Bond issuers in capital markets are increasingly focused on transition finance. Unlike green finance, which is directed at activities that are already consistent with a 1.5 degree warming scenario, transition finance funds emission abatement and low-carbon technologies where no purely green technology is readily available. This form of finance inherently relies on climate commitments by the company.

For capital markets to work, bond issuers will need to get better at explaining their climate transition plans and underpin such plans with sound management and governance arrangements.On the side of investors, the low-carbon transition has also defined some very different investor mandates and objectives. A new interpretation of fiduciary duty that is consistent with climate policies has already been reflected in legislation in a number of jurisdictions. Requirements for better sustainability disclosures will also expose asset managers and investment advisers to greater market discipline. Individually and in the various investor coalitions, such as the Glasgow Financial Alliance for Net Zero, asset owners set themselves targets for the mobilization of green assets and also for the decarbonization of their portfolios.

Many have argued that transition finance requires a new type of taxonomy, in addition to the green taxonomy that identifies unambiguously green activities aligned with a 1.5 degree climate scenario. Such a classification would set out the various ‘shades of green’ of technologies deployed on the path to a net zero world. Shipping, for instance, is a typically ‘hard-to-abate’ sector. Gas-powered vessels may reduce emissions at first, while not offering the ultimate net zero technology. The EU’s technical expert group proposed such a separate taxonomy but legislation seems unlikely in the remaining term of the current EU Commission.

Transition finance in bond markets | ECGI Blog