II. International transition bond guidelines

(1) Purpose

The history of green bonds and related experience show that without international guidelines to follow, there is limited possibility and opportunity of helping greenhouse gas intensive industries raise funds in the sustainable bond market and supporting their climate change mitigation strategies (e.g. Spanish Oil Major Repsol's green bond offering in 2017). Therefore, international financial markets push for transition bond guidelines mainly to provide an adequate set of guidelines for sustainable bond market participants and enable greenhouse gas intensive industries to obtain funding through bond offerings and progress toward Paris Agreement compliant transition targets and low carbon emissions business models. Meanwhile, having international guidelines in place allows issuers to avoid questions of greenwash, and facilitates the development of the transition bond market.

(2) Current international guidelines

While financial markets worldwide have a general consensus on the concept and theory of transition bonds, there may be small differences in practice. They can be divided into two groups. One does not create a new label for transition bonds as the EU Taxonomy expanding the definition of green will make it easier to include transition economic activities for zero net emissions targets by 2050 in green activities. In addition, the existing sustainability linked bonds in the sustainable bond market are not subject to any restriction on funding, and can therefore be used for transition by the issuers as needed. International guidelines for this group are considered to be intended only to strengthen disclosures by issuers in greenhouse gas intensive industries. It will be sufficient just to strengthen the credibility of an issuer's transition promise and path for market participants. The Climate Transition Finance Handbook published by the International Capital Market Association (ICMA) in December 2020 is an example of this group. The other group creates a new label for transition bonds to draw a clear line between green bonds and transition bonds. An example is the Financing Credible Transition White Paper published by the Climate Bonds Initiative (CBI) in September 2020. It gives market participants a consistent and science-based guide for greenhouse gas intensive industries to take timely action to accelerate the transition to a low carbon economy and achieve zero net carbon emissions.

 

III. Development of sustainable bond boards on major exchanges worldwide

Given the current lack of a consensus on transition bonds among financial markets worldwide, major exchanges with a sustainable bond board are still working on whether to create a separate category for transition bonds or to place them under the existing categories. Both approaches are described briefly as follows:

(1) Creating a transition bond label - HKEX

The HKEX Sustainable and Green Exchange (STAGE) gives transition bonds in compliance with international guidelines an independent label to support low carbon transition economic activities and board diversity.

(2) Placing under existing categories on sustainable bond board - LSE

The London Stock Exchange (LSE) followed the four key elements of the ICMA Climate Transition Finance Handbook and established the transition bond classification criteria to add transition bonds to the LSE Sustainable Bond Market (SBM) in February 2021. The Transition Bond Segment is made a bond category under the SBM. Transition bonds, depending on the principles and criteria, may be green bonds or sustainability linked bonds. Supervision of transition bonds is focused on the credibility of an issuer's climate transition promise and implementation. Therefore, the LSE has created new rules to be followed by transition bonds, including guidelines for investment plans for transition bonds, disclosure principles, and public promises and reports on Paris Agreement targets. However, the SBM shows transition bonds separately under the information and statistics sections on its website to help investors identify the bonds and facilitate market growth.

 

IV. Development of the transition bond market

Transition bond is a brand new concept in the financial markets. The market is still in a very early stage. Since the ICMA Climate Transition Finance Handbook was published, only China's Bank of China (Hong Kong), Italy's Snam, and UK's Cadent have issued transition bonds in January, February, and March 2021, respectively, and become listed on the HKEX, LuxSE and ISE, and LSE, respectively. In particular, the transition bonds issued by the Bank of China (Hong Kong) and Snam were certified by external agencies to be compliant with the four key elements of the handbook.

V. Conclusion

Although the transition bond market is still in its infancy, the zero net carbon emissions target is already a global consensus. While there remains a lack of a universal standard for whether to create a new label for transition bonds, there are few green industries currently near zero net carbon emissions and many businesses with urgent needs to start the low carbon transition and relying heavily on funding from the capital market. Hence, transition bonds, as a solution and tool for achieving the Paris Agreement targets, have a greater potential and allow a wider range of issuers. We will continue to watch closely for developments in the global market.