The Climate Bonds Initiative and Credit Suisse have kicked off a consultation on creating a ‘transition bond’ label, which would allow companies in high-emitting sectors to issue labelled notes, as long as they have credible decarbonisation strategies in place.
Transition bonds have been gaining traction as an asset class over recent years, but have been controversial. They are based on the same principles as green bonds, but allow for fossil-fuel based or high emitting activities that contribute to sustainability goals. Proponents say they are a necessary tool to enable carbon-intensive companies to finance the shift to low-carbon business models, but there have been accusations of greenwashing. The debate intensified after Brazilian meat producer Mafrig issued a $500m sustainable transition bond last year, with critics arguing that beef consumption was fundamentally misaligned with the goals of the Paris Agreement.
The new consultation, Financing credible transitions, claims there is a need for a robust transition framework to avoid greenwash. Echoing long-standing calls from green investors, it includes a requirement that an issuer has an entity-level strategy for meeting the Paris Agreement.
The proposed framework lays out five criteria for companies wishing to issue a transition bond:
- Align with net zero by 2050, with an emissions reduction of nearly half by 2030 (this is in line with the goals of the EU’s strategy and green taxonomy)
- Have a global, group-wide zero carbon strategy led by scientific experts
- Do not count carbon offsetting in transition strategies
- Use viable technology to decarbonise, even if it is not economically competitive
- Have a strategy underpinned by data and metrics, rather than high-level pledges and commitments.
The framework says that economic activities fall under five categories, ranging from carbon neutral to ‘stranded’, with some activities being acceptable only in the short term:
- Near zero
- Pathway to zero
- No pathway to zero
Under the plans, an organisation that meets the transition principles and engages in ‘near zero’ economic activities can issue a green bond, while those engaged in ‘pathway to zero’ or ‘no pathway to zero’ economic activity can also issue a transition labelled bond. Organisations engaging in interim or stranded economic activity cannot issue a green or transition labelled bond at an entity-level.
The consultation document looks at past bonds issued under the transition label and finds the sustainable transition bond issued by Mafrig last year would be neither green nor transition under its framework. This is also the case for a green bond issued by Repsol in 2017.