Transition bonds – an issuance option for 'brown' companies wanting to clean up their act – are controversial but essential tools in the fight against climate change.
There is growing acceptance of the fact that we need to drastically change the way our economies function if we are to avert a climate crisis. Industries and sectors across the board will need to radically reduce their greenhouse gas emissions and ideally adopt net zero operating models in order to stabilise global temperature increases.
The fact that achieving such a transition is essential does not change the fact that it will be an almost unimaginably large and complex undertaking, and something that cannot happen overnight.
In recent years, we have seen significant growth in the issuance of green bonds, which support projects with environmental benefits – such as renewable energy or clean transportation projects. This is positive news, but only financing unambiguously green projects will be nowhere good enough. Helping sectors and companies that are currently high carbon emitters to clean up their act will arguably make far more of a difference.
To date it has been tricky for 'brown' companies to access this sort of finance via the green bond markets as understandably there have been concerns about the market being tarnished or undermined.
That is why the developing market for so-called transition bonds is so important. Sure, there are many issues that still need to be ironed out, such as how to uphold standards and weed out the companies that are only paying lip service to idea of climate transition versus those that are genuinely committed to making meaningful changes. Grappling with these issues will not be easy and, with public sentiment running high, there are reputational risks for banks, issuers and investors alike. But if we are to make meaningful progress on climate transition, the capital markets must be open to brown companies that are trying to do the right thing.
