh said.
Deals most vulnerable to a slowdown include the next generation of transition-labelled bonds and loans that are in the pipeline for high-emitting issuers, following the introduction of transition guidelines in October by the three global loan associations and the International Capital Market Association.
Many of the new deals were expected to come from the Middle East, as more banks in carbon-intensive economies published transition finance frameworks to give clarity on the types of projects and criteria that would constitute eligible transition lending and investment, similar to South Africa's FirstRand Limited's transition framework in December.
Moody's has forecast transition-labelled bond volume of US$40bn this year, up from US$9bn in 2025, anticipating diversification into new sectors and geographies after the new transition loan and bond guidelines, however some of these deals could now take longer to reach the market.
"The situation is still very fluid, so it's hard to say the impact on the longer-term," the GCC-based sustainable finance banker said.