The Climate Bonds Initiative, a non-profit organisation seeking to “mobilise the largest capital market of all, the $100 trillion bond market, for climate change solutions,” and Credit Suisse, have published a white paper Financing Credible Transitions: How to Ensure the Transition Label has Impact.
According to the paper, as companies and investors seek to scale up climate action to meet the targets of the 2015 Paris Agreement, there has been a parallel rise in the use of green bonds and sustainability bonds to finance investments in climate mitigation solutions. “As the market has grown, so too has the breadth of assets and activities that is being financed to cover a more diversified cross-section of the global economy. Large GHG emitters, however, are still largely absent and present an opportunity for the markets to aid their sustainable transition. But while such actors have not played a significant role in the green finance market to date, they have a vital role to play in reducing global emissions – and are often key constituents in mainstream investment portfolios.”
In response to this challenge, the Climate Bonds Initiative and Credit Suisse put forth a new framework for ‘transition bonds’ to fill market gaps where traditional green bonds have excluded these market actors. The framework was developed “to support the rapid growth of a transition bond market as part of larger and liquid climate-related market.” To avoid the potential for “greenwashing” climate targets (such as an overreliance on offsetting emissions rather than reducing them), the framework aims to “deliver confidence for investors, clarity for bankers and credibility for issuers.” The framework was developed based on interviews with key stakeholders such as loans issuers, banks and policymakers.
In short:
Some of the key takeaways highlighted in the paper are below:
Takeaway 1: Financing for climate investments is growing
To meet the goals of the Paris Agreement, there is a diverse emerging ecosystem of bond “labels” that seek to direct financing towards sustainable climate investments:
Source: Climate Bonds Initiative, Financing Credible Transitions: How to Ensure the Transition Label has Impact (September 2020)
Takeaway 2: The transition bonds framework is underpinned by five principles to protect from greenwashing
The authors note that greenwashing of investments in climate solutions is a threat to driving real progress on climate change. The transition bonds framework is therefore underpinned by five core principles to ensure transition investments are credible and robust:
Source: Climate Bonds Initiative, Financing Credible Transitions: How to Ensure the Transition Label has Impact (September 2020)
Takeaway 3: Different economic activities require different approaches to transition
The framework accounts for five categories of economic activities in recognition that not all business entities and activities will be able to transition at the same rate or to the same extent. This ensures that any transition framework is inclusive of entities across the entire economy. The five categories are outlined below:
Source: Climate Bonds Initiative, Financing Credible Transitions: How to Ensure the Transition Label has Impact (September 2020)
Takeaway 4: While it is important to distinguish between green bonds and transition bonds, there is a role for both to meet global climate goals
The means of determining when a green bond label is applicable and when a transition bond label is applicable are laid out in two decision trees detailed in the report —one for whole entities, and one for specific activities. In short, whether the green label or transition label can be used depends on a range of factors, including whether the entity is currently near zero, whether the activity can be aligned with the Paris Agreement global warming target, and whether the product or service produced is needed up to 2050 because no viable substitute exists.
“The UN’s 17 Sustainable Development Goals (SDGs) frame a future where it is possible to imagine air that is cleaner than what we breathe today, where everyone can access clean water and where climate change is restrained to avoid threats to peace and our survival. To achieve that from where we are today, we urgently need to reverse rising greenhouse gas (GHG) levels and help communities and economies to adapt. This will require entities with some of the highest emissions levels to reimagine themselves, planning and implementing transition pathways in a world that has renewed priorities for GHG management and climate resilience.”
Climate Bonds Initiative and Credit Suisse, Financing Credible Transitions: How to Ensure the Transition Label has Impact (September 2020)