2.3 Transition bond guidelines: Summary

FMR projects. However, they all share the goal of reducing emissions in high-emitting sectors, opening the door—at least in principle—to FMR applications. Proponents of transition bonds and loans include French asset manager AXA, CBI (in partnership with Credit Suisse), DBS Bank (Singapore), and EBRD. Box 2.3 provides a summary of their transition bond guidelines.

At the time of writing, transition bond issuance has been minimal, especially when compared to the size of the green bond market. Table 2.5 provides a sample of transactions labeled or contextualized by the issuers as transition bonds.

Sustainability-linked loans

Sustainability-linked loans (SLLs) are a type of transition loan. SLLs can take different forms, all less constraining than green loans. In SLLs the terms of the loan are linked to performance under sustainability criteria or third-party assessments of green criteria. This practice has the advantage (compared to green bonds or loans) that loan proceeds can be applied to general corporate purposes, rather than being tied up in a controlled bank account to be applied only for a specific limited green purpose.

BOX 2.3

Transition bond guidelines: Summary

French asset manager AXA’s guidelines mirror the four components of the Green Bond Principles (see main text) but include in the use of proceeds nonrenewable energy, transportation, and industry, among others. They also recommend that issuers clearly communicate how climate transition fits in their business models and strategies, and that transition strategies should be intentional, material, and measurable (Takatsuki and Foll 2019).

The Climate Bonds Initiative’s white paper on transition bonds proposes the use of a “transition” label for eligible investments that (1) make a substantial contribution to halving global emissions by 2030 and reaching net zero emission by 2050 but without playing a long-term role or (2) will play a long-term role, but it is uncertain whether they will be aligned with net zero goals in the long term (CBI 2020c).

DBS Bank has published a framework and taxonomy to label bonds, loans, and other financial instruments as green, aligned with the United Nations Sustainable Development Goals, or transition. The latter would apply to the funding of activities that reduce greenhouse gas emissions more than industry norms or enable the application of less carbon-intensive options. DBS Bank recognizes that assessing transition activities is complicated and must consider contextual information such as location of the activity, best available technology, time horizon, and speed of change toward net zero emissions (DBS Bank 2020).

The European Bank for Reconstruction and Development has published criteria for its own issuance of “green transition bonds.” The use of proceeds is to finance or refinance “projects that are intended to enable significant improvements towards decarbonization, reduction in environmental footprint and/or improved resource efficiency in key sectors of the economy” (EBRD 2019). At least 50 percent of the proceeds must be specifically used to ensure the green transition of a project or asset; in addition, the related company must commit to ensure improved climate governance across the organization. Examples of eligible sectors include chemical, cement, and steel production; agribusiness (promoting energy efficiency and sustainable land use); and activities that enable a green transition, such as electricity grids, supply chains, low-carbon transport and infrastructure, logistics and information technology, and construction and renovation of buildings (EBRD 2019).