Transition finance: a pathway for high-carbon industry to meet green targets
Reports and statistics released recently have shone a light on the growth of investment in climate tech, impact tech and sustainable bonds. We also see regular pronouncements on the latest organisations committing to net zero emissions and/or divesting from high-carbon companies. There is, however, a case for investors to exercise caution in abandoning companies with a large carbon footprint.
Hence, the growth of yet another niche market: transition finance. Companies who are involved in carbon-intensive sectors such as oil and gas production, construction, aviation, etc. will require time to reduce their carbon emissions…and, by inference, require funding to survive during the transition. Abandonment by investors is not conducive to net zero targets being met simply because these companies are of vital importance.
Climate Bonds Initiative – the international, not-for-profit, investor-focused organisation – have worked with Credit Suisse on a framework for “ambitious and credible transition pathways for companies that will collectively reduce global emissions and deliver the goals of the Paris Agreement”. The collaboration resulted in the publication of a paper called Financing Credible Transitions in September.
One of the aims is to ensure the availability of “green funding” to high-carbon companies who can issue Transition Bonds to assist their move towards better alternatives. It is a holistic approach which, it hopes, will avoid companies indulging in “greenwashing” – false virtue signalling of green credentials – in order to attract funds.
Financing Credible Transitions lists five principles for an ambitious transition:
Reduce emissions by 50% by 2030 and reach net zero by 2050;
All goals and pathways to be led by scientific experts and harmonised across countries;
Credible transition goals and pathways will not include carbon offsets;
Goals and pathways should include an assessment of current and expected technologies which can be used to determine a decarbonisation pathway;
Transition should be supported by operating metrics rather than a pledge.
The paper looks at activities undertaken (e.g. steel production) and entities (e.g. electrical utility) undertaking them and places the activity or entity in one of five categories ranging from near zero; on a pathway to zero; no pathway to zero; interim activities currently needed but to be phased out by 2050; stranded activities which cannot meet global warming targets and already have a low-carbon substitute.
Activities and entities are then assessed against the principles listed above and assigned either a green or a transition label which determines whether they qualify as a green or transition investment.
In text, this appears a complex method of determining the label applicable to the entity or activity but the schematic illustration in this summary from the paper is illuminating.
The paper applies their test to three bonds already issued – Repsol, Cadent and EBRD – to determine whether the label applied to each would pass the Financing Credible Transitions test.
It remains to be seen if the Climate Bonds Initiative / Credit Suisse model becomes an industry standard but it should be noted that the International Capital Markets Association (ICMA) – the self-regulatory organisation which drafted the guidelines for Green, Social and Sustainability Bonds – has a working group examining climate transition finance; a working group which includes Climate Bonds Initiative and Credit Suisse.