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September 14, 2022

The reasons why Icma won’t label transition bonds

Market participants are still seeking guidance on transition debt instruments and increasingly turning to sustainability-linked bonds. Development in this area appears more likely to come from clearer direction on corporate transition plans than a labelled transition product.

By Virginia Furness

Nicholas Pfaff, deputy CEO of the International Capital Market Association, says transition is too broad a topic to be reduced to a label. (Photo courtesy of Icma)
  • The market wants guidance on transition finance, but the International Capital Market Association (Icma) does not plan to endorse transition bonds.
  • However, new guidance from Icma and the Climate Bonds Initiative looks to ease the challenges of raising finance for transition…
  • … though the real sticking point remains lack of clarity around what a transition plan comprises, for which possible solutions are in the pipeline.

The influential International Capital Market Association (Icma) does not plan to endorse transition bonds as stand-alone instruments despite confusion about the nature and scope of transition finance seemingly hindering the market.

There have been hopes that Icma – which has helped drive the swift growth of green and social bond issuance with its globally accepted set of principles – would provide a similar set for transition debt. But that will not happen, Icma’s deputy chief executive tells Capital Monitor.

Transition “isn’t a product; it’s a process, a trajectory, a theme,” says Nicholas Pfaff, who is also head of sustainable finance and secretary of the Green Bond Principles and the Social Bond Principles. “Accordingly, we decided it didn’t make sense to [develop] transition bond principles but rather to provide guidance on transition strategies and disclosures for issuers of all types of sustainable bonds.”

The trouble with transition finance

Financing the decarbonisation, or transition from brown to green, of the most polluting companies is an essential component of reaching net zero and a huge task in terms of the amount of capital required (see chart below). But with no clear definition of transition finance nor a universally agreed way for companies to communicate transition strategies – though there is plenty of work being done in this respect – transition finance can be a tricky area for capital providers.

Financial firms are facing increased public scrutiny and regulatory pressure to cut exposure to high-carbon sectors, which will nonetheless need help to transition their businesses. Yet transition bonds are still struggling to gain traction, aside from a few brighter spots such as China and Japan, despite some governments and regulators voicing support.

Transition bond volumes had started to rise but seem to have stagnated. Nine issuers sold 12 bolds worth $4.4bn last year, up from $585m in 2019, amounting to total global sales of $9.6bn, according to the Climate Bonds Initiative. There was $2.1bn of transition bond issuance in the first half of this year, coming almost entirely from China and Japan.

Icma did in June set up the Climate Transition Finance Methodologies registry – a list of tools to help debt issuers, investors and financial intermediaries validate their emission reduction trajectories, or ‘pathways’, as science-based.

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But the trade association is otherwise sticking to the guidance laid out in the Climate Transition Finance Handbook it issued in 2020. This recommends a strategy and disclosure framework for issuers of use-of-proceeds or sustainability-linked bonds that want to communicate their transition strategy to the market, rather than explicit transition bond principles.

“The market is still hunting for transition bonds,” Pfaff acknowledges, but Icma feels transition is “too broad a topic to reduce it to a label”.

Debt explicitly labelled as transition bonds was mooted as a key tool for driving capital to companies looking to decarbonise. France’s Axa Investment Managers and Swiss bank Credit Suisse were early advocates for the product, with the latter joining forces with non-government organisation Climate Bonds Initiative (CBI) to build a roadmap for ‘sustainable transition bonds’ in 2019.

Several transition-focused bond funds, such as Aviva Investors’ Climate Transition Global Credit Fund, also sprang up in 2021 to support development. However, around 30% of the Aviva fund’s $350m in holdings are in US treasuries or other government bonds.

Sustainability-linked bonds an alternative

However, Icma’s Pfaff argues there are other options: “The reality is transition bonds are right in front of us. Seventy per cent of sustainability-linked bonds in 2021 had emission reduction-related KPIs and can be considered therefore as transition-themed.”

Sure enough, some issuers and bankers have turned to sustainability-linked bonds and loans to fund business transformation.

Dutch natural gas grid operator Gasunie became the first gas grid operator to issue a sustainability-linked bond, with a €500m 12-year deal in June. Its key performance indicators (KPIs) for the issue include targets to cut methane emissions and Scope 1 and 2 greenhouse gas emissions - emission sourced directly or indirectly from a company . The framework for the deal is explicitly linked to the Icma Transition Finance Handbook.

“[Gasunie has] good KPIs linked to carbon and methane emission, but we felt we needed to talk more broadly about the company’s transition narrative,” says Arthur Krebbers, head of corporate climate and ESG capital markets at British investment bank NatWest Markets, which was bookrunner on the deal. “Any instrument can merit a transition label as long as you contextualise the structure within the company’s overall decarbonisation strategy and objectives.”

Clearly, Gasunie's assets today are not aligned with the 2015 Paris Agreement, but natural gas is a transition tool and there is scope for green hydrogen and other renewable gases, and the company’s investor relations team has said it plans to issue green bonds as its assets become greener, Krebbers adds.

Guidance coming?

Sustainability-linked debt is a good tool for transition finance, agrees Tonia Plakhotniuk, vice president of climate and ESG capital markets at NatWest Markets. But some investors would like a clearer transition label and definition, guidance on transition plans or some form of transition taxonomy, she says. “It’s the topic that is on everyone’s agenda.”

One solution may come from the CBI. On 6 September, it released for consultation draft proposals on the expansion of its Climate Bond Standard and Certification Scheme from solely use-of-proceeds green bonds to also cover SLBs and corporates themselves.

To be eligible, entities and SLBs must be aligned with a 1.5°C pathway or be able to prove that they will be by 2030. To prove this, they must have company-wide transition KPIs, performance targets and transition strategies, irrespective of any associated financing instrument.

Another standard for the bond market, the EU Green Bond Standard, was updated in May to propose that companies publish verified transition plans as part of the requirements for an EU Green Bond Label, known as EuGB. But commentators say a lack of clarity over these plans and their requirements may dissuade some issuers from using this standard. 

French bank Natixis suggests, for example, that for transition plans to be more detailed and usable, several indicators should be specified, such as intermediate targets, capital expenditure, research and development, and human resources allocated.

Policy push

Forthcoming policy developments may also help provide some guidance.

Market participants are waiting for the European Commission to provide feedback on the recommendations for an extended taxonomy from the European Platform on Sustainable Finance, which incorporate transition criteria.

But, as Plakhotniuk says, “everyone is grappling with different priorities, so the speed of sustainable finance policy development has slowed down a bit”.

The UK Treasury is also expected to give an update on its Taskforce on Transition Finance, which is developing a gold standard for transition plans for UK financial institutions and corporates.

“Eventually we expect detailed templates to tell companies what they need to disclose,” says Plakhotniuk. “It will be an important initiative… because currently, everyone is struggling with what a credible transition plan is, what sort of disclosures companies need to provide and who will verify the accuracy of the disclosures and the adequacy of the transition plans.”

There is also hope that guidance will come at a global level from the Glasgow Financial Alliance on Net Zero (Gfanz), which is expected to publish guidance on real economy transition plans at this year’s Cop27 summit in Egypt in November. In July, Gfanz closed its consultation on a draft Net Zero Transition Plan for the financial sector as well as publishing an introductory note on expectations for real economy transition plans.

The sooner there is agreement on defining transition and communicating strategies for achieving it, the quicker the abundant capital needed to decarbonise economies can be unlocked and the more effectively greenwashing concerns can be addressed.

Capital Monitor is hosting the second day of its Making Sense of Net Zero webinar series, alongside the New Statesman and Tech Monitor on September 21. Find more information on

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