Japanese researchers have published their final Transition Finance Guidance, which includes two “transition taxonomies” – standards for financing corporates and individual business activities to support the transition to a low-carbon economy.
The guidance is authored by a number of thinkers including Yoshihiro Fujii, former Professor of Global Environmental Studies at Sophia University and 2 Degrees Investing Initiative’s Hugues Chenet, via Japan’s Transition Finance Study Group. It argues that providing money to new green projects “is necessary, but not enough to change the whole economic and social system in a smooth and cost-effective way, because we have a huge volume of old-type projects, corporate entities and related systems around the world”.
“To enable this smooth transition of both particular business activities and entire corporate entities, there is a need to develop and deploy investment and finance especially for this purpose,” it says, putting forward two parallel transition taxonomies: one focused on projects and assets, and the other focused on company-level transition.
The authors explain that, while they previously had concerns around the difficulty of measuring corporate-level transition, they have now chosen the indicators identified in the Sustainablity-linked Bond Principles published by the International Capital Markets Association this summer.
The taxonomy covers companies in nine industries including electricity, energy, iron and steel manufacturing. It says company-level transition finance should be limited to carbon intensive sectors or those with a high environmental impact.
To help ensure transition finance meets the expected targets, the report recommends including collateral clauses in product documents; for example, transition bonds should include a variable coupon, where the issuer pays additional interest if unable to achieve outcomes.
The ‘asset-based’ taxonomy is a “non-exhaustive list” of 16 eligible projects, including coal-fired power generation plants, natural gas, automobiles, building and housing, ships and aircraft.
It raises the possibility of setting phase-in transition processes with interim targets, as long as issuers can show how and when they will reach their final targets. For coal, transition finance would include, for example, converting to natural gas or biomass on the first phase, then using CCS or CCU to reach net zero for the second. It excludes the transition from low-efficiency coal power technologies to ultra-supercritical (‘clean') coal “due to the lock-in effect of lifetime emissions that would nullify emissions saved in the short term”.
On consumer goods, it says the first phase could include converting plastic packaging to sustainable alternatives, and changing to a circular economy business model in the second phase.
When the Transition Finance Study Group, convened by non-profit the Research Institute for Environmental Finance, called for feedback on its interim report in April, RI wrote that the proposed Japanese framework took a “swipe" at the EU’s flagship taxonomy by potentially offering a looser, less strict alternative. But in its final report, the group maintains it made the guidance for transition finance to contribute to “a common global standard for transition finance”, rather than a national one. Canada is making a similar effort to create a ‘transition taxonomy’ focused on high-carbon industries.