The background of CTF

In previous articles, we have talked about different sustainable finance instruments. One thing in common is that they are targeting companies with green/social projects or companies from low GHG emitting industries.

However, to be Paris aligned, ALL the companies need to take action, including those from GHG intensive industries. This is where the concept of “transition” comes in. These companies need funding to transit into a low carbon economy such as investing in low carbon technologies or transforming their ways of doing business.

Climate Bond Initiatives has published a paper to present the five core principles for an ambitious transition:

Financing Credible Transitions — A framework for identifying credible transitions | Climate Bonds Initiative

At the moment there is no “Climate Transition Bond/Loan Principles”. As said in the ICMA CTF Handbook, the existing Principles are enough to guide issuers to utilise either Use of Proceeds Bonds or Sustainability-Linked Bonds towards the achievement of their climate transition strategy. Therefore, a company that is classified as “Transition” can issue a Transition bond/loan which is aligned with GBP/GLP, or issue SLB/SLL.

Hard-to-abate sectors

Responsible for nearly one-third of carbon emissions, the hard-to-abate sectors have a role to play to achieve Paris aligned targets. According to the World Economic Forum Why clean, green heavy industry is mission possible | World Economic Forum (weforum.org), the below industries are usually named as ‘hard to abate’ because there are barriers to reducing their GHG emissions. For example, though the majority of the low carbon technologies are in place, manufacturing solar-powered planes for commercial use are not economically or technologically viable at the moment. Another alternative would be using sustainable aviation fuels (SAFs), though it is not as effective as using renewables.

Heavy industry

• cement
• steel
• chemicals
• aluminium

Heavy-duty transport

• shipping
• trucking
• aviation

IEA Energy Technology Perspectives Report 2017

ICMA Climate Transition Handbook

There are four key elements in the Handbook that are recognised as market practice in the Transition Finance disclosure. They should be referenced in connection with any Use of Proceeds or SustainabilityLinked Bond issuance:

1. Issuer’s climate transition strategy and governance;
2. Business model environmental materiality;
3. Climate transition strategy to be ‘science-based’ including targets and pathways; and,
4. Implementation transparency

Other useful resources

• ICMA Climate Transition Handbook Climate Transition Finance Handbook » ICMA — International Capital Market Association (icmagroup.org)
• A Climate Bonds discussion paper: Transition Finance for Transforming Companies Transition Finance for Transforming Companies | Climate Bonds Initiative
• OECD Transition Finance Toolkit Transition Finance Toolkit — OECD
• EU Transition Finance Report Transition finance report — March 2021 — EU Platform on Sustainable Finance (europa.eu)