Transition bond label launched to help companies fund decarbonisation

International Capital Markets Association tells REP the time is right for official guidelines

The International Capital Markets Association (ICMA) unveiled guidelines for Climate Transition Bonds this week, in a bid to help companies get their decarbonisation projects financed.

The document will underpin the development of a new label that should give firms access to more capital to fund activities like rolling out carbon removals technologies, decommissioning dirty assets and switching to greener fuels. 

The move reflects an uptick in appetite for transition finance among investors, banks and issuers. 

ICMA was the architect of the Green Bond Principles, which have long been the de-facto minimum standard for issuing a green bond. 

Green bonds are used by companies and governments to get better financial terms or investor access in return for promising to spend the money on environmentally-friendly projects. 

But ICMA had previously ruled out the possibility of developing similar standards for transition bonds. 

Its deputy CEO and head of sustainable finance, Nicolas Pfaff, told the media in 2022 that such a label would be inappropriate, because the transition was “a process” undertaken at entity level, and shouldn’t be boiled down to specific products. 

But ICMA has changed its mind. 

Simone Utermarck, the body’s senior director for sustainable finance, told Real Economy Progress that the emergence of tools and taxonomies to define a credible climate transition has paved the way for a legitimate label to develop. 

Taxonomies being developed across Asia and Australia have been particularly focused on capturing transitional, rather than already-green activities.   

Utermarck said such taxonomies could be used as “safeguards” that could “add credibility to [a] transition bond”.  

“I would say, if you follow the guidelines, including the safeguards, you should be able to move ahead [and issue a transition bond],” she said.  

The guidelines highlight the importance of company-level transition plans when raising transition finance. 

This week, the International Transition Plan Network launched a report providing “stronger evidence about the relationship between private sector transition planning and mobilisation of transition finance”. 

The document, aimed at public sector officials, sets out the areas where there are signs that transition finance flows or strengthened financial performance are being observed as a result of transition planning.