Transition Bonds poised to hit $1.5 trillion: Climate Bonds Initiative

Transition bonds are poised to be the next big thing in sustainable debt as heavy polluters worldwide look to raise money to help them clean up their acts, according to a climate finance group.
 

The market for these new securities is set to hit $1.5 trillion by the end of the decade, up from just $12 billion, according to the Climate Bonds Initiative, the world’s No. 1 certifier of green debt. 

“The appetite for green bonds is unbelievable,” said Sean Kidney, the chief executive officer of London-based CBI. Transition bonds are “a subset label. It’s a flavor, but it’s still all gelato. We’re just feeding the beast with more gelato.” 

Companies in heavy-emitting industries like oil and gas or aviation have traditionally been excluded from the green bond market, and some big banks and investment companies have cut access to finance as they try to decarbonize their portfolios. But in recent months, they’ve warmed to deals that would help fund big polluters’ transition plans. 

“It’s useful for investors that are concerned about how to explain to their asset owner clients why they’re putting some high-carbon investments in their portfolios,” Kidney said. 

Clear Signal

The International Monetary Fund said in its global financial stability report this month that “transition taxonomies,” which determine whether and how assets are aligned with emission-reduction goals, can help emerging market issuers send a clear signal of climate benefits to private investors.

That includes China, which is piloting “low-carbon” transition bonds for high-emission sectors like steelmaking and petrochemicals. Japan’s push for its dirtiest industries to shift to cleaner technology is boosting transition and transition-linked debt. Tokyo meanwhile is vying to become a global leader in this area, according to an executive at a public-private partnership charged with bolstering the city’s financial system.

“Society won’t be able to make green progress unless we provide finance in that field,” Shinichi Tsunoda, Mizuho Financial Group Inc.’s general manager of sustainable business promotion, said in an interview.

In Canada, several companies are laying the groundwork to issue transition bonds, according to Jonathan Hackett, head of sustainable finance and co-head of the Energy Transition Group at Bank of Montreal’s capital markets unit. He calls these bonds the “next evolution” of finance in the sector.

The global sell-off in bonds has curbed issuance for green debt, though there was an uptick in September. Firms have raised about $396 billion in green bonds this year, down 11% from the first nine months of 2021. Weak returns haven’t helped, with an index of global green bonds down 29% on the year.

Rising interest rates and volatility have slowed momentum for bonds, including transition ones, Kidney said. Asia, though, offers investors more opportunities, because governments “are really keen and working hard,” on transition goals and plans. Some 40% of the issuance in the near term could come from the region, he estimated.

The other lingering question for the new securities has to do with the quality of the transition efforts funded by the bonds. The International Capital Market Association has said it wouldn’t endorse transition bonds as standalone instruments, while other investors see sustainability-linked bonds with transition targets as the better alternative.