'Significant game-changer': How Transition Bonds could help heavy industries clean up their act

A new financial framework to help investors support the transition to a low carbon future, while tackling potential 'greenwashing' within the fast-expanding green finance sector, has been published this week by Credit Suisse in partnership with the Climate Bonds Initiative.

The new 'Financing Credible Transition' report proposes a mechanism for enabling the rapid expansion of the embryonic transition bond market, which aims to raise funds for companies in the highest emitting industries to help them transition to lower carbon technologies and business models.

The green bond market has grown rapidly in recent years, providing companies and governments with a means for securing capital for green infrastructure or corporate transformation projects. Germany last week provided a further boost to the green sovereign bond market, raising €6.5bn to support its new green stimulus plan.

However, green bonds issued by carbon intensive companies have faced criticism from some investors and campaigners, who have alleged that investments that are labelled 'green' have been used to fund projects from high carbon industries.

The emerging transition bond is seeking to tackle this issue, by allowing higher carbon firms to issue bonds that would support their efforts to move towards lower carbon business models. Earlier this year, gas distributor Cadent issued the UK's first transition bond raising €500m to support efforts to tackle methane leakage and upgrade its networks to make them ready for the use of hydrogen and other green gases. 

Now Credit Suisse and the Climate Bonds Initiative are seeking to provide a further boost to the nascent market with the publication of a paper they said would "assist in the mobilisation of global capital flows towards activities which enable the transition to a Paris Agreement-aligned economy".

"While much of the focus on the capital markets has rightly been on green and sustainability bonds, we see transition bonds as being a significant game changer in terms of broadening the universe of issuers who can begin to transition towards sustainability," said Marisa Drew, chief sustainability officer and global head of sustainability strategy, finance, and advisory at Credit Suisse. "This paper represents an important milestone in the development of the sustainable finance markets and one which helps us all transition to a low-carbon economy."

The paper proposes that to ensure transition bonds help drive down emissions and avoid accusations of 'greenwash' a set of standards should be established for the emerging sector. These would include demonstrating that investments are aligned with a net zero emissions by 2050 goal and a near halving of emissions by 2030, are led by scientific experts, exclude carbon offsets, and are backed by clear metrics rather than commitments or pledges.

Climate Bonds Initiative's CEO Sean Kidney said the move to transition bonds represents a vital next step as the global economy moves towards a net zero economy. "We have a tough job ahead to achieve our Paris Agreement targets and avoid catastrophic climate change," he said. "We've started, with clean energy, electric vehicles and of course green finance. Now we must tackle hard to abate sectors, like steel, oil and gas, plastics and cement. We need to transition them, quickly.

"This paper sets out the pathways for that transition investment market to grow."

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