Climate Bonds White Paper

Financing credible
transitions

How to ensure the transition label
has impact

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Supported and funded by Credit Suisse

Table of Contents
Executive summary3

1. Introduction

8

1.1 Climate change: at the heart of the SDGs

8

1.2 Mobilising finance for the Paris Agreement

9

1.3 What we mean by transition

9

2 The climate mitigation transition

10

2.1 A framework to capture the diversity of transition

10

2.2 Five Transition Principles to avoid greenwashing12

2.3 The framework in practice – illustrative examples

16

3 A guide for users – what credible transition means in practice18

3.1 Activity and entity level transitions

18

3.2 Granular measures to decarbonise

19

4 Implications for transition finance21

4.1 Opportunities for investors

21

4.2 A need for a ‘transition’ label?

21

4.3 Practical considerations when portfolios are mixed

24

4.4 Sustainability-linked financing

24

5 A review of market transactions25

5.1 Energy and utilities

26

5.2 Energy distribution

27

5.3 Agriculture27

5.4 Hard-to-abate sectors

27

6 Stakeholder views - the debate

28

7 Next steps

29

Annex 1: A review of selected guidance

30

Annex 2: Other stakeholders’ approaches and commentary34

Annex 3: Stakeholder views – the detail

36

Endnotes

39

September 2020

Financing Credible Transitions Climate Bonds Initiative2

Executive Summary
The UN’s 17 Sustainable Development Goals (SDGs) frame a future
where it is possible to imagine air that is cleaner than what webreathe today, where everyone can access clean water and whereclimate change is restrained to avoid threats to peace and oursurvival.1 To achieve that from where we are today, we urgently needto reverse rising greenhouse gas (GHG) levels and help communities
and economies to adapt. This will require entities with some of thehighest emissions levels to reimagine themselves, planning andimplementing transition pathways in a world that has renewedpriorities for GHG management and climate resilience.
Green and sustainable bonds have become an increasingly important
tool to finance these transitions. As the market has grown, so too has
the breadth of assets and activities that is being financed to covera more diversified cross-section of the global economy. Large GHG
emitters, however, are still largely absent and present an opportunity
for the markets to aid their sustainable transition. But while suchactors have not played a significant role in the green finance market
to date, they have a vital role to play in reducing global emissions –and are often key constituents in mainstream investment portfolios.

The need for a robust transition framework to
avoid greenwash
In order to fill this gap, those issuers which felt locked out from thegreen bond market have utilised the ‘transition bond’ concept andlabel, and have provided a valuable solution for high carbon emitting
sectors to finance their transition.
However, labelled - “transition”, “sustainable” - transactions to datehave utilised different definitions of transition. Consequently, someinvestors have expressed concerns around the lack of a set of robust,
industry-adopted standards for transition instruments and that thislends itself to the potential for greenwashing – i.e. that the label isbeing used as a catch all for activities that are a ‘bit green’ but are notlinked to a Paris-aligned transition pathway and therefore have very
limited impact in moving the needle on reducing global emissions.

Investors are supportive of a global definition of acredible and ambitious transition
Climate Bonds Initiative undertook in-depth interviews with stakeholders
including issuers, banks and policy makers to understand theirthoughts about transition. The following key messages came across:• Ambition is essential for any definition of transition – it shouldmean a significant reduction in GHG emissions relative to current
practice and alignment with the Paris Agreement.
• Strong support for issuance to be accompanied by an entity-level
carbon reduction strategy consistent with Paris Agreement targets.
• Transition should be applicable to high emissions sectors although a distinction was drawn between activities that are neededin the future (iron and steel) and those that are “stranded” (coal).
Better guidance on transition pathways is needed, ideally withemissions thresholds, particularly for some sectors and activities.

This paper presents a framework for identifying
credible transitions aligned with the Paris Agreement
This paper has two purposes:
1. Define transition as a concept by presenting a starting point for themarket to see a credible brown to green transition as ambitious, inclusive
and aligned with the Paris Agreement (thereby avoiding greenwash).
2. Put forward a framework for use of the transition label inpractice and propose clearly demarcated roles for both a green and atransition label.
Underpinning these proposals is recognition that the nature of transitiondiffers for different entities - depending on the need and substitutabilityof their economic activity and its near-term and long-term potential todecarbonise. The proposals therefore embrace transition in a variety ofactivities, entities and technologies across the global economy, including
those less readily accepted within the current green bond market, and byextension, transition finance delivered via a range of financial products.

This should not be the case. The transition concept and any
associated label could and should be a useful tool for identifying
sectors and entities that are making ambitious transitions, as acomplement to the existing green label. As the market expands
to encompass new sectors and issuers that need to be rapidly
decarbonised, a common, coherent and scientifically credible
framework for this transition is needed. Without that, hesitancy will
thwart progress at the time when action is most needed.

Financing Credible Transitions Climate Bonds Initiative3

A starting point – 5 principles to protectfrom greenwash

To drive this ambition, we propose the following 5 principles for atransition with impact.

To achieve ambition, we need transition pathways that have endgoals for environmental factors that are consistent with planetary
boundaries and have sufficiently ambitious trajectories to get there. A
prerequisite is developing transition pathways to move from today’shigh GHG emissions to levels commensurate with meeting the goalsof the Paris Agreement. That is our ‘climate mitigation transition’.

Importantly, any entity, activity or project meeting these principles
is substantially contributing to meeting the goals of the Paris
Agreement and should therefore be eligible for capital that has a
climate or environmental mandate. This provides wide scope tosupport the growth of a large, liquid market for both already netzero and transition-related activities.

1. In line with 1.5 degree trajectory
All goals and pathways need toalign with zero carbon by 2050
and nearly halving emissions by2030.

4. Technological viability trumps
economic competitivenessPathways must include an assessmentof current and expected technologies.
Where a viable technology exists, even
if relatively expensive, it should be
used to determine the decarbonisation
pathway for that economic activity.

2. Established by scienceAll goals and pathways must be
led by scientific experts and beharmonised across countries.

5. Action not pledges
A credible transition is backed
by operating metrics rather thana commitment/pledge to follow atransition pathway at some point in the
future. In other words, this is NOT atransition to a transition.

3. Offsets don’t countCredible transition goals andpathways don’t count offsets,
but should count upstream scope
3 emissions.

An inclusive framework – promoting an economywide transition
Only a minority of economic activities operate at zero or near zero
emissions today. For some high-emitting activities, feasible low- or
zero-emissions solutions are available or credibly envisaged within areasonable timeframe - transition should be towards those solutions.
For others, there are no such solutions, but substitute low-emission
activities exist or are in development - transition should be awayfrom those activities and towards the better alternatives.

Enabling Activities cut across all of the categories above. Withineach category, there are activities whose biggest contribution
to transition will not be their own decarbonisation, but the
decarbonisation they enable elsewhere. In other words, the goods
and services they produce are essential to enable other activities tofollow Paris aligned decarbonisation pathways – e.g. manufactureof wind turbines or metals recycling or carbon capture and storage.

To account for these differences, we have categorised economic
activities based on:i. how long the product or service delivered by the activity will beneeded (which depends in turn on the availability of low-carbon
substitutes); andii. the viability of decarbonising the activity so that it aligns with theParis Agreement.
This gives rise to 5 categories for economic activities:

NEAR ZERO
Activities alreadyat or near net-zeroemissions that may
require some further
decarbonisation
but not a significant
transition - e.g. wind
power generation.

PATHWAY TO
ZEROActivities needed
beyond 2050
and have aclear 1.5-degree
decarbonisation
pathway – e.g.
shipping

Financing Credible Transitions Climate Bonds Initiative

NO PATHWAYTO ZERO
Activities that areneeded beyond 2050
but at present, do nothave a clear 1.5 degree
decarbonisation
pathway to 2050
– e.g. long-haulpassenger aviation.

INTERIM
Activities currently
needed but should
be phased out
by 2050 – e.g.
production of energy
from municipal
waste

STRANDED
Activities that cannot
be brought into linewith global warming
targets and havean alternative, lowemissions substitute- e.g. electricity
generation from coal.

4

A flexible framework – applicable to whole
entities, everything they do and a range ofassociated financial products
It is also important to note that the transition concept is applicableat both an activity and an entity-level. This goes beyond the Useof Proceeds model in the green bond market where, for example,
a green label is appropriate at an activity-level for an oil company
building a wind farm but not appropriate for the entire entity.
In this framework, we propose that the transition concept is also
applicable to whole entities if the entire company is on a transition
pathway. We do note, however, that the work to map out specifictransition pathways for whole entities and determine credible
indicators for their transitions is still at a nascent stage.
The implication of this is that the transition concept is also applicable
to a broader range of financial products. For whole entities, this may
include equity investments, sustainability-linked loans/bonds andgeneral purpose bonds. For activities, this includes asset-backed
securities and Use of Proceeds bonds (already well-used in thecurrent green bond market).

Who do we propose should use the transition
label and how?
Following the principles outlined above would ensure all resulting
transition investments are aligned with the goals of the Paris
Agreement and as such can be viewed as green.
That said, we do believe there is a useful distinction to be madebetween activities that do not have a long term role to play in a low
carbon economy (due to their high emissions) and those that do(despite their high emissions), and this can provide the foundation ofa demarcated ‘transition’ label.
In broad terms, we propose that the green label continue to be used
for eligible investments (i.e. that meet the Principles) in activities orentities that have a long-term role to play and are either already nearzero or are following decarbonisation pathways in line with halving
global emissions by 2030 and reaching net zero by 2050. And also
for investments in activities and entities that enable those activities
and entities.
And the transition label can be used for eligible investments that:• are making a substantial contribution to halving global emissions
levels by 2030 and reaching net zero by 2050 but will not have along term role to play; OR• will have a long term role to play, but at present the long term
pathway to net zero goals is not certain.
These proposals are illustrated in the two decision trees below.

For entities:
Is the entity currently
near zero?

Meets
transition
principles

Yes

NEAR ZERO entity
Green label

Examples:No

Is there a credible
entity-level transition
strategy being
followed that is inline with the Paris
Agreement?

Yes

PATHWAY TO
ZERO & INTERIM
entities
Green/transition label *PATHWAY TO ZERO:
Sovereign whose economy
is fully aligned with 1.5°C
goals
Coal company switching
to renewables at the
speed required by the Paris
Agreement
INTERIM:
Waste to energy company
rapidly switching torecycling operations

No

Financing Credible Transitions Climate Bonds Initiative

NO PATHWAY TO
ZERO & STRANDED
entities.
No label applicable atentity level5For activities:

NEAR ZERO
Green label

Already net-zero

Activity provides a
product or service
needed up to andbeyond 2050
(as no viable
substitutes exist)

Yes

Not as yet

Meetstransition
principles

Yes

Not as
yet

Yes

Yes

NO PATHWAY TO ZERO
Transition label
By definition, the activity
cannot be aligned with
the Paris Agreement.
Therefore the only eligible
investments are measuresthat significantly reduce
emissions in the short tomedium term

Activity canbe aligned with
Paris Agreement
global warming
targetActivity provides
a product orservice needed in
the interim until
viable alternatives
are available

PATHWAY TO ZERO
Green/transition label*

Yes

Yes

INTERIM
Transition label

STRANDED
Transition label

Not neededYes

By definition, the activity
is not needed post 2050.
Therefore the only eligible
investments are measuresthat significantly reduce
emissions in the short tomedium term and no lock inof high carbon technology

Examples:Steel production
meeting decarbonisation pathway
Credible measures todecarbonise activity
may include:
Retrofits of airline
fleets to operate witha maximum biofuel or
synfuel mix

Operation of plastics
recycling facility until
sunset date

Capture andutilisation of gas
leakage from closed
landfill
Decommissioningof a coal-fired power
station earlyNot as yet
No Label
Activities that do not meetthe principles are noteligible for a label

ENABLING ACTIVITIESGreen/transition label*
These are essential goods and services
in supply chains and cut across all of
the categories. Their appropriate label
depends on what they are essential to:If essential to Near Zero activities (e.g.
manufacture of triple glazed windows)
then the green label is applicable.

If essential to No Pathway to Zeroactivities (e.g.CCS), then the transition
label can apply.

Financing Credible Transitions Climate Bonds Initiative*Why can green or transition labels be used?
This proposal leaves open whether ‘pathway to zero’
investments be labelled as green or transition. In theory, they
can be labelled as green as they are aligned with the Paris
Agreement. However, given the current lack of consensus on
appropriate, viable transition pathways for some activities,
flexibility is built in if a more cautionary approach is preferredin the short term.

6How would this proposal apply to transition bonds
already issued?
To illustrate the above, here are a few examples of bonds alreadyissued and whether or not the proposed transition label would havebeen appropriate.
Repsol green bond, 2017: Proceeds funded energy efficiency
projects and technologies to reduce fugitive methane emissions fromrefineries. However, neither the use of proceeds, nor the corporate
strategy were at the time aligned with the Paris Agreement. In 2019,
Repsol committed to be zero net carbon by 2050 meaning thateither the transition or green label may be applicable for future bonds
depending on the detail and alignment with the 5 Principles put
forward in this paper.
Cadent transition bond, 2020: Proceeds were directed toadaptation of the gas network for hydrogen as an energy carrier.
The company explicitly aligned with the EU (draft) Taxonomy.
It excluded natural gas network expansion and applied tight EU
thresholds for biogas. Such explicit alignment with the EU (draft, atthe time) taxonomy has not yet happened often and is an important
contribution to transitioning to near zero activities, subject toaddressing fugitive emissions.
EBRD green transition bond, 2019: Proceeds supported investmentin ‘hard-to-abate’ sectors’ to finance substantial energy efficiency
improvements in chemical, cement and steel production andagribusiness, among others. Projects should also not lock-in carbonintensive assets or processes in the longer term. It excluded new
fossil fuel generation. The criteria set out by EBRD broadly follow
the principles we outline above but do rely on the development oftrajectories to fully articulate. However, by focussing on assets andactivities in sectors with pathways to zero the bond does fit the broadrequirements for a green label.

There are gaps
As noted above, the transition framework and principles are inclusive.
However, they are predicated on the availability of clear guide-rails
for transition pathways for all activities and entities across the
economy. However, while some of this exists, many gaps remain.
Existing material is largely focused on those activities that will beneeded in a post 2050 economy. There is little guidance for stranded
activities or for those high emitting industries, where energy efficiency
or shifting fuels will not be enough. More specific pathways are needed
for industries such as oil & gas, mining and heavy industry. While theseare being developed, it is recommended that borrowers and investors
select a pathway they believe is credible and provide transparency on
the source of the pathway, the extent to which it does or does not meetthese principles, and the rationale for its selection for the assessmentof the activity or entity transition in question.

Next steps…
The concepts in the paper will be put out for consultation anddiscussion in the market so that they can be refined and improved.
In the meantime, there is a role for investors, issuers, academics,
subject-matter experts, scientists and policy-makers to strengthen andreinforce the idea of an ambitious transition model around the world:
1. Investors: socialise the definitions here with the sell-side andencourage future transactions to be aligned with the principles.
2. Issuers: issue securities in line with the principles outlined.
3. Scientists, subject experts and academia: help use the best
available science and research to give further definition to appropriate
transition pathways that exist today or are within sightlines.
4. Policy-makers: lend a voice of support and contemplate how
regulation could assist in incentivising this market to scale.
5. Market analysts: test and use this transition concept to assess realtransactions and financial products. More detail on how the Climate
Bonds Initiative plans to do so is given in the box below.

Implications for the Climate Bonds Initiative
The Transition Framework proposed will have a number of
implications for the work that the Climate Bonds Initiative does incollecting labelled bond data and in certifying debt instruments.
The following areas are currently under consideration:
Certified Climate Bonds: We already certify many financial
products relating to sectors and activities that could be classified
as ‘transition’ under this framework and work is underway todevelop criteria that define transition pathways in more of these
sectors – industrial sectors such as cement and steel are particularpriorities. These cover Use of Proceeds bonds, asset-backed
securities and other debt instruments.

Financing Credible Transitions Climate Bonds Initiative

We are not currently able to certify whole-entity transitions
but this is currently being explored and we hope to make anannouncement on this in the coming year.
Climate Bonds Database: We currently collect data for green
and other labelled bonds that is used as the base data for indicesand indexes. For green bonds, the data is screened to ensure thatbonds are aligned with the Climate Bonds Initiative Taxonomy. For
social bond data, each bond is mapped against relevant SDGs but
as no widely-accepted social taxonomy exists, the data is collectedwithout any additional filtering.
For future transition bonds, we will collect and tag all bonds labelled
as transition and categorise their uses of proceeds. We are also
looking to develop a methodology to screen these deals in line withthe framework outlined.

7

1 Introduction
The goal of this paper is to assist in the mobilization of global
capital flows towards activities which enable the transition to a Paris
Agreement-aligned economy, a critical requirement if the world is toachieve sustainable development.
To date, green finance frameworks and capital flows have been
principally directed at activities which can be considered ‘alreadygreen’. There has been significantly less investment into transitioning
activities and assets that are associated with the highest carbonemitting industries and businesses.
To this end, this paper addresses the following issues:• How do we avoid ‘greenwashing’ when financing transition?
• How do those effecting their transition demonstrate that theiractions are moving the needle and investors evaluate the impact oftransition claims – i.e. that they have an impact?
To address this, we put forward:• A Transition Framework in Section 2.1 that categorises economic
activities based on the nature of their role in a global, economywide transition to the Paris Agreement targets, and describes thecorresponding transitions needed from entities practicing those
activities.
• Five Transition Principles in Section 2.2 where adherence to theseprinciples signal the credibility of the transition ambition.
• Illustrative examples in Section 2.3 of entities, economic activities
and specific use-of-proceeds taken from across the brown-togreen spectrum that fall into each transition category.
• A proposal on the use of a ‘transition label’ in Section 4 and ourviews on other key considerations relating to transition-related
financial instruments.
These proposals build on and align with other work, particularly
Climate Bonds Initiative’s Taxonomy and more recently the proposed
EU Taxonomy for Sustainable Activities, as well as the Green
Bond Principles administered by the International Capital Markets
Association.
Our objective is to create the foundation for capital markets todrive the mobilisation of large pools of investments dedicated toaccelerating the transition to resilient, sustainable economies andsocieties. We hope this guidance can provide the basis for discussion,
collaboration and broad market adoption of a comprehensive, robust
and implementable concept of transition. We also hope that thisresults in greater consistency of how the term ‘transition’ is used
across the market and make a meaningful contribution to economictransformation, rather than delivering incremental improvements.

1.1 Climate change: at the heart of the SDGs
The 17 Sustainable Development Goals (SDGs) were adopted aspart of the 2030 Agenda for Sustainable Development by the UN
General Assembly in 2015. This programme’s objective is to secure
peace and prosperity for all people and the planet. However, ending
poverty and hunger, improving health and education, reducing
inequality, supplying clean water and energy, strengthening thenatural environment and establishing peace is not possible in a world
where global temperatures continue to rise, and communities andeconomies are unable to adapt.
Addressing climate change is central to delivering the SDGs, butmore than that, scientific evidence overwhelmingly points to thiscentury reaching a tipping point for extreme weather volatility andintensity as a result of climate change, including a greater and more
severe incidence of floods, storms and droughts. We will continue
to experience accelerating global temperatures negatively affecting
our food and water supply, health of our oceans and billions of
livelihoods. And in relation to the crisis at hand, also at risk are
our many fragile ecosystems which rely on planetary health andbiodiversity. Yet on the current climate trajectory, we will likely
experience further pandemics arising from pathogens jumping
species and unique animal-to-human contact in climate-stressed
habitats.
Already we are seeing the disruption caused by a one-degree
temperature rise. The compounded effects if we do not tackle record
high emissions now will be catastrophic and irreversible. Not only
do we need investment to stave off the effects of climate change but
investment is also needed to ensure that economies and societies areequipped to adapt and be able to recover from climate shocks. This iswhere we turn to the SDGs which help us to provide a blueprint for theareas where investment can both help mitigate and support resilience.
Addressing climate change requires fundamental and rapidtransformations across all sectors of the economy, including
those with the largest and hardest-to-abate emissions. Suchtransformations cannot be achieved through incremental
improvements to established modes and systems alone. Climate
action to date is neither broad nor deep enough to be responsive
to the scale of the challenge faced. The question is no longer why
or whether the global economy needs to swiftly move towards a
low carbon, climate adapted, sustainable model, but rather how tourgently finance and operationalise the required transition.

Lastly, we would hope that this work could also inform the design ofCovid-19 stimulus and industry bail-out packages, thereby linking thepost-pandemic recovery to a more sustainable future.

Financing Credible Transitions Climate Bonds Initiative8

1.2 Mobilising finance for the Paris Agreement
Our aim is to make finance consistent with the requirement for rapid
shift to a low-carbon and climate-resilient world. Finance is beginningto flow: United Nations Framework Convention on Climate Change(UNFCCC)’s most recent Biennial Assessment on Climate Flows
reports a growth in climate finance flows from USD584bn in 2014 to
USD681bn in 2016 (the next biennial assessment is not yet ready).2
Using slightly different definitions, Climate Policy Initiative reports
flows of USD388bn in 2014, rising to USD546bn in 2018.3 However,
we need at least USD3.5tn per year in energy systems investments
alone,4 let alone other sectors of the economy that have to transition.
The gap in investment required across the SDGs is around USD3tn
per year just for developing countries.5 The UN estimates the climate
and development finance gap to be around USD 5-7tn per year.6
Green and sustainable financial instruments have contributed toclosing that gap. Sustainable investing has been increasing at pace,supporting global green bond market growth from zero in 2007*
to almost USD800bn outstanding by the end of 2019.7 Hundreds
of issuers have offered thousands of deals, now coming from morethan 60 countries - the majority focussed on decarbonisation.
Government-led initiatives such as the European Commission’s
Action Plan on Financing Sustainable Growth, regulatorcommissioned initiatives such as the Task Force on Climate-related
Financial Disclosures (TCFD) or investor campaigns like Climate
Action 100+ all aim to accelerate the path to more sustainablebusiness models funded by sustainable capital markets.
However, the speed and scale of climate investment is still far lower
than necessary. Most use-of-proceeds finance has focused on sectors
and activities for which climate action has been more straightforward.
Green bond issuance to date is dominated by top-rated governmentrelated entities (including water and public transport utilities), energy
utilities, the real estate sector and financial corporates. Their uses ofproceeds have been largely geared toward green buildings, renewableenergy, energy efficiency and (public) transport. But action is needed
across the broader economy in every industry, and finance will
particularly need to support rapid change in high-emitting sectors suchas heavy industry, manufacturing and agriculture. This will involve
mobilising institutional investment at scale.
To gain an understanding of how the investment community isaddressing climate change, in 2019 Climate Bonds Initiative surveyed
48 Europe-based fixed income investment managers representing
EUR 13.7tn assets under management.8 The survey found broadinterest among investors to support industry sectors that mosturgently need to transition. When asked to identify the non-financial
corporate sectors in which they would like to buy more green
bonds, respondents highlighted industrials (e.g. transportation,
manufacturing, machinery, services), utilities (e.g. electric, gas,
water), consumer discretionary (e.g. automotive, retail, electronics),
energy (including oil & gas, though often with a tendency to earmark
desired issuance to renewable energy projects), and materials(e.g. metals & mining, chemicals, construction materials, forestry
products). Committed ESG-motivated investors, looking for greater
portfolio diversification and yield, are calling for a broader diversity ofcorporate issuers, uses of proceeds and credit ratings (including thenon-investment grade universe).
Guidance on what qualifies as appropriate climate action, assets oractivities can be provided by market-led (e.g. Climate Bonds Initiative
Taxonomy9) or the regulatory-driven (e.g. EU Taxonomy10) initiatives.
These establish the concepts and thresholds needed for investments
in sectors that have to transition and decarbonise. Notably, theproposed EU Taxonomy includes cement, steel and aluminium
production under the manufacturing sector, power generation from
Financing Credible Transitions Climate Bonds Initiative

renewable sources that can be high emitting (such as hydropower,
geothermal power and bioenergy), agricultural production, buildings
and transport, recognising them as ‘transitional activities’. Disclosure
against the EU Taxonomy will become mandatory for EU investors
and corporates from 2021. Many other organisations are also
engaged in establishing performance criteria for high-emitting
sectors. Other market participants have published proposals to
identify and categorise activities that achieve different levels oftransition and cover a broader range of sectors. This provides a
wealth of useful guidance - though it is important to note that there
remain significant gaps and inconsistencies. A summary of existing
input relevant to this discussion is given in Annex 2.
More recently, a small but growing number of bond issuers have used
the term ‘transition’ (or labels like ‘climate action bonds’, ‘sustainabletransition bonds’) to describe their transactions. Notable examples
are discussed in Section 5.
In the absence of a market-adopted standard for transition bonds,
some of these proposals and transactions have raised concerns in themarket about inconsistencies across the various transition labels andthe potential for greenwashing. This has led to calls for a framework
and robust methodologies that provide clarity on the green benefitsof transition-related use-of-proceeds and corporate strategies.11,12
Our survey also pointed out that market participants are in
disagreement as to whether the transition-concept (whatever that
may be) would be best supported by existing green use-of-proceeds
bonds, ‘transition’ use-of-proceeds bonds, by bonds linked to KPIs
relevant to corporate strategies, or a combination of these. Several
respondents who act as bond underwriters report that prospective
issuers out of high-emitting sectors which have not found access to
the green bond market to date are studying the market with greatinterest - but are held back by the lack of guidance and perceived
reputational risk associated with their industry or use of proceeds.
The buy-side stresses a similar call for guidance for ‘transition’-type
products to maintain the credibility and rigorous standards of the
now well-established green bond market. Section 6 summarises theviews of market participants interviewed as part of this work.

1.3 What we mean by transition
Before going further, it is important to be clear what we meanby ‘transition’.
Delivering sustainable development requires clear and agreed
transition pathways that have end-goals for all of the environmental
and social objectives embedded in the SDGs. These end-goals haveto be consistent with planetary boundaries and social and societal
objectives like the Paris Agreement for climate change, and also
have sufficiently ambitious trajectories. This is easy to write, butchallenging to implement, given the tangle of co-benefits and tradeoffs, and the difficulty in establishing measurable metrics.
In this paper, our focus is on the transition that entities, activities
and assets need to make from today’s high greenhouse gas (GHG)
emissions to levels commensurate with meeting the goals of the Paris
Agreement. That is a ‘climate mitigation transition’. We start here as
this is the focus of most transition-labelled transactions to date, andclimate change is integral to achieving many of the SDGs.

* The European Investment Bank issued the EIB Climate Awareness Bonds essentially created the green bond market in2007. This concept was replicated a year later by the World Bank, upon bespoke demand by, among more, the Swedish
AP buffer funds.

92 The climate mitigation transition
Who has a role to play in a decarbonisation effort to limit global
warming to the levels targeted in the Paris Agreement? What is
the nature of transition needed from them? How do they and otherstakeholders, including investors, ensure that their transition claims
are credible? To address these fundamental questions:
A Transition Framework is provided in Section 2.1 which categorises
economic activities based on the nature of their role in a global,
economy-wide transition to the Paris Agreement targets. It describes
the nature of transition needed in respect of activities in each of
those categories.
Five ‘Transition Principles are outlined in Section 2.2 which, whenadhered to, signal the credibility of transition.
Examples are given in Section 2.3 to illustrate the Transition
Framework and Transition Principles across the brown-to-green
spectrum that we believe would fall into each category of transition.
A user guide follows in Section 3 to discuss how the Transition
Principles can also be applied in practice to entities and activity leveltransitions, and to the more granular measures to reduce emissions
within economic activities or to enable a transition away from certain
economic activities. In summary, the Transition Framework andTransition Principles can be said to define a ‘green transition’, as they
are tied to the Paris Agreement.

2.1 A framework to capture the diversityof transition
Only a minority of economic activities operate at zero or near zero
emissions today. The vast majority currently produce emissions
that are substantially higher which need to transition to rapidly
decarbonise.
For some high-emitting activities, feasible low- or zero-emissions
solutions are available or credibly envisaged within a reasonable
timeframe, and transition should be towards those solutions. For
others, there are no such solutions, but substitute low-emission
activities exist or are in development and so transition should beaway from those activities and towards the better alternatives. For
this reason, the nature of transition differs for different entities depending on the activities they practice and the need and potential
to decarbonise them.
Figure 1 illustrates the proposed framework for capturing thistransition diversity. It categorises economic activities based on theirrole in a global, economy-wide transition to the Paris Agreementtargets. Specifically, this categorisation depends on:• how long the product or service delivered by the activity will beneeded (which depends in turn on the availability of low-carbon
substitutes); andThey are inclusive, with space for both traditionally ‘green’ and‘brown’ actors to participate - given the need to decarbonise whole
economies.

• the viability of decarbonising the activity so that it aligns with theglobal warming limits targeted in the Paris Agreement, taking into
account its scope 1, 2 and 3 emissions.**

They are flexible by addressing whole entity transitions as well as
the specific measures that deliver those transitions – in other words
they are broad enough to encompass both tied (use-of-proceeds)
and general-purpose finance.

5 distinct categories for economic activities are identified:

They set a high bar, requiring operating performance to be alignedwith Paris Agreement targets (so far as this can be determined*),rather than relying on promises for future change. This is necessary
to avoid charges of green-washing, and also because the climate
emergency dictates that we hold entities to account for theirperformance today.

1. Near zero: activities already at or near net-zero emissions that
may require some further decarbonisation but not a significant
transition*** - e.g. wind power generation.
2. Pathway to zero: activities needed beyond 2050 and have a clear
1.5-degree decarbonisation pathway to 2050 – e.g. shipping.
3. No pathway to zero: activities that are needed beyond 2050 but atpresent, do not have a clear 1.5 degree decarbonisation pathway to2050 – e.g. long-haul passenger aviation.
4. Interim: activities currently needed but should be phased out by
2050 – e.g. production of energy from municipal waste.
5. Stranded: activities that cannot be brought into line with global
warming targets and have an alternative, low-emissions substitute- e.g. electricity generation from coal or solid fossil fuels.

* The Paris Agreement targets are collective, global targets. How these are allocated to countries, and for the purposesof this work, to industries or economic sectors is a complex question with no fixed answer. For some industries it is not
yet possible to give clarity on Paris-aligned transition pathways as either i) the emissions goal for that industry that is
consistent with global warming targets is not clear, and/ or ii) the transition pathway to that goal is not clear due touncertainties about e.g. technological solutions to reduce emissions.
** Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions
from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2)that occur in the value chain of the reporting company, including both upstream and downstream emissions. See
ghgprotocol.org/sites/default/files/standards_supporting/FAQ.pdf for more detail. It is important to include scope 3
emissions here. This is not about determining liability or accountability for emissions within an entity’s control. It is anattempt to look across the whole economy to determine which activities and their supply chains are or are not viablewith a zero emissions future.
*** Such as reducing embedded emissions and increasing energy efficiency. But these improvements are relatively
small compared to the emissions reductions required in other economic activities.

Financing Credible Transitions Climate Bonds Initiative10

Figure 1: Transition categories
Already net-zero

Yes

Activity
provides a
product orservice needed
up to andbeyond 2050
(as no viable
substitutes
exist)
No

Activity can bealigned with Paris
Agreement global
warming target

Yes

No

Yes

Activity provides
a product orservice needed in
the interim until
viable alternatives
are available

No

Enabling Activities cut across all of the categories above. Within eachcategory, there are activities whose biggest contribution to transition
will not be their own decarbonisation, but the decarbonisation
they enable elsewhere. In other words, the goods and services they
produce are essential to enable other activities to follow Paris aligned
decarbonisation pathways – e.g. manufacture of wind turbines or metals
recycling or carbon capture and storage. This indirect contribution totransition is addressed in more detail later in this section.
How does a credible transition look for entities and activities falling
into each category?
• For ‘Pathway to Zero’ activities: decarbonise as fast as possible
along appropriate transition pathways.
• For ‘no pathway to zero’ activities: reduce emissions as much as
possible without locking-in technologies that might prevent future
rapid decarbonisation.

A broader scope than the EU definition of transition
The transition framework put forward here is broader than the scopeof transition in the proposed EU Taxonomy, addressing entity-leveltransitions as well as more familiar activity-level transitions. The
proposed EU Taxonomy addresses only economic activities deemed
critical to the economy in 2050. Our framework adds activities thatare needed for an interim period and also stranded activities, giventhat emissions reductions are needed by entities practicing those
activities too. Our framework also addresses measures that reduce
emissions/ increase sequestration. Such measures are only addressedin the EU Taxonomy for a small number of economic activities.
The proposed EU Taxonomy does not make a distinction between
what we call ‘Pathway to zero’ and ‘No pathway to zero’ activities,
calling them all ‘transitional activities’ defined as activities which
are not currently close to a net-zero carbon emissions level and

Financing Credible Transitions Climate Bonds Initiative

1. NEAR ZEROACTIVITY

E.g. Wind energy

2. PATHWAY TO ZEROACTIVITY

E.g. Shipping fleet operators(as retrofits to clean fuelare viable)

3. NO PATHWAY TO
ZERO ACTIVITY

E.g. Long-haul passenger
aviation

4. INTERIMACTIVITY

E.g. Waste to energy(preferable to landfill
but redundant in circular
economy)5. STRANDEDACTIVITY

E.g. Electricity generationfrom solid fossil fuels• For ‘Interim’ activities: phase them out in line with their future
sunset date, but in the meantime decarbonise them as fast as
possible along appropriate transition pathways.
• For ‘Stranded’ activities: phase them out, but at the same time takeany measures that can deliver substantial emissions reductions
without locking in those stranded assets and technologies.
• For enabling activities in any of these categories: the primaryobjective is simply that the activity makes a substantial
contribution to facilitating another activity to follow an appropriate
transition pathway. Their own decarbonisation is a secondarypriority.
N.B. Those with near zero activities do have a transition to make but
as noted above, do not require significant decarbonisation and assuch are not a focus of this paper.

therefore must significantly enhance their performance, without
lock-in to carbon-intensive assets or processes. Our frameworksplits these activities into two categories. This distinction becomes
important when discussing appropriate labels (see 3.2).
Like the proposed EU Taxonomy, our framework incorporates theconcept of ‘enabling’ activities – i.e. those that provide products
or services enabling transition in other economic activities or
sectors. These enabling activities would in theory inherently
belong in one of categories 1-4 depending on their own longevity
and decarbonisation viability. However, at this time, the transition
priority for these activities is not their own emissions reduction but
rather that of enabling the transition of other economic activities
or sectors. The enabling contribution is deemed to significantly
outweigh the direct emissions footprint. For this reason, suchactivities have been identified as a fifth category in the framework.

112.2 Five Transition Principles to avoid
greenwashing
Five transition principles are summarised in Table 1 and further
described below.
The principles define the characteristics of credible transition
pathways and note that credibly transitioning entities and economic
activities are those that are already following and will continue tofollow such pathways - credible transition is not just making promises
for alignment tomorrow. In summary, these transition pathways
must align with 1.5 degree targets and have been established by thescientific and technical community, taking into account technologicalpossibilities rather than economic competitiveness, and counting
own contributions only (as opposed to emission offsets). The
principles are consistent with the framework for evaluating transition
activities in the EU Taxonomy.13
They encapsulate a scientifically robust transition, aligned withinternationally agreed climate change goals. The climate emergency
dictates that we push for rapid and ambitious transition – anythingelse is a distraction.

Table 1: Summary of the Transition Principles for activity and entity level transitions
Principle

Details

1. Credible transition goals
and pathways align with
1.5°C global warming limits• Transition goals and pathways need to align with global targets for net zero emissions by 2050 and anearly halving of emissions by 2030.
• Compatibility with Nationally Determined Contributions (or strategies aligned with that) is not
automatically sufficient.
• Neither are pathways that are exclusively defined in terms of best in class benchmarks (such as best
available technologies).

2. Credible transition goals
and pathways are establishedby the climate science
community and are not entity
specific• The expertise of the climate science community and technical experts is needed to navigate thecomplexity of allocating global GHG budgets between industries and economic activities.
• Using the science as a common base for commonly applied transition pathways maximises the chanceof global emissions reductions reaching the scale needed to limit global warming to the agreed targets,and ensures comparability between transitioning activities and entities in the same industry.

3. Credible transition goals
and pathways don’t countoffsets, but should count
upstream scope 3 emissions• Pathways should not account for emissions reductions generated through separate activities,
including purchased offsets, but should address scope 1 and 2 and upstream scope 3 emissions as far
as this is practically possible.

4. Credible transition
goals and pathways take
into account technologicalviability, but not economic
competitiveness• Development of transition pathways must include assessment of current and expected technologies.
Where a viable technology exists, even if relatively expensive compared to business-as-usualtechnology, it should be used to determine the appropriate decarbonisation pathway for that
economic activity.

5. Credible transition means
actually following thetransition pathway – pledges,
policies and strategies alone
are not sufficient• Actual operating metrics are the key indicators of performance, not simply pledges or the
implementation of policies and procedures that may or may not deliver operational outcomes.
• Activities/ entities must be able to credibly demonstrate how they will follow the transition pathway
over the financing term, and regular assessment is required to demonstrate that transition iscontinuing at the necessary scale and pace.
• In some situations, this will require activity/ entity level decarbonisation plans and targets matchedto the financing term.

Financing Credible Transitions Climate Bonds Initiative12

PRINCIPLE 1: Credible transition goals
and pathways align with 1.5°C global
warming limits
Per the Paris Agreement, governments have set
a shared goal of keeping global temperature rise this century well
below 2°C and ideally within 1.5°C. The benchmark of credible
transition should be alignment with pathways consistent with 1.5°C
global warming limits, given that:i. the scenarios for 1.5°C give us only a 50:50 chance of keeping
global temperatures to that level; andii. in reality, there will be laggards who do not meet the
decarbonisation thresholds, and unfortunately others will need tocompensate for that if we are to limit warming to well below 2°C.
In its Special Report on Global Warming of 1.5°C (SR15)14 theIntergovernmental Panel on Climate Change (IPCC) presented
pathways with no or limited overshoot of 1.5°C.
In these pathways, global emissions need to drop by 45% from2010 levels by 2030 and down to net zero globally by 2050. Entityand activity specific transition pathways should align with this goal.

PRINCIPLE 2: Credible transition goals
and pathways are established by theclimate science community and are
not entity specific
The 1.5°C warming goal is a collective, global target for decades
into the future. How global GHG budgets should be allocated tocountries and to economic sectors, and how these allocations
evolve over time, is a complex question. This complexity iscompounded by uncertainties over future emissions levels andtherefore decarbonization needs, and technological capabilities. In
essence, different industries will have greater or lesser potential toreduce emissions/ increase sequestration over time, meaning thatthe end goals and speed of transition toward them will vary. Some
activities will need to be phased out before 2050. For those neededin 2050 and beyond, not all industries will be able to reach net zeroat that date.15
Navigating this complexity to establish appropriate transition
pathways requires a full understanding of the potential for and timingof each activity to align with 1.5°C global warming limits, i.e. of theclimate modelling scenarios for each sector and of its emissions
profiles and technological options vis-à-vis sectoral and economywide carbon budgets. This requires the expertise of the climate
science community in partnership with other technical experts.
Transition pathways should not be determined by individual
institutions on a case-by-case basis. Rather, pathways should beharmonised globally, e.g. through regulatory approaches such as theroll out of regulated taxonomies like the EU’s. That would significantly
increase the chance of global emissions reductions reaching the scaleneeded, and boost comparability.
There may, of course, be other considerations at play affecting therelative ease or difficulty of meeting common GHG thresholds in
different contexts or locations, while balancing other development
needs (e.g. degree of economic development or maintaining
resource security). For this reason, there may be some flexibility inapplying the climate science in different regions and contexts. But innavigating this, we must again be led by the scientific community.

Financing Credible Transitions Climate Bonds Initiative

Implication of Principle 1 – The need to go
beyond Nationally Defined Contributions(NDCs) and best-in-class benchmarks
Pathways that align with NDCs cannot automatically be taken
to represent credible transitions to 1.5°C goals, at least at thistime. In theory, it makes sense to align transition pathways
with NDCs, since the Paris Agreement allows flexibility fornations to determine their own contributions, and to determine
how emissions reductions will be shared across the economy.
However, at this time, in aggregate, NDCs do not equal even a
2°C world (rather 3-4°C). An individual NDC may be sufficiently
ambitious to align with 1.5°C goals, but this would needinvestigation and cannot be assumed.
Likewise, benchmarks such as ‘best available technologies’
cannot themselves represent credible transition to 1.5°C goals(or any climate-aligned goal) as they simply identify ‘top
performers’ and may not over time keep pace with the speedof required decarbonisation. At best, they might be used as astarting point for appropriate decarbonisation pathways. For
example, a decarbonisation pathway might start with best-inclass metrics today but very quickly decline thereafter to reachthe necessary emissions target in future.

Challenge of Principle 2 – An urgent
need to address and deal with incomplete
transition pathways
Annex 2 reviews existing guidance on transition goals andpathways. A number of groups including but not limited to
the Climate Bonds Initiative, the Technical Expert Group(TEG) advising on the EU Taxonomy, the Energy Transition
Commission, and the Transition Pathway Initiative provide
analysis and pathways across a number of sectors. However,
the review has identified a number of critical issues that will
limit the roll out of ambitious transition. These are i) a numberof gaps in the scope and coverage of existing guidance, andii) inconsistencies where different groups or initiatives haverecommended different transition goals and pathways (for avariety of reasons, including basing those pathways on different
climate scenarios or different methodologies for allocating
emissions across industries). As a result, widely and commonly
accepted transition metrics and pathways have not been
established yet for many sectors.
This is a significant barrier to change. Transitioning entities,
and their investors, have no clear targets or guidelines toaim for, nor to measure performance against. This leads tochallenges in determining/ assessing the credibility of theirtransition, deterring engagement. This holds particularly for
longer term financing (or equity investments), where we would
wish to see alignment with the targets over the full term of theinvestment. Unfortunately, as illustrated in Annex 2, this is thecase for many high-emitting activities, for which we most needto see transition.
In ‘Next Steps’ (Section 7), we recommend that this situationis addressed as a matter of urgency. In the meantime, we
recommend that borrowers and investors select a pathway they
believe is credible and provide transparency on the source ofthe pathway, the extent to which it does or does not meet theseprinciples, and the rationale for its selection for the assessmentof the activity or entity transition in question.

13

PRINCIPLE 3: Credible transition goals
and pathways don’t count offsets
but should count upstream scope 3
emissions as much as is possible
Transition pathways should not take into account purchased or
self-generated offsets from other activities (such as ‘natural’ carbon
capture and storage solutions via agriculture, forestry, naturallandscape restoration and ‘artificial’ carbon capture and storage
solutions through direct air capture). Offsetting reduces transparency
and diverts attention away from reducing inherent emissions. The
only exception to this is if the offsetting is very directly linked to
the key activity in question and offsets emissions that cannot be
minimised in any way, e.g. putting solar panels on a hydropower
reservoir, or CCS solutions applied directly at an industrial facility.16
Transition pathways should take into account scope 1 and 2 andupstream scope 3 emissions as under the control of the transitioning
entity, but not downstream scope 3 emissions.

PRINCIPLE 4: Credible transition
pathways take into accounttechnological viability, but noteconomic competitivenessTransition pathways should be ‘technology- or solution-neutral’ inorder to maximise opportunities to reduce emissions and encourage
innovation.* However, determination of appropriate pathways cannot
be done without consideration of technologies currently available oron the horizon. To be of use, transition pathways must be viable aswell as ambitious, or they will not incentivise change.

Clarification for Principle 3 – Addressing scope
3 emissions
As noted in section 2.1, all scope 1, 2 & 3 emissions should beconsidered when categorising activities within the framework.
This is particularly important to properly identify ‘interim’ or‘stranded’ activities. For example, the transportation of fossil
fuels in oil tankers is a stranded activity as much as a power
station burning that oil, even if the tanker fleet is powered byclean energy sources.
However, transition pathways can and should account only foremissions within the control of the entity (i.e. scope 1, 2 andupstream scope 3 emissions) based on reasonable expectationsof traceability of upstream scope 3 emissions.
Why upstream scope 3? Upstream scope 3 emissions are theemissions related to purchased goods and services (i.e. within
their supply chain). While these are not directly controlled
by an entity, they are indirectly controlled by their purchasing
decisions. By including upstream Scope 3 emissions, thetransition principles are reinforced along supply chains. A food
manufacturer, for example, purchasing ingredients associatedwith significant deforestation would not be making a credible
transition even if their manufacturing process gave rise tozero emissions. Sourcing sustainably is a valid expectation ofsomeone deemed to be making a credible transition.

Implication of Principle 4 – Entities constrainedby cost competitiveness cannot be said to becredibly transitioning
Entities carrying out an activity that does not follow its
decarbonisation pathway, even if the reason is maintaining costcompetitiveness, are not making a credible transition. This may
seem harsh, given the need to remain cost-competitive, but is atrue reflection of emissions status, which is the variable underconsideration here.

This assessment of viability should not rule out technologicallyfeasible options that are already in commercial use, even if they are
relatively expensive compared to business-as-usual.
Economic barriers to technology up-take could be addressed withappropriate incentives and support, as has been demonstrated forvarious renewable energy forms. This sends a strong signal to all
stakeholders, including governments and other bodies that cancatalyse change by addressing the economics.

* Such as by using metrics representing emissions intensity per unit of output

Financing Credible Transitions Climate Bonds Initiative

14

PRINCIPLE 5: Credible transitionmeans actually following the transition
pathway – pledges and policies are
not sufficient
Pledges to align with 1.5°C global warming limit, or even policies,
procedures and governance practices which influence and guide
operating performance in the right direction, are not sufficientindicators of a credible transition because they can only provide
an indication of intent and commitment. The focus needs to be on
impact that is actually being delivered today (and over the termof the investment), as determined by alignment with a credible
transition pathway (that meets principles 1-4).*
This is a high bar to set, but we do not have time to delay
decarbonisation. Activities or entities that are moving towards,
but are not reaching, transition pathways for their industry are notyet doing enough. Transition to transition is not acceptable. Morepractically, it is a much simpler and more robust process to set andassess the performance of entities and activities in terms of theiractual and expected operating metrics, rather than assessing thefuture effectiveness of their current pledges and policies.

We note that further guidance is needed to define the key
characteristics of these entity-level transition strategies. Certainly,
they must demonstrate that the entity is undertaking a broader
low-emissions shift, not a one-time effort amid ongoing high emitting
activities. This should address how the entity is transitioning its
assets and capital to provide products and services which will allow
the entities business activities to follow transition pathways thatmeet the principles outlined above.
In all cases, the robustness of these strategies and actual
performance against the relevant transition pathways overthe financing term (where appropriate) must be verified by anindependent third party.
In the green bond market, this could be via a second opinion provider
following the Green Bond Principles, or for bonds and debt instruments
more broadly, via certification under the Climate Bonds Standard.

This does of course require looking to future operating practices andmetrics to assess whether the transition pathway will (continue to)be met over the term of the instrument. In practice, what this means
varies according to the financial instrument in question:• For use-of-proceeds bonds: if the measure or activity aligns with atransition pathway over the financing term that meets principles 1-4
and it is needed post 2050,** then it is delivering credible transition.
While many investors may look for an accompanying entity-level
decarbonisation strategy, particularly for a highly emitting sector,
such strategies are welcomed rather than essential.
• For fixed term but general purpose finance (e.g. general purpose
bonds, or sustainability linked loans): if the entity follows atransition pathway over the financing term that meet principles
1-4 then it is delivering credible transition. This should bedemonstrated via a credible entity-level transition strategy which
at least covers the term of the financial instrument.
• For open ended entity level finance (e.g. equity investments): if theentity follows a transition pathway that meet principles 1-4 then it
is delivering credible transition. Again, this should be demonstrated
via a credible entity-level transition strategy. There is a question here
regarding the timeframe of that strategy given the finance is openended. We suggest this should outline a transition pathway to 2050,
with significantly more detail on alignment with a transition pathway
to halve global emissions by 2030.

* i.e. Good transition performance should have already started. The pathways developed for high emitting sectors represent
ambitious but possible performance levels today and you should be meeting those if your transition claim is credible** Further, transition pathways have downward emissions trajectories, capturing the need to ratchet down emissions

over time and reflecting future opportunities to decarbonise as new, improved technologies come online. Therefore,
activities and entities that are close to the GHG threshold at any point in time run the risk of falling out of compliance
if they do not take further action to reduce their emissions. Hence, compliance over the financing term needs to takeaccount of the declining emissions trajectory over the financing term.

Financing Credible Transitions Climate Bonds Initiative15

2.3 The framework in practice illustrative examples

In the footnotes following the table are brief explanations for thiscategorisation, particularly where there is likely to be some debate.

Table 2 provides examples of economic activities that are likely tofall into the categories described in the transition framework. These
examples have been assessed based on an understanding of thelikely role that they will play in an economy that meets the goals of
the Paris Agreement, the mitigation potential of these activities, andthe ability to set transition pathways for them that satisfy principles
1-4 above. However, fully understanding the mitigation potential forany activity requires detailed analysis of each sector, its emissions
profile and technological options vis-à-vis sectoral and economy
wide carbon budgets. For some activities, this work has already been
done, for others it is ongoing. The examples in this table are based on
our best understanding at this time.

As noted in Section 2.1, appropriately categorising activities requires
full and consistent consideration of lifetime emissions associatedwith a product or service. That is, covering all material sources ofemissions across scope 1, scope 2 and scope 3 to the best extent
possible. This ensures consistency in categorisations across supply
chains. For example, energy generation from coal is a ‘stranded’
activity, and so we want to phase out not just those energy
generation facilities, but also the coal mining and transport services
that supply them. These linked activities are also ‘stranded’.

It is very important to note that it is not the case that all realworld instances of those activities, or entities practicing them,or all investments associated with those activities, will fall into
these categories. They will only do so if they meet their respective
transition pathways, including associated GHG thresholds or
qualitative equivalents.

Importantly, the allocation of activities to transition categories is notdetermined by their emissions today but rather about the need andpotential to rapidly move to net zero alignment.
Lastly, at- or near-zero activities and their enabling activities havebeen included just for completeness for the full brown-to-green
spectrum, and as in some cases transition requires transition to these
activities. However, they are shaded light grey as they are not thefocus of attention here.

Table 2: Categorisation of activities within the brown-to-green spectrum
Activity category

Examples relating to power
generation

Examples relating
to transport

Other examples

Near zero• Solar energy generation• Manufacture or operationof electric modes oftransport• Production of green hydrogen• Shipping• Manufacture of steel, iii cement iv• Wind energy generation• Landscape restoration• Generation of bioenergy fromagricultural or forestry waste
products
Pathway to zero

• Hydropower generationiii

BROWN TO GREEN• Manufacture of packaging• Crop productionvi• Property management
Interim• Waste to energy from municipal
solid waste viii

• Production of biofuels forshipping xi• Production of energy frombioenergy (non-waste products) ix• Gas power generation with CCS
No pathway to zero

• Electricity generation from solid
fossil fuelsvvii• Production of blue hydrogen xiii
• Fossil-fuel plastics recyclingxiv• Gas production for heavy
industry xii• Production of mineral waterxv• Long-haul passenger
aviation xvi• Production of hydrogen using
steam generated from fossil fuelsx• Manufacture or operationof fossil fuel powered
passenger vehicles xvii
Stranded• CCS for power generation

Enabling• Manufacture of renewables
components

Financing Credible Transitions Climate Bonds Initiativexviii• Manufacture of electricfuel cells or batteries• Single use fossil fuel plastics• Metals recycling• CCS for industry

xix

xx

• Energy storage

16

i
Impoundment hydropower can offer a variety of services aswell as (potentially) providing low GHG intensity power, including
peaking and storage services that do not have easy substitutes atthis time. This justifies the inclusion of this activity in the ‘activity
in transition’ category, even though it is recognized that individualhydropower facilities may have only limited opportunities to actively
reduce their emissions. Emissions reductions would come then fromthe development of lower GHG footprint hydropower facilities andthe phasing out of higher footprint facilities.

The use of ammonia and hydrogen at scale is looking
sufficiently viable in the medium term future to enable longdistance shipping to transition to alignment with a net zero
emissions economy, and biofuels coupled with short scale
electricity and/ or wind, is a viable fuel mix to achieve emissions
reductions to begin the transition in the interim.
ii

The categorisation of steel manufacturing is perhaps moredebatable. The development of green hydrogen is enabling rapid
decarbonisation of the production processes of iron and steel, ashydrogen is a viable high intensity power supply as a long-term
substitute for coke. Gas could be used sooner to substituting for coke(in the interim period only, as leakage factors mean gas productionand energy supplies will not be compatible with net zero emissions
goals). However, some argue that hydrogen (alone) cannot give thefull process temperatures needed. Part of the solution will also be to
reduce demand by maximising recycling of steel.
iii

The production of cement results in process carbon dioxide
emissions from the reduction of limestone (calcium carbonate) tolime (calcium oxide) which binds to silicates to produce cement.
Binding agents other than calcium oxide could reduce emissions
or even absorb CO2 however there are other problems in using or
handling these cements limiting their adoption. An interim solution
might be to replace some of the cement used in concrete withmaterials like blast slag, and reduce demand for cement overall e.g.
by improving building design. However, at this time it is thought thatcarbon capture and storage will be needed for cement production toreach net zero emissions.
iv

A transition from manufacturing fossil-fuel based, single-use
plastic packaging to multi-use packaging using lower emission
materials and production processes, alongside a rapid shift to amore circular economy and reduced demand for plastics would
significantly reduce emissions. However, as above, there are doubts
about the availability of sufficient biomass to enable a transition to
net zero in this sector.
v

vi Crop production as a whole is generally not realising its
mitigation potential. There is the need and opportunity to improveland management techniques to reduce emissions and build up
greater carbon sequestration in above and below ground biomass
and soil. Application of vertical farming may be an option to enable
expansion in productivity without significantly increasing land
requirements.

Commercial building stock has a generally long life (post 2050)
and often has a relatively high emissions footprint. However, most ofthese buildings undergo retrofits or upgrades as part of their regular
maintenance cycle, which offers relatively regular opportunities toreduce their GHG footprint to align with emissions reductions targets.
vii

viii The contribution of waste-to-energy to decarbonisation
pathways is hotly debated. Waste-to-energy can be an effective
way to deal with residual waste, better than putting into landfill,particularly where displaced energy still has a relative high emissions
intensity. However, as grids decarbonise and circular economies are
more fully established, the value of waste-to-energy’s contribution
diminishes. Nevertheless, at present, there is no clear guidance as towhen that tipping point might be reached.

There is disagreement about the sustainable capacity forbioenergy over the long term - per the IPCC’s Special Report on
Global Warming of 1.5°C (SR15), October 2018. Deployment at thelevels envisioned by 1.5°C-consistent pathways may put significant
pressure on available land, food production and prices and potential
water and nutrient constraints. Therefore, the use of biomass
should be prioritised for sectors where there are few other viable
decarbonisation technologies, e.g. long haul aviation and possibly
plastics production.
ix

x Electricity generation from gas may be a viable interim activity
given the relatively short life of such assets (around 15-20 years) - ifactions taken to address emissions, including leakage, ensure that thepower facility meets the appropriate GHG thresholds. In the longer
term, given leakage cannot be fully curbed, such activities will not be
part of a net zero carbon economy.
xi

Ibid

xii

See footnote on steel manufacturing example.

xiii The production of blue hydrogen is powered by gas, andtherefore has high emissions associated with it. It will therefore
only be eligible as a short-term transition solution until the
production of green hydrogen is viable.
xiv Deemed an interim activity as fossil-fuel based plastics
should be phased out as quickly as appropriate alternative
plastics allow (e.g. plastics produced from bio- or synthetic
feedstocks that can be sustainably produced at scale andappropriately disposed of after use).

Deemed an interim activity on the grounds that ideally we will
not be buying bottled water by 2050 as by then clean drinking water
will be available via water infrastructure networks in all locations
and consumer preferences will have moved away from bottled water
towards tap water.
xv

xvi Long-haul aviation does not yet have a viable pathway for
substantial emissions reductions to take it to net zero. Electricity
storage for long haul is not viable, and there is insufficient agricultural
production to deliver the volume of biofuel that would be needed
without causing serious problems for food supplies. For now, long
haul aviation cannot be categorised as an ‘activity in transition’.
xvii These are already unable to meet established GHG thresholds
and pathways for passenger vehicles, given the existence of electricvehicles with significantly lower tailpipe emissions (sufficient tooffset embedded emissions).
xviii As noted in a number of these examples, CCS critical for some
activities to get to significantly reduce emissions.

As enables the establishment of a circular economy, where thereuse of materials reduces emissions by displacing virgin materials
with higher production emissions.
xix

xx

Financing Credible Transitions Climate Bonds Initiative

Ibid

17

3 A guide for users – what credible transitionmeans in practice
Our collective goal, as agreed by signatories to the Paris Agreement,
is to decarbonise the global economy sufficiently rapidly to halve
global emissions by 2030 and achieve net zero emissions by 2050.

3.1. Activity and entity level transitions

This requires various levels of transition:

The idea behind the principles is that any entity or economic activity
that follows a transition pathway that satisfies the principles will not
be greenwashing.

• Entities to implement/ finance/ incentivise17 the rapid decarbonisation of
all their activities that have a role in a post-2050 net-zero economy andphase out those that do not, switching to low carbon alternatives.

However, this simple message needs a little flexibility when applied
to the diversity of transitions encapsulated in the categories and thediversity of entities practicing them.

• Activities to each be decarbonised (if needed post-2050) or
phased out (if not)Table 3 captures how the principles would be applied in practice by
credibly transitioning activities and entities.

• Measures undertaken to substantially reduce emissions in thoseongoing activities and phase out those that do not have a role.

Table 4 then provides specific examples of investments that would
likely meet these requirements, given what we know today of transition
pathways aligned with the five principles, drawing on the range of
guidance already available (see Annex 1 for more information).

Below we describe how the transition framework and principles canbe applied to each of these layers of transition.

Table 3: How to apply the principles for a credible activity or entity level transition
Activity category

EntityActivity

Near zero

N/A‘Pathway to Zero’

Decarbonise entity (and therefore all activities) as fast as
possible along 2050 transition pathways in line with Principles‘No pathway to zero’

N/A (No pathway exists therefore there is no credible transition at the activity or entity level, but see ‘Measures’
below for decarbonisation options)‘Interim’Phase out all interim activities in line with sunset date AND

Phase out activity in line with sunset date AND

In the meantime, decarbonise entity along appropriate
transition pathways

In the meantime decarbonise activity along
appropriate transition pathways‘Stranded’

Phase out all stranded activities and switch to low carbon
alternatives

N/A (the aim is not to decarbonise stranded
activities but phase them out)

Enabling

The activity makes a substantial contribution to facilitating another activity to follow an appropriate transition
pathway. Their own decarbonisation is secondary

Decarbonise activity as fast as possible along
2050 transition pathways in line with Principles.

Table 4: Examples of likely credible transitions at activity and entity level
Activity category

Credible transition at activity level

Credible transition at entity-level

Near zero

Construction of wind farms by amixed power generation company(e.g. oil, gas and wind)

N/A

Pathway to zero

Farm following low carbon
agricultural practices

Property management company undertaking deep retrofits to allproperties in its portfolio

A steel production facility thatmeets decarbonisation pathways

Sovereign whose economy is fully aligned with 1.5°C goals

No pathway to zero

N/A

N/A

InterimOperation of plastics recycling
facilities (within sunset date forplastics use and production)

Waste to energy company with full capture and utilisation of energy(within sunset date)

Stranded

N/A

Coal fired power generation company rapidly expanding into renewables

Enabling

Establishing metals recycling
facilities

Company specialising in R&D into e.g. CCS for industry, synthetic plastics, newfeedstocks to reduce / eliminate ruminant emission, cement-less concrete,hydrogen or electric kiln furnaces that generate sufficient heat intensity

Financing Credible Transitions Climate Bonds Initiative

Bank whose loan portfolio includes only loans to entities/ activities/
projects meeting appropriate decarbonisation pathways

Waste to energy company rapidly switching to recycling operations18

3.2 Granular measures to decarbonise

Credible measures within ‘stranded’ activities

Discussed below is how the five transition principles can beapplied to determine the credibility of more granular measures todecarbonise activities or phase out ‘stranded’ or ‘interim’ activities.
Table 5 provides specific examples of measures that would likely
meet these requirements, given what we know today of transition
pathways that broadly align with the five principles, drawing on therange of guidance already available.

Under what conditions might measures (and associatedinvestments) to reduce emissions generated by ‘stranded’
activities be viewed as part of the transition landscape?

Credible measures to reduce emissions/ increase sequestration
within activities or entities should:
1. Be part of a programme to bring the performance of the activity
or entity in line with a credible transition pathway (per principles
1-4)
For example, if the transition path for activity X dictates operating
emissions must be 100gCO2e/m2 in 2020 and 50gCO2e/m2 in
2025, then the measures must be part of a programme that will
deliver such emissions performance.
The programme should have a very high likelihood that the activity orentity will meet the thresholds by the end of the period. This shouldbe evidenced - e.g. via a detailed and viable capital expenditure planand therefore in line with Principle 5 (pledges and policies are notindicators of credible programmes).
OR
2. Be recognised individually as making a substantial contribution
to climate mitigation
Many measures are already effectively pre-assessed throughtheir recognition by the technical and scientific community. As
an example, the proposed EU Taxonomy includes a ‘whitelist’of measures that can be undertaken to decarbonise buildings(e.g. install triple glazed windows) and a similar whitelist’ for
decarbonising electricity transmission and distribution systems.
These measures should seek to reduce emissions as much as
possible without locking in technologies that might prevent future
rapid decarbonisation
The box on the right considers more specifically potentially credible
measures to reduce emissions in ‘stranded’ activities before they arephased out.

Here, it is not about transitioning the activity per se, but rather
about recognising the contribution of specific measures totransitioning onto Paris Agreement-aligned pathways at theaggregate, global level. Such measures could potentially be
admissible if they deliver very substantial mitigation without
locking the underlying activity or the entity performing it deeper
into the economic system. Examples here might include gas
capture on closed landfill sites. It would not include incremental
improvements in energy efficiency at fossil fuel power
generation facilities.

Credible measures to transition entities away from high-emissions
activities or assets
Measures relating to acquisitions or organic growth in low-emissions
alternatives are eligible. So are the costs of early decommissioning
in order to align with the necessary sunset dates dictated by global
emissions reductions targets.
Measures relating to divestment of high-emissions assets oractivities are not eligible. Simply passing high-emitting assets
and activities to others will not help us achieve global emissions
reductions targets.
Are entity-level transition strategies needed alongside credible
measures?
If the above conditions are met, the measures being implemented(and financed) are enabling an appropriate decarbonisation and are
therefore making a credible contribution to transition. The whole
entity need not be aligned with 1.5-degree pathways for the value ofthe measures to be recognised.
However, we acknowledge that many investors look to supporting
entity-level decarbonisation strategies, particularly when theinvestment relates to a highly emitting sector. They view suchstrategies as a means to assess that any specific decarbonisation
measures are part of a broader low-carbon shift, not a one-timeeffort amid ongoing high-emitting activities.

AND
3. In all cases, the measures should not lead to a lock-in of GHGintensive assets activities or entities

Financing Credible Transitions Climate Bonds Initiative

19

Table 5: Likely examples of credible transition measures
Activity category

Measures to decarbonise activities

Measures to transition
away from activities
that ought not be part ofthe long term economy

Near zero

Replacement of wind turbines with more efficient models

n/aPathway to zero

Deep retrofits of residential properties

n/a

Retrofit of shipping vessels to run on green ammonia
Installation of CCS in steel manufacturing facility
Kiln electrification for cement production
Switch to use of 100% recycled materials in clothing production
No pathway to zero

Retrofits of airline fleets to operate with a maximum biofuel or synfuel mix

n/aInterimInstallation of gas capture at a waste-to-energy plant treating only residual waste

Early shut down of
waste to energy facilities
when circular economy
sufficiently establishedand residual waste isminimised

Switch from fossil fuel based plastics to compostable alternative in production ofbottled mineral water
Capture and utilise gas leakage in gas pipelines
Stranded

Capture and utilisation of gas leakage from closed landfill[Noting that these investments are recognised not because of the need or desire totransition stranded activities, but rather to maximise opportunities to halve global
emissions by 2030]

Enabling

R&D in technologies for the production of new construction materials using low
emission cement and steel

Financing Credible Transitions Climate Bonds Initiative

Early decommissioningof a coal-fired power
stationn/a20

4 Implications for transition finance
4.1 Opportunities for investors
As stressed above, accelerated decarbonisation is needed acrossall sectors of the economy if we are to meet the goals of the Paris
Agreement. A number of examples of credible transition investments
are given in section 3, but this is just the tip of the iceberg.
As these examples illustrate, transition can be and should be
financed via a range of financial instruments – some general
purpose at the entity level (e.g. equity investments, general purpose
debt and sustainability linked loans), some focussed on activities
and measures to reduce emissions (e.g. use of proceeds bonds
and loans). Figure 2 below gives an example of these options fortransition of an electrical utility company.
Given this range of economy-wide transition actions and the diversityof associated financial instruments, there are huge opportunities for
credible transition investments for green or responsible investors.

green bond market or by extension a green label. Indeed, following
the principles outlined above would ensure all resulting transition
investments are aligned with the goals of the Paris Agreement andas such can be viewed as green. As detailed in Appendix 1, manyof the existing frameworks, taxonomies and other guidance for thegreen bond market, including Climate Bond Initiative’s taxonomy,
the EU Taxonomy, the Green Bond Principles and the China Green
Bond Catalogue, incorporate manufacturing, power generation,transport, buildings and agriculture, all sectors with high emissions
footprints today. This could support the view that there is no need fora separate transition label.
That said, we do believe there is a useful distinction to be madebetween activities that do not have a long term role to play in a low
carbon economy (due to their high emissions) and those that do(despite their high emissions), and this can provide the foundation ofa demarcated ‘transition’ label.
In broad terms, we propose that the:4.2 A need for a ‘transition’ label?
Whether relevant investments are labelled as ‘green’ or ‘transition’is less important than that these transitions happen and finance isavailable for them. However, it is necessary to address whether there
is a need for the nascent ‘transition label’ to remain and to scalealongside the established ‘green label’.
Turning to the bond market, the transition label originated to sellbonds that were difficult to market as green bonds. Very valuably,
this has created a new drive to bring a broader range of sectors andactors into the sustainable finance space. Some market participants
see the label as a way to further engage and help the largest
emitters (fossil-fuel extraction, non-renewables energy generation,
manufacturing, aviation that have not been widely engaged in thegreen finance market to date) to finance the significant investments
required to facilitate their transition journey with dedicated pools ofcapital.

• green label continues to be used for eligible investments* inactivities or entities that have a long-term role to play and areeither already near zero or are following decarbonisation pathways
in line with halving global emissions by 2030 and reaching net zeroby 2050• transition label be used for eligible investments* that:- are making a substantial contribution to halving global
emissions levels by 2030 and reaching net zero by 2050 but will
not have a long term role to play; OR- will have a long term role to play, but at present the long termalignment to net zero goals is not certain.
* Eligible investments are those that apply the framework andprinciples in the manner described in Section 3.

However, the reason that green finance for high-emitting activities
has so far been limited is arguably due to a lack of provision of robust
eligibility criteria - not because they are a priori incompatible with the

Figure 2: Application to entities, activities and measures
Whole entities

Activities

Measures to reduce emissions

e.g. Electrical utility

e.g. For Electrical utility:

Applicable if whole entity
is following a transition
pathway

Renewable energy generation

EquitySustainabilitylinked
bond/loan

Distribution networks

Generalpurposebond

Financing Credible Transitions Climate Bonds Initiative

Use ofproceeds
bonde.g. For Electrical utility:
Stop gas flaring
Early fossil fuel plantclosureUpgrading gas networks
for green hydrogen

Asset-backed
security

Green loan

21

The implications of this proposal are summarised in Figures 3 and4, which illustrate respectively the resulting labelling for activity
level investments and associated measures to reduce emissions
and the resulting labelling for entity level investments. It aims tobalance the need for coherence and consistency across all efforts todecarbonise the global economy without creating false distinctions.
It takes the opportunity that the engagement around transition
labels has already opened up to accelerate and broaden ourcollective decarbonisation efforts.
It is perhaps worth noting that this proposal leaves open whether
investments connected to ‘pathway to zero’ activities be labelled as
green or transition. In theory, they can be credibly labelled as green
as their inclusion in the ‘pathway to zero’ category by definition
meets the requirement of alignment with Paris Agreement goals.

However, given the current lack of consensus on appropriate, viabletransition pathways for some of these activities, flexibility is built into label these as transition if a more cautionary approach is preferredin the short term.
Importantly, however, it is stressed that as anyone meeting theprinciples outlined above is substantially contributing to meeting
the goals of the Paris Agreement, all of these investments should
therefore be eligible for capital with a climate or environment
mandate regardless of whether they are labelled as ‘green’ or‘transition’. This is important to ensure a large, liquid market for bothalready net zero and transitioning activities and entities.

Figure 3: Use of green and transition labels for entity level investments
Is the entity currently
near zero?

Meets
transition
principles

Yes

NEAR ZERO entity
Green label
Examples:No

Is there a credible
entity-level transition
strategy being
followed that is inline with the Paris
Agreement?

Yes

PATHWAY TO
ZERO & INTERIM
entities
Green/transition label *PATHWAY TO ZERO:
Sovereign whose economy
is fully aligned with 1.5°C
goals
Coal company switching
to renewables at the
speed required by the Paris
Agreement
INTERIM:
Waste to energy company
rapidly switching torecycling operations

No

NO PATHWAY TO
ZERO & STRANDED
entities.
No label applicable atentity level*Why can green or transition labels be used?
This proposal leaves open whether ‘pathway to zero’
investments be labelled as green or transition. In theory,
they can be labelled as green as they are aligned with
the Paris Agreement. However, given the current lack ofconsensus on appropriate, viable transition pathways forsome activities, flexibility is built in if a more cautionary
approach is preferred in the short term.

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22

Figure 4: Use of green and transition labels for investments in activities and associated measures
NEAR ZERO
Green label

Already net-zero

Activity provides a
product or service
needed up to andbeyond 2050
(as no viable
substitutes exist)

Meets
transition
principles

Yes

Not as
yet

Yes

Yes

PATHWAY TO ZERO
Green/transition label*

NO PATHWAY TO ZERO
Transition label
By definition, the activity
cannot be aligned with
the Paris Agreement.
Therefore the only eligible
investments are measuresthat significantly reduce
emissions in the short tomedium term

Activity canbe aligned with
Paris Agreement
global warming
targetExamples:Steel production
meeting decarbonisation pathway

Credible measures todecarbonise activity
may include:
Retrofits of airline
fleets to operate witha maximum biofuel or
synfuel mix

Not as yet

Activity provides
a product orservice needed in
the interim until
viable alternatives
are available

Yes

Yes

Not needed

ENABLING ACTIVITIESGreen/transition label
These are essential goods and services
in supply chains and cut across all of
the categories. Their appropriate label
depends on what they are essential to:

Yes

INTERIM
Transition label

Operation of plastics
recycling facility until
sunset date

STRANDED
Transition label

Capture andutilisation of gas
leakage from closed
landfill

By definition, the activity
is not needed post 2050.
Therefore the only eligible
investments are measuresthat significantly reduce
emissions in the short tomedium term and no lock inof high carbon technology

Decommissioningof a coal-fired power
station earlyNot as yet
No Label
Activities that do not meetthe principles are noteligible for a label

If essential to Near Zero activities (e.g.
manufacture of triple glazed windows)
then the green label is applicable.

If essential to No Pathway to Zeroactivities (e.g.CCS), then the transition
label can apply.

Financing Credible Transitions Climate Bonds Initiative23

4.3 Practical considerations when portfolios
are mixed
Many entities practice a mix of activities, some of which might belabelled as green, others as transition, others as neither per the
proposals above. Likewise, use-of-proceeds bonds might likely
encompass a range of assets and projects which cross a number ofthe categories and associated labels proposed above.
In these cases, to err on the side of caution, it is recommended thatissuers/ borrowers adopt the labelling of the ‘lower bar’. That is,
if some proceeds or business areas are categorised as transitionand others green, overall the financial product should be labelled
as transition. If some proceeds or business areas are categorised
as transition and others as neither green nor transition, overall thefinancial product should be labelled as neither green nor transition.
The approach is equivalent to requiring that 100% of proceeds orbusiness activities must be deemed as ‘eligible investments’ per
the requirements described in Section 3, in order to use a green ortransition label. This is consistent with the current approach taken by
the Climate Bonds Initiative when certifying climate bonds, where alluse-of-proceeds must meet the relevant eligibility criteria in order forthe bond to be certified.

4.4 Performance-linked financing terms linked tosustainability performance
Some recent green use-of-proceeds bonds have incorporated
innovations in the financing terms. Examples include DC Water’s
2016 Environmental Impact bond which links financial payouts withenvironmental performance. Generally, these have not been criticalto the green labelling, though. Likewise, the key feature of transitionrelated use-of-proceeds bonds is that their use-of-proceeds areallocated to ‘transition’ outcomes compatible with the appropriate
transition pathway. Coupons, or other financing terms, linked tofuture transition performance may well be a ‘cherry on top’ forinvestors but are not the key feature of use-of-proceeds finance.
Over the past year, the market for sustainability-linked products(especially loans at this stage) has exploded, attracting issuers withsustainability programmes but without necessarily the assets toissue a use-of-proceeds green bond. In the burgeoning Sustainability
Linked Loan (SLL) market, performance-linked margins are often
offered if entity-level ESG metrics are met. A criticism of this nascentmarket is that the metrics are difficult to compare and benchmark
against the Paris Agreement and SDGs.
Apart from using the ICMA-administered Sustainability-linked
Bond Principles, such deals with KPIs related to climate mitigation
should also make use of the transition framework outlined above.
Performance metrics should be linked to a transition pathway thatmeets the principles described above and evidence on progressshould be available. Anything less than that would mean the coupon
is not linked to a suitably robust and ambitious transition.

Financing Credible Transitions Climate Bonds Initiative24

5 A review of market transactions
There have been a number of ‘transition’ transactions over recent
years. Most of these have a strong focus on climate mitigation
objectives, often linked to wider SDGs and a few transactions have
explicitly been labelled as ‘transition’. However, dozens of deals havecome to market which, while tagged as ‘green’, are highly pertinent to
the transition debate.
This section reviews a selection of those deals, their characteristics,
and their market reception, focusing on often debated issuance outof energy- and/or emissions-intensive sectors that we deem most
instructive here.
These transactions are summarised in Table 6 below.

For each, we considered:• What is the meaning of transition for any particular issuer’s sector
to start with? Do we need a definition or are the frameworks
already in place enough to support the transition?
• Do the relevant activities have a role to play up to and beyond
2050?
• What key issues have to be tackled in order to establish a robusttransition framework?
• How do we set the right ambition levels and scope boundaries forany measures taken?
• What interplay does there have to be between demands at asset
and project level vs. wider company strategy?

Table 6: A summary of transactions reviewed
IssuerLabelled

SectorUse of Proceeds

Provisional assessment*

CadentTransition

Gas distribution

Methane leakage control, network
repairs & hydrogen readying, lowcarbon vehicles

Green/transition bond - readying forhydrogen, a near zero solution, so longas fugitive emissions addressed, anddecarbonising other high emitting activities
with potential pathways to net zero

EBRD

Green
transition

Development bank

Energy efficiency of fossil fuel use
in industry

Green/ transition bond - decarbonising highemissions activities with potential pathways
to net zero, subject to following appropriate
decarbonisation pathways

ENEL

SDG

Power utility

NA (General corporate bond withrenewable energy targets)Green/ transition bond - entity transitioning
to near zero activities

Marfrig

Sustainabletransition

Beef processing

Purchase of beef avoiding farms using
deforested land or forced labour

Neither green nor transition - does notaddress key sources of emissions)

OrstedGreenOil & gas

Renewables

Green bond - near zero activities

RepsolGreen

Oil & gas

Energy efficiency of fossil fueloperations

Neither green nor transition - due topotential lock in of stranded activities

SNAM

Climate action

Gas distribution

Renewable Energy, Energy
efficiency of fossil fuels &methane capture

Transition bond - due to decarbonisation of
a potential interim activity, alongside othergreen proceeds, subject to addressing fugitive
emissions* Provisional assessments based on the nature of the investment/ use of proceeds. Firmer assessments not possible in the absence oftransition pathways against which to benchmark the decarbonisation impacts of the investment and fuller details to assess the credibility oftransition strategies and targets

Financing Credible Transitions Climate Bonds Initiative25

5.1 Energy and utilities
ENEL
Italian energy utility Enel issued an SDG-linked corporate bond in
2019.18 The bond was marketed around the overall corporate strategy,
which was presented in the broader context of SDGs rather than
the Paris Agreement - even though it mainly addresses energy andclimate change objectives. Proceeds, while not earmarked or ringfenced, are meant to support funding of projects to achieve corporate
sustainability objectives linked to four SDGs (7, 9, 11, 13).
Enel defined specific corporate improvement targets, pivotal to its
core business, to outline its low-carbon transition path. Unlike green
use-of-proceed bonds, the company did not specify which exact
projects the proceeds would fund. Instead, it set overall targets
to be achieved, laid down in a key performance indicator (KPI)
of generating 55% of total capacity from renewable sources by
2021 (up from 46% as of 30 June 2019). Enel will thus not need toprovide a set of proposed activities and assets and verify that suchprojects met certain green criteria, nor will it have to provide detailed
reporting (disclosure) after issuance to describe the impacts of the
pre-specified investments.
Supporters argue that the shift from impacts at project level tothe entire company, its strategy, and operations, also considering
sustainability beyond climate change, is important. Detractors argue
that without specified project allocation and disclosure, investors
will have little insight into how Enel proposes to achieve its corporate
sustainability. In particular, it is unclear whether the KPI may beachieved through acquisitions/divestments (we note that somecoal divestments – which are not identical to decommissioning - inRussia had already been planned) or organic renewables growth.
Divestment does not contribute to reducing global emissions. The
KPI itself, however, is clear and easy to map on a transition pathway
compared to ESG scores or other such metrics.
The structure of the bond was also different from traditional green
bonds. The coupon was linked to KPIs and would rise by 25 basis
points if the company failed to hit those within the specified time
periods depending on the term of the bond (4 tranches issued - 1
USD and 3 EUR). In the EUR trade, the 25bps step up represents
around half of the initial spread of the shorter tranche. Suchincentives have been used in the sustainable loan market before but
are unusual in green bonds. It is often received with mixed views:
some argue that it is good to provide a financial ‘carrot’ (or stick, inthis case) to the issuer; others hold that it would be perverse to see
investors rewarded for a failure to deliver sustainability gains.
There is some debate about the materiality of the incentive inchanging corporate behaviour. However, such non-delivery risk exists
with use-of-proceeds bonds as well. In both cases, the reputationalrisk is likely to be a more important consideration. Another risk
is that KPIs may be set at insufficiently high ambition levels. Can
investors judge what the right ambition level should be?
Whether or not the bond meets the transition principles hinges onwhether the corporate targets are aligned to the net-zero trajectory
for the power sector. Its ambition of 55% renewables by 2021
appears to be in line with the sector targets – which would put thecompany in transition to near zero goals.
Orsted (formerly DONG)
This Green Bond is another example of an energy company
issuance in 2017. This use-of-proceeds bond set out a clear
corporate strategy and commitment for achieving energy transition
to net zero energy sources. The green bond framework alignedwith the Green Bond Principles;19 proceeds were used to finance
Financing Credible Transitions Climate Bonds Initiative

renewable energy projects and excluded nuclear or fossil fuelenergy generation projects. It also set quantitative targets ofimprovements at corporate and project level. Decarbonisation at
corporate level included stopping the use of coal generation by2023 and ensuring the share of green energy generation exceeded
95% by 2023. This would reduce GHG emission from power
generation and heat by 96% by 2023.20 Orsted also compared its
trajectory of improvements to pathways that comply with the Paris
Agreement for both green energy generation and GHG emissions.21
At the time, there was not yet discussion in the market about any
transition label. This use-of-proceeds bond used the green label
to flag and finance the company’s transition away from fossil fuel.
The very pivotal place that these projects had within the company’s
significant asset portfolio restructuring toward renewables wasevident. It may have been this context of a full strategic reorientationthat ensured the bond’s green credentials. The bond was later often
cited as a prime ‘historical’ example of ‘transition’.22 The 2017 bondmeets the criteria for being called green.
RepsolRepsol’s labelled Green Bond was an example of a Spanish oil andgas company going to market to finance improvements in its climate
performance. Its 2017 green use-of-proceeds bond attracted
substantial attention and debate, raising questions about what could
be classified as a green bond. Proceeds were used to fund energy
efficiency projects and technologies reducing fugitive methane
emissions (a potent GHG) from the company’s oil refineries.23
The bond’s framework defined the criteria for activities eligible forfunding which included the company’s sustainability model andits commitment to climate change. It also provided estimates ofimprovements in emissions that the earmarked activities aimed toachieve. It was externally verified as compliant with the Green Bond
Principles. Despite that, the use of the green label was challenged by
the market, specifically by many dedicated green bond investors.
The main concern was that funds were to be used to render fossil
fuel operations more (energy) efficient - perpetuating, rather thanreplacing, fossil fuel emissions from the use of oil and gas. If theefficiencies avoided extension of life of the assets, then there may
have been a case for inclusion if in line with necessary emission
reduction pathways to meet the Paris Agreement targets. While thecompany did refer to the transition to a low emission future, it did
not set out whether the activities funded by the green bond put it
on a trajectory to align with the Paris Agreement. Critics, including
Climate Bonds Initiative, argued that the savings on direct (‘scope 1’)
emissions, while leading to significant short-term absolute emissions
reductions of 0.66MtCO2e (compared to the company’s Spain-basedrefining and chemical direct emissions of 11.7M tCO2e) from refining
and chemical plant, were insignificant compared to the scope 3
emissions from the use of the fuel. Others had even deeper doubts
as to whether investment in refinery improvement may not only lockthe company into longer-term future fossil fuel production but may
even make fossil fuels more competitive going forward – locking in
the economy at large.24
The 2017 bond would not have qualified as a green or transitionalbond because neither the use of proceeds, nor the corporate strategy
were aligned with the Paris Agreement. In December 2019, Repsol
announced new objectives that committed it to be zero net carbon
by 2050. Detailed implementation plans and transition strategies
are scheduled be published in 2020. This includes the company’s
scope 3 emissions, arising from the use of oil and gas products.
The transition or green label may be applicable for future bonds
depending on the detail of both the strategy and the bonds.

26

5.2 Energy distribution
Cadent Gas
About a year after SNAM’s ‘climate action bond’, the UK gas
distribution company Cadent Gas Limited brought a ‘transition bond’to market. Cadent Gas has a business model similar to SNAM’s.
However, Cadent Gas is less openly supportive of a future role fornatural gas. It is also explicit about the need for methane leakage
management (and controls its leakage successfully) as well as aswitch to hydrogen and other low-carbon gases with an eye on Paris
Agreement compliance. The company directs spending to adaptationof its network for hydrogen as an energy carrier.
We note the company’s alignment with the EU (draft) Taxonomy,
as reviewed by DNV GL : 1) retrofitting networks for hydrogen 2)
methane leakage repairs only if also readying for hydrogen 3) nonatural gas network expansion 4) applying tight EU thresholds forbiogas and (fuel-cell hybrid) vehicles and low-emissions buildings.25
Such explicit alignment with the EU (draft, at the time) taxonomy
has not yet happened often and is an important contribution totransitioning to near zero activities.
SNAM
Italian gas distribution utility, SNAM, issued a Climate Action Bond
early in 2019.26 The bond funded eligible projects and assets to improveenergy efficiency of gas distribution and methane emission reductions.
The company presented this issuance as part of its commitment to
the energy transition. The eligible projects included enhancing theefficient operation of its equipment using more efficient gas-powered
equipment. The projects do not directly contribute to a net zero
outcome as a switch from natural gas to hydrogen/electric would.
The bond was underpinned by a framework that complied with theGreen Bond Principles and defined project-specific criteria. It also put
emphasis on the overall strategy of the company. It presented four
SDGs which the company is focussing on (two with direct climaterelevance), as well as the related implementation strategy.
The second party opinion (SPO) stated that the bond supports thetransition to a greener economic model and justified this based on
the compatibility of the use of fossil fuels (i.e. natural gas) in the
Italian National Adaption Plan. The latter includes gas as an interim
fuel while the scale of renewables increases. The SPO therefore
considered funding operations that involve gas-transportation while
limiting their environmental impacts - to be appropriate.
SNAM updated its framework in the context of a second transaction
and changed the deal’s name from the initial Climate Action Bondto Transition Bond, “in consistence with market evolutions”.27 The
company strengthened its methane leakage target from 25% to
40% by 2025 (using a 2016 baseline) and put more emphasis on
getting networks hydrogen-ready. It aligned the latter category withEU Taxonomy demands. This is an important improvement in useof proceeds categories compared with the previous transaction.
Significantly, the “carbon & emissions reduction” projects focus is
now on the electrification of equipment (like compressors) replacing
natural gas unlike SNAM’s earlier bond.

plan (November 2020). For now, both the use of proceeds andthe corporate strategy are (largely) aligned to the continued useof natural gas. This puts the new bond within the ‘transition’ bonddefinition set out where use of gas has potential for an interim energy
source, subject to fugitive emissions being abated.

5.3 Agriculture
Marfrig, a Brazilian beef producer, issued a “sustainable transitionbond” in 2019. The bond, which followed a use-of-proceeds format,
included a framework which was aligned with the Green Bond
Principles.29 This set out environmental and social criteria for thebeef the company would buy from producers. The origin of thoseanimals had to be from farms that respected deforestation criteria
and complied with Federal Government Protection protections (suchas National Parks, indigenous lands); labour contracts had to comply
with labour legislation, including forced labour provisions.
At a broader level, some critics of this bond questioned theappropriateness of the inclusion of beef production in a global
transition strategy, given its high emissions footprint compared toother food sources. Others pointed out that a transition approach
would push for lower emissions from the meat sector as well as thecompanion objectives of avoided deforestation highlighted in thisbond. Note that the EU and Climate Bonds Initiative Taxonomies
include sustainable livestock production.
The bond is of interest because of its explicit referencing of legislated
standards and industry practises. We consider alignment withbest practice, where this is sufficiently demanding to meet climate
or other sustainable development goals, as a potentially robust
approach. The problem with this specific case from a climate
perspective is that Marfrig’s framework is insufficient to mitigate
climate change. Cattle are a significant source of GHG emissions
and although there are husbandry approaches farms could adopt toreduce emission, these issues were not addressed. This bond would
not therefore be considered consistent with the principles set out.

5.4 Hard-to-abate sectors
EBRD issued a Green Transition Bond in 2019 supporting investmentin ‘hard-to-abate’ sectors’ energy efficiency. The bond’s framework
reflected EBRD’s philosophy for transition to green.30,31 The criteria
for identifying sectors supportive of transition were those where
the sector: is currently highly dependent on fossil fuel; is needed
to enable the transition in line with the Paris Agreement; needs
to overcome significant technological or economic challenges totransition to net zero carbon emissions.

As before, the company strategy retains its focus of natural gas inthe ‘energy transition’. For example, the strategic pillar ‘sustainablemobility’ is centred around CNG (compressed natural gas) andLNG (liquefied natural gas), energy efficiency and only lastly
biomethane.28 However, it also flags that it monitors the European
debate around hydrogen closely, and pledges to contribute to it.

EBRD argued that green transition bonds allowed it to financeprojects that made substantial energy efficiency improvements
in industries like chemical, cement and steel production; foodproduction; agribusiness and sustainable land use; transportsystems; and in the construction and renovation of buildings.32 It
saw progress in these sectors as necessary to meeting the Paris
goals. Projects funded with the bond proceeds should not lock-in
carbon-intensive assets or processes in the longer term, though.
It excluded new fossil fuel generation and emphasised projects
that would achieve significant resource and energy efficiency
improvement or replace a high carbon asset with a low carbon
one. As with some of the bonds described above, issuers also
had to “frame [investments] within the context of the issuer’s
overarching objectives, strategy, policy and/or processes relating toenvironmental sustainability.”More updates may be forthcoming as part of the company’s planned
net-zero strategy, to be published in the context of its next strategic

The criteria set out by EBRD broadly follow the principles outlined
above but rely on the development of trajectories to fully articulate.

Financing Credible Transitions Climate Bonds Initiative27

6 Stakeholder views - the debate
In order to obtain decent visibility on market views, the Climate
Bonds Initiative developed a questionnaire to undertake structured
interviews with a number of stakeholders interested in the conceptof transition bonds, including organisations that had issued labelledbonds. Altogether 27 interviews were completed across different
stakeholder groups.
Stakeholders

Interviews

There were different views about whether the transition label
was needed. Opponents were concerned that transition would
be used to excuse weak or insufficiently demanding strategies
to decarbonise, supporting greenwashing. Assigning a transition
label to an activity needed emissions thresholds and a trajectory.
Deciding who and how these standards should be set wascontroversial. National climate strategies might provide a reference,so might an independent expert panel.

Banks

6

Investors

7

Issuers

7

Policy maker/MDB

2

There was strong support for any use-of-proceeds transition bondissuance to be accompanied by an enterprise level carbon reduction
strategy consistent with Paris Agreement targets. To be credible,
such a strategy needed short-term KPIs linked to material reductions
in emissions. It also needed the enterprise to support government
policies like carbon pricing.

Think tank

5

More details of the survey can be found in Annex 3.

Total

27

In summary, there was broad agreement the concept of ‘transition’referred to activities that significantly reduce GHG emissions
relative to current practice, but not enough to comply with the EU
taxonomy’s definitions of green. Few people appreciated that the EU
taxonomy already includes thresholds for several ‘pathway to zero’
activities like cement production.
The transition label was considered applicable to hard-to-abate
sectors. A distinction was drawn between currently highly-emitting
activities that were needed in the future like iron and steel, and‘stranded’ activities that could be dispensed with in the future
like coal. A large number of the stakeholders we consulted were
opposed to fossil fuel extraction and use, certainly in the absence ofcarbon capture and storage, being labelled ‘transition’. A minorityof stakeholders thought that definitions of transition might vary
between emerging and developed markets, or in regions whererenewable energy was not feasible.
The term ‘sustainability’ should be used for environmental issues
extending beyond climate, like circular economy or social issues.

Financing Credible Transitions Climate Bonds Initiative28

7 Next Steps
This paper lays the groundwork for how the transition label can beused as a tool for directing financial flows to activities and entities
that are making ambitious transitions from a high-carbon to a
low-carbon pathway. It also helps to ensure against greenwashingby putting together a set of principles for the market to align within this complex area. The concepts in the paper will be put out for
consultation and discussion in the market so that they can be refinedand improved.
In the meantime, there is a role for investors, issuers, scientists andmarket shapers to strengthen and reinforce the idea of an ambitioustransition model around the world. What next?

1. Investors: Socialize and harmonize a single
definition of transition
While the detail may need refining, the message from investors isclear: transition must be ambitious not greenwash or transition-wash.
The basic principles and framework expressed here are a solid basis
for avoiding greenwash and the core concepts need to be socialized
across the market now.
This means that all stakeholders in the market need to encourage
all types of investments that fit the parameters outlined, even if
they fall outside of traditional green sectors. If in doubt, encouragetransactions that are:• Ambitious – this means in line with 1.5 degrees or have significant
emissions reduction potential• Global – ambition should be evaluated against global emissions
reduction requirements rather than national plans or sector-based
best in class metrics.
• Inclusive – allow all sectors and activities to participate as long as
they demonstrate compliance with the principles and frameworkoutlined.

2. Issuers: Get issuing – in line with the principles
We need the transition market to get going in earnest and for the
principles and framework outlined in this paper to become theglobal benchmark for issuers. The more it is used, the more others
will follow and the more capital will be directed to ambitious GHG
emissions reductions. But we are aware that there is inconsistent andnon-existent scientific guidance for some activities.
If guidance is inconsistent - entities should be transparent overthe source of the mitigation goal and transition pathway they arefollowing, and why that was selected over alternative options.
If guidance doesn’t exist - we recommend the adoption of the mostambitious measures available to maximise mitigation potential andhigh levels of transparency report on the transition goal and pathway.

3. Scientists/NGOs/Academics: fill in the gaps
Not all entities have a science-based transition plan laid out for themand their sector/activity. Addressing this gap in information must
be a priority. It will require a concerted effort on the part of climate
scientists, technical specialists and industry practitioners.
This may also involve a comparative mapping of different transition
pathways, comparing not just the metrics and thresholds proposed
but also the underlying assumptions driving those metrics, including
assessment of their alignment with these principles. This will enable
a greater understanding of why recommended transition pathways
and thresholds vary, open up the potential for closer alignment, andwhere differences are legitimate, enable a more informed decision
regarding which transition pathway to adopt.

4. Market analysts and service providers
Test and use this transition concept to assess real transactions andfinancial products.
More detail on how the Climate Bonds Initiative plans to do so isgiven in the box below.

5. All stakeholders: Send comments on this paper
Feedback is critical to ensure this is a robust and usable framework.
We invite all stakeholders to send feedback on the framework overthe coming months.

Implications for the Climate Bonds Initiative
The Transition Framework proposed will have a number of
implications for the work that the Climate Bonds Initiative
does in collecting labelled bond data and in certifying
debt instruments. The following areas are currently underconsideration:
Certified Climate Bonds: We already certify many financial
products relating to sectors and activities that could beclassified as ‘transition’ under this framework and work isunderway to develop criteria that define transition pathways
in more of these sectors – industrial sectors such as cement
and steel are particular priorities. These cover Use of Proceeds
bonds, asset-backed securities and other debt instruments.
We are not currently able to certify whole-entity transitions
but this is currently being explored and we hope to make anannouncement on this in the coming year.
Climate Bonds Database: We currently collect data for green
and other labelled bonds that is used as the base data for indicesaround the world. For green bonds, the data is screened toensure that bonds are aligned with the Climate Bonds Initiative
Taxonomy. For social bond data, no such taxonomy exists andthe data is collected without any additional filtering.
For future transition bonds, we will collect and tag all bonds
labelled as transition. We are also looking to develop amethodology to screen these deals in line with the frameworkoutlined.

Financing Credible Transitions Climate Bonds Initiative29

Annex 1: A review of selected guidance
A number of initiatives and frameworks implicitly or explicitly provide
guidance for entities undertaking, and investors financing, transition.
This section reviews a selection of these providing• A summary of the key takeaways from this review• A summary of what we consider to be the most instructive
guidance for the concept of transition• A fuller description of a wider variety of guidance which touches on
the transition topic.

Key Takeaways
1. ‘Brown’ is already the new ‘green’…in part
Both the recommended EU Taxonomy and the Climate Bonds Initiative
Taxonomy include a number of ‘pathway to zero’, ‘interim’ and ‘nopathway to zero’ activities inside their ‘green bond’ frameworks. The
key factors determining inclusion are: 1) the need for those activities ina 2050 economy (i.e. no likely substitutes available at this time), and2) the need for mitigation in those activities.
This may suggest that a separate transition label for bonds fromsome brown sectors is not necessary, since it is already codified
under existing green labels.
2. There are gaps in the guidance for ‘pathway to zero’ and ‘nopathway to zero’ activities
Most existing guidance address only a subset of the full range of
economic activities, assets and projects (henceforth abbreviatedto just ‘activities’) that need to rapidly decarbonise. Gaps are mostprominent in the high emitting sectors.
For example, transition goals, pathways, metrics and indicators havebeen established for activities relating to buildings (construction andretrofits) and to land-based transport (manufacture and operationof road vehicles, trains and associated infrastructure), but have beenmuch less frequently addressed for aviation, shipping and heavy
industry. Clear criteria relating to heavy industry has been addressedin only four frameworks: the EU Taxonomy, the China Green Bond
Endorsed Project Catalogue, the Transition Pathway Initiative(TPI) and the Corporate Knights and Council for Clean Capitalism
Taxonomy. But the first two of these relate just to performance today,rather than defining transition pathways to stated long term goals.
3. There is an absence of guidance for ‘stranded’ activities
There could be transition goals and pathways for activities that will
be phased out by 2050. Such guidance could set-out guidelines
to exploit time limited mitigation potential that avoids locking-in
or extending the life of such activities. Examples might include
mitigation reduction using rather than flaring waste gas.
For entities where the transition requires the business to move awayfrom its current activities - a so-called brown taxonomy - little work
has been done on specifying any trajectory for the decline. For
example, for a power generation company, the key performanceindicator might be coached in terms of penetration of renewables,
not the suspension in use of unabated coal.

Financing Credible Transitions Climate Bonds Initiative

4. There are gaps in the guidance and sunset dates on ‘interim’
activities we need to transition away from
‘Interim’ activities likely won’t be necessary in 2050, but for which
there is no viable alternative now are rarely covered under existingguidance. Nor does existing guidance set out when the activity
should be phased out. For instance, the contribution of waste-toenergy to decarbonisation pathways is hotly debated. Waste-toenergy can be an effective way to deal with residual waste, compared
to landfill. However, as grids decarbonise and circular economies
are more fully established, the value of the energy’s contribution
diminishes. There is no clear guidance as to when that tipping pointis reached.
5. Decarbonisation metrics and pathways are generally not tailoredto local contexts – but this will likely change as more regions
develop their own taxonomies
The existing global frameworks, such as Climate Bond Initiative’s
Taxonomy and the GBP, and do not provide differential guidance for
across countries or regions.
This can be problematic. The SDGs and the Paris Agreement
incorporate the idea of differential pathways and targets to reflect
local circumstances, but this is at odds with the two Taxonomies’
paradigm. We are mindful of the development of a number of
localised taxonomies following the lead of the EU and re-emphasise
the need to balance local development needs while climate goals arebeing met.
6. Transition pathways do not all meet the principles set out
here – for example, they do not specify alignment with 1.5-degree
outcomes
The existing guidance is not consistent with the Transition Principles
set out in this report. For example, few transition pathways align with
1.5 degree warming targets, some include offsets, some are basedon best-in-class benchmarks, some are driven by a policy agenda
as much as a climate science agenda. A full review of all existingguidance and the assumptions underpinning them is needed to fully
understand their alignment with these Principles and with each other.
7. A mix of guidance for use-of-proceeds and entity strategies –that can perhaps better inform each otherTransition bonds can encompass both a) use-of-proceeds bonds,
in which specific assets and projects are identified to receive
the funding (these bonds may or may not be accompanied byinformation on aligned corporate strategies); and b) general purpose
bonds underpinned by a transition strategy/ commitment/ KPIs forthe issuing entity. The latter defines success to the overall strategy ofan organisation and its KPIs.
Of the frameworks and guidance reviewed, some are focussed on
use-of-proceeds, others on corporate strategies. The latter tend to
be less precisely formulated, with more of a focus on principles andcommitments, rather than KPIs with specific performance levels.
The former could perhaps be used to tie down the latter. For example,
if decarbonisation trajectories for cement manufacturing facilities aredefined, then these could provide the basis for a set of KPIs.

30

Details
Since 2014, the Climate Bonds Initiative has developed mitigation
criteria following the Climate Bonds Taxonomy to screen theuse-of-proceeds of various debt instruments (most notably green
bonds) for the purpose of determining eligibility for Climate Bonds
Certification.33 Initially, these criteria focussed solely on climate
mitigation.
For many assets and projects, the mitigation criteria define GHG
thresholds that are ‘Paris Agreement-aligned’. The criteria are to be
used in all geographies – with no differentiation between emerging
markets and developed countries, with the exception of the buildings
criteria and criteria for waste-to-energy.34
To date, the Climate Bonds Initiative have published Criteria across
six sectors of the taxonomy as follows: i) energy - solar, wind, marine
renewables, geothermal, ii) transport - land transport, shipping andbioenergy, iii) water infrastructure, iv) buildings, v) land use andmarine resources - agriculture, forestry and waste management
These cover a range of activities that would be categorised as‘pathway to zero’ and ‘interim’ activities per the descriptions in
Section 2. For many of these, transition pathways are alreadyavailable in which these thresholds tighten over time (notablybuildings and transport). For others, the criteria are the starting
point of the transition, but the future downward trajectory is not yet
described (e.g. renewable energy). Climate Bonds Initiative reviews
criteria regularly to revise them in line with climate mitigation targets
and technological and other market developments.
For certification under the Climate Bonds Standard, use-ofproceeds must comply with the relevant sector criteria. There is norequirement for evidence of a credible green or transition strategy on
the part of the issuer, although this is encouraged to be included aspart of their green bond framework. As set out already the coverageof sectors is incomplete by Climate Bonds Initiative and many of thelargest emitting sectors do not yet have criteria.
In March 2020, the Technical Expert Group to the European
Commission (the ‘TEG’) released its recommendations for an
EU Taxonomy of Sustainable Finance (the ‘recommended EU
Taxonomy’). The Commission will use this as the basis for an EU
Taxonomy that will be adopted in regulation by the end of 2020 andenter into application by the end of 2021.35 Member states and theEU will be required to apply the Taxonomy when adopting measures(e.g. setting labels or standards) presented as ‘environmentally
sustainable’. Similarly, financial market participants who offer
financial products (debt, loans, equity investments) will be required
to disclose compliance of those products and their underlying
activities with the Taxonomy. Likewise, large corporates and groups
subject to the Non-Financial Reporting Directive (NFRD) will need todisclose compliance.
The recommended EU Taxonomy currently addresses six environmental
objectives: climate change mitigation, climate change adaptation, water
management, circular economy, ecosystem protection, and pollution
prevention and control. Finance will be compliant with the taxonomy
if it delivers a substantial contribution to at least one of theseobjectives and does no significant harm to the others and respects
minimum social safeguards. The intention is to extend to all six
environmental goals, and to incorporate more specific social goals.
The criteria screen for 70 economic activities spanning sevenmacro sectors: (i) agriculture and forestry, ii) manufacturing, iii)
electricity generation, iv) water, sewage, waste and remediation, v)
transportation, vi) information and communication, vii) construction
and real estate activities.

Financing Credible Transitions Climate Bonds Initiative

Each of these economic activities’ eligibility is categorised on either
its own performance, or because it enables substantial mitigation
downstream (for example a manufacturer of wind turbines). 34 ofthese 70 activities are also flagged as a ‘transitional activity’ basedon the view of the Technical Expert Group that these activities
are critical to the economy in 2050 and contribute to a transition
to a net-zero emissions economy by 2050 - but are not currently
close to a net-zero carbon emissions level themselves and mustsignificantly enhance their performance beyond the industry average,
without lock-in to carbon-intensive assets or processes. Therefore,
the screening criteria for these activities will be subject to regularrevision, approaching zero over time.36
These 34 activities cover a range of activities that would be
categorised as ‘pathway to zero’ and ‘interim’ activities per thedescriptions in Section 2. They include cement, steel and aluminium
production under the manufacturing sector, power generation fromrenewable sources that can be high emitting (such as hydropower,
geothermal power and bioenergy), agricultural production, buildings
and transport. For some of these, the TEG noted that low-carbon
solutions are not currently available, but still recognised them as‘transitional activities’ and adopted the following two principles todetermine screening criteria that can be applied today:
1. Ensuring no lock-in of assets inconsistent with the net zero goals;
and
2. Environmental performance well above the sector average.
The Taxonomy Regulation requires the European Commission toreview all screening criteria regularly and, in particular, to review‘transitional activities’ at least every three years. Climate Bonds
Initiative CEO Sean Kidney was a member of the Technical Expert
Group and Climate Bonds Initiative staff were actively involved indevelopment of the EU Taxonomy.
The draft EU Green Bond Standard requires i) the use-of-proceedsof such bonds to align with the EU Taxonomy where possible,
and ii) that the issuer indicates how its strategy aligns with theenvironmental objectives of the EU Green Bond Standard, as well as
their rationale for issuing.37 The standard does not specify any KPIs orother markers that might be used to describe issuers’ strategy.
At national level, the People’s Bank of China (PBoC) publishedthe first edition of its Green Bond Endorsed Project Catalogue in2015,38 covering the interbank bond market (which accounts forover 90% of green bonds issued in China). In January 2016, China’s
macroeconomic management agency, the National Development &Reform Commission (NDRC), published a separate set of green bondguidelines covering corporate bond issuance. China signalled in 2018that it would exclude ‘clean utilisation of coal’ from the next versionof the Catalogue. This has not been confirmed and it is uncertain
whether it will.39,40
The Canadian Standards Association is currently developing a
National Standard of Canada for Transition Finance, including ataxonomy of activities intended to reduce GHG emissions in line withthe transition to a lower carbon economy in Canada, for the following
seven priority sectors: i) oil and gas (upstream, midstream anddownstream utilities), ii) utilities (energy production), iii) agriculture,iv) forestry, v) transportation (focus on heavy duty vehicles – railways,
aviation, trucking), vi) materials (cement, steel, glass), vii) mineralmining. It will build on existing taxonomies and guidance, in particular
the EU Taxonomy. The first edition of the Canadian Transition FinanceTaxonomy document will be published as a CSA Express Document,
targeted for the summer of 2020. This document will be used as thebasis for the development of a National Standard.

31

The ISO is also in the process of defining an international green bondstandard, which will be known as ISO14030. It is expected that thisnew standard will be available around 2021.41 At this stage, it looks
like the Standard will reference appropriate local taxonomies, notestablish a meta or global taxonomy, and therefore will automaticallyincorporate any transition principles and resulting transition
pathways embedded in those taxonomies. (Climate Bonds Initiative
is a member of the relevant ISO14030 drafting committee.)
The International Capital Markets Association (ICMA) hosts thesecretariat for the Green Bond Principles (GBP). The GBP identify
ten eligible use of proceeds categories for green bonds which crosseconomic sectors and environmental factors. These are i) renewableenergy; ii) energy efficiency; iii) pollution prevention and control; iv)
environmentally sustainable management of living natural resources
and land use; v) terrestrial and aquatic biodiversity conservation;vi) clean transportation; vii) sustainable water and wastewater
management; viii) climate change adaptation; ix) eco-efficient and/or circular economy adapted products, production technologies andprocesses; and x) green buildings.
There are no specific screening criteria or equivalent for thesecategories, and they can be applied to activities across the spectrum
outlined in Section 2, including ‘stranded’ activities. It may thus not be
surprising that a number of ‘transition bonds’ that have been verified
as aligned with the Green Bond Principles have attracted criticism(fairness commands to note, though, that some investors have also
voiced support of these deals). See Section 5 for more information.
The GBP do though encourage bond issuers to position information
on project selection within the context of the issuer’s overarching
objectives, strategy, policy and/or processes relating toenvironmental sustainability . In line with the overall approach of the
GBP, they do not give any guidance on the form or levels of ambition
that those objectives and strategies should take, though.
This may possibly change over time. The: terms of reference of a recently
formed GBP Climate Transition Finance Working Group (Climate Bonds
Initiative is a member) include considering what might be the main pointsof a credible transition strategy for an issuer and how consistency between
the strategy and expenditures could be evidenced, as well as asking
what if anything might need to be added to the existing GBP to capture
appropriate transition activities.42 This work will include considerationof relevant transition pathways and metrics. The Working Group is
expected to publish some relevant output over the course of 2020.
The GBP have also recently launched a working group to look at
sustainability-linked KPI instruments. While there is no full overlap
with the transition question, the two issues are often perceived as
closely interrelated: some observers feel that one type of instrument(use-of-proceeds vs KPI-linked) fits one type of bond label (transition
or green or otherwise) better or worse.
The FSB Task Force on Climate-related Financial Disclosure (TCFD) has
produced recommendations to help companies disclose tailored climaterelated financial information, which will aid investors in determining
which companies are most at risk from climate change and how they
prepare themselves to manage such risk.43 Such information will serveas an essential basis for a corporate transition strategy to move to a
low carbon, climate adapted footing where its climate-related risks areappropriately minimised. The TCFD itself identified non-financial sectors
and industries which have significant exposure to transition or physicalrisks related to GHG emissions, energy, or water, but they deliberately do
not explore transition pathways that might minimise those risks.
In 2019, Global Compact produced a roadmap to mainstream SDG
investment and SDG bonds to help companies use capital markets
to finance their sustainability initiatives and increase allocation of
Financing Credible Transitions Climate Bonds Initiative

capital to SDGs.44 Of particular relevance to this discussion is thereference to stranded assets and how an orderly transition away fromthese assets might be achieved. The roadmap notes that potential
options for such assets might be re-purposing older assets, retiring
assets, and retraining the workforce. This might inform transition
strategies for entities engaged in stranded activities.
The Climate Action 100+ initiative is an investor initiative aiming
to secure commitments from the boards and senior managementof the world’s largest corporate greenhouse gas emitters to takenecessary action on climate change.45 The companies on which theinitiative focuses include 100 companies that represent up to twothirds of annual global industrial GHG emissions according to CDP,
plus 60 other companies flagged by investors as having significant
opportunity to drive the clean energy transition.
The Transition Pathway Initiative (TPI) currently provides carbon
performance benchmarks for nine sectors across the full rangeof categories outlined in Section 2. Specifically, oil & gas; electricutilities; automobiles; airlines; cement; steel; aluminium; paper;and shipping.46 These benchmarks include emissions performance
trajectories aligned with 3 scenarios: Paris pledges / NDCs; 2degrees C; below 2 degrees C. Companies across these sectors havebeen assessed against those benchmarks.
The Science Based Targets initiative (SBTi) promotes
science-based target setting by companies engaged in the transition
to the low-carbon economy. It is a partnership between CDP,
the United Nations Global Compact (UNGC), World Resources
Institute (WRI), and WWF. We Mean Business also collaborates.
As of February 2020, some 800 companies globally have committed
to the objectives of the SBTi, with some 330 of them having set
targets already. SBTi covers 6 macro sectors, spanning a total of 27
sub-sectors.
Working through Technical Advisory Committees, SBTi seeks to set
sectoral decarbonization approaches based on mitigation potential
and projected growth. Pathways are being developed for several hard
to abate sectors like Oil & Gas, Forest, Land & Agriculture, Chemicals& Petrochemicals as of yet there are no published results setting out
sector pathways.
Sustainability Accounting Standards Board (SASB) released its
standard in November 2018 covering 77 industries in eleven sectorsthat include: Extraction and Mineral Processing, several othermanufacturing sectors, Financial, Transportation, Infrastructure andServices.47 The standard’s universe of issues covers Environmental,
Social Capital, Human Capital, Business model & Innovation,
Leadership & Governance. SASB publishes a Materiality Map toidentify sustainability dimensions that are likely to affect each of
the 11 broad industries. The Map sets out for each industry issues
that are not likely to be material, to be material for 50% of firms andissues material for greater than 50% of firms.
Companies using the standard produce reports disaggregated by
ESG dimension and company activity to aid analysts to compare
firms. For instance, oil and gas extraction’s GHG report they are theirconsolidated Scope 1 emissions of the GHGs.48 There are separate
indicators for fugitive emissions and emissions from equipment used
for extraction or transport. Companies are asked to discuss theirforward strategies to manage Scope 1 emissions and analyse theirperformance against these targets. SASB’s guidance does not specify
thresholds or standards, nor any science-based forward trajectory forthe firm benchmark performance.
The Energy Transitions Commission (ETC) is a group of leadersfrom across the energy landscape: energy producers, energy
users, equipment suppliers, investors, non-profit organizations and32

academics from the developed and developing world. In November
2018, the ETC published its flagship report, “Mission Possible:
Reaching net-zero carbon emissions from harder-to-abate sectors
by mid-century”. Separate more detailed reports cover the cement,
steel, plastics, shipping, heavy-duty road and aviation sectors. The
ETC work is particularly useful as source material which other parties
can use to develop industry trajectories for decarbonisation.
Mission Possible’s annexes seek to establish trajectories for the six
sectors based on projections of demand, opportunities for demand
management (at the consumer end) and recycling, and also thetechnological avenues for decarbonisation. For instance, in the
cement annex the technologies which are discussed include new
cement chemistries, carbon capture, use of biomass as a fuel and thepractical challenges in scaling each of these options. The summaries
provide a useful summary of the scope for each of the technology to
reduce emissions, the timeframe over which the technology mightmature and an indication of the cost to consumers of implementing
the technology or business practice.
The UK-based Global Investor Coalition on Climate Change (GICC),
has worked with its regional counterparts (Ceres, IGCC, AIGCC)
to develop guidance focusing on a number of brown sectors: realestate, construction materials, steel, oil & gas, automotive, electricity
utilities, mining.49 Using a governance and disclosure focused
approach, it also articulates the level and pace of transformation thatinvestors would like to see. It mentions current best practice andalso alternative technologies / methods to provide insights on future
potential and speed of change. It also provides details of the type of
information that an entity-level strategy for emission improvement
needs to include, in the view of investors. This may inform thedevelopment of credible markers for those strategies.
Some of these are:
• Disclosures that are in line with the recommendations of the TCFD.
• Evidence at board level confirming that the company’s strategy
is consistent with the goals of the Paris Agreement, with astrong governance framework which clearly articulates theboard’s accountability and oversight of climate change risk andopportunities.

undertaken by IIGCC, with the engagement of IIGCC members andinput from external experts. The Paris Aligned Investment Initiative
will produce, among other things:• Pathways for Paris Alignment based on emissions, technology andeconomic scenarios.
• An assessment of relevant methodologies and approaches for 4
asset classes: sovereign bonds, listed equity, corporate debt andreal estate.
• Testing of the most relevant methods and approaches foraligning portfolios using up to 5 real world portfolios, forecasting
implications of aligning to Paris over time against key financial
metrics relevant to investors.
The Corporate Knights and the Council for Clean Capitalism
released their taxonomy for clean financing for heavy industry, which
they called Clean Transition Bonds Guidelines (CTBG), in 2018.51,52
The eligible transition categories are carbon intensive, covering
oil and gas, energy utilities, mining, metals, and other non-fossil
fuel commodities such as cement, chemicals, steel, and smelting.
The CTBG make a distinction between eligible transition project
categories and eligible clean project categories. Projects in theeligible transition categories are:• Cleaner fossil fuels extraction with significant reductions in GHG
emission intensity• GHG efficient fossil fuel refining systems• GHG efficient processes for non-fossil fuel commodities• Cogeneration from fossil fuels
The CTBG go into some detail by providing concrete eligibility criteria
based on minimum levels of GHG emissions reduction, but it is notclear whether the proposed reductions align with Paris Agreement
objectives.53 Furthermore, the GHG emissions considered do notcover scope 3 emissions (i.e. those from using the product), ignoring
the most significant part of the sector’s emissions.

• Action to reduce greenhouse gas emissions across the value chain,consistent with the Paris Agreement, which may include shortand long-term emission reduction targets, investment plans andother actions that support those reductions, relevant research anddevelopment and capital expenditure.
The Paris Agreement Capital Transition Assessment (PACTA) tool,
supported by PRI, is a free online tool based on analysis by the 2°C
Investing Initiative. The tool, which covers equity and bond issuers,
is based on analysis of companies’ investment and productionplans in both high-emissions activities and low-carbon solutions,both now and in the coming five years. These are then comparedwith the technology and energy mix which would be consistent
with the trajectory towards a given climate scenario. A range of
scenarios are available, including the IEA 2°C and 1.75°C scenarios.
The output is a ‘technology exposure gap’, showing the degree towhich the investment and production plans within a given portfolio
is aligned with a given climate scenario. This alignment analysis may
in itself meet the investor’s objectives on climate change; it mightalternatively be used as a tool to inform deeper analysis in areas/
sectors with misalignment, or for product design.
The Paris Aligned Investment Initiative is led and coordinated by
IIGCC with a steering group of leading asset owners.50 The work todevelop concepts, assess methodologies and test portfolios will be

Financing Credible Transitions Climate Bonds Initiative33

Annex 2: Other stakeholders’ approaches
and commentary
AXA Investment Management (AXA IM) put forward theirinterpretation of transition bonds and activities in a 2019 publication
entitled ‘Financing brown to green: Guidelines for Transition Bonds’.54
Their proposal intends transitions bonds to be used by companies
that are in greenhouse gas-intensive industries such as materials,
extractives, chemicals and transportation. AXA IM provide examples
of projects categories that will be eligible for funding from transition
bonds, but do not define specific eligibility criteria for projects.
The reporting requirements lists indicators, such as GHG emissions
avoided and energy efficiency achieved, and a reference point (CO2emissions trajectory under the IEA 2°C scenario - although we notethat this scenario is not Paris Agreement-compatible as carbon
neutrality is reached by 2100, not 2050). The proposal explicitly
links the eligibility criteria to the overall transition strategy of thecorporation that issues the bond, not the use-of-proceeds.
Natixis, in its ‘Brown Industries: Transition Tightrope Series’, focusses
on company transformations and sets a framework for setting andassessing the credibility of businesses’ transition strategies. Natixis
defines transition as “the interim period and process by which acompany transforms its business model and activities to adapt
to a new paradigm - in our case, a carbon-constrained world”. In
this context, they identify five complimentary transition levers forbusinesses:• Quit/exit: Changing activities and/ or business model by divestingor disengaging from most harmful activities via asset disposal/
sale or asset decommissioning;• Diversify: Increase the share of ‘pure’ green activities (e.g.
renewables) via e.g. organic diversification, acquisitions or spinoffs;

This section briefly discusses a number of thought-leadership pieces
showing the arguments made in 2019. Comments are often reflections
on recent labelled bond issuances described in Section 5 of this report.
Environmental Finance’s Peter Cripps writing about the SNAM bondissuance (Environmental Finance – 6 March 2019) asked if a moreradical agent for change was needed than the standard green bond,especially if the funds are being used to refinance existing projects
rather than drive new investment. He asked whether green bondissuers needed to have an enterprise level transition strategy. He
argued that the market needed innovation to provide an entry point
for “dirty issuers […], but only those with credible plans to fall in linewith a 2°C scenario”.
He was ambivalent as to whether these bonds should be labelled‘green’ or ‘transition’. “I think a likely outcome would see bonds
with non-controversial green assets being labelled green, andthose such as Snam whose green bond framework involves making
improvements to its fossil fuel assets, being given a transition label.”
BNP-Paribas offered a thoughtful pair of articles in Environmental
Finance (6 & 13 September 201956,57) arguing that the labelled bondmarket was setting off a revolution by:• earmarking how funds are allocated through the use of proceeds
model be spent;• next prompting issuers to link the coupon to attainment/failure ofsustainability targets [he referred to the ENEL bond]; and• in the future, linking cost of risk with sustainability performanceand impact.

• Decarbonise: Decarbonise core and hard to abate activities’ GHG
emissions via investment in new assets/ equipment, process
reshuffling, dedicated R&D, ad hoc skills management

In the second article he argued the need for the market to become
broader and include “sectors that are ‘brown’ today and willremain brown for a very long time”. Transition finance was about“transitioning from brown to... brown a lighter shade of brown”. Hesuggested the concept of transition applies to sectors:• Offset: e.g. via CCS or reforestation in addition to the removal thatwould occur via natural carbon cycle processes; and1. “that are not green today”, embracing energy intensive and hardto-abate.

• Low carbon solutions: sell materials, products or services thatenable the transition of other sectors or companies.

2. “cannot become green tomorrow”, restricting transition toactivities where green is not economic or practical locally, e.g.
switching from coal to gas where wind is not economically viable.

Natixis also outline a framework for assessing the credibility of thesestrategies and the entity carrying them out, encompassing tests ofthe company’s willingness, ambition, willingness and effort.
BlackRock has published a framework and argues for “converged
standards on portfolio-level disclosure of environmental, socialand governance (ESG) characteristics, as well as agree on naming
conventions for categories of investment funds, and on productnaming conventions”.55 It criticises the EU taxonomy for its binary andprescriptive thresholds for assigning whether activities are green or
not green. BlackRock asserts that such “greenest of green” investment
needed to be supplemented with other taxonomies. It advocatesaligned and enhanced company level disclosure of ESG data throughcommon disclosure standards, favouring the SASB standard for most
ESG issues, and TCFD for forward looking climate-risks.
The concept of transition has been widely discussed in the trade press.
Articles cover: a) the labelling nomenclature: “transition”, “SDG”,“sustainability”, “sustainable transition”, “climate action”, b) themarket’s reactions to specific labelled issuances, and c) queries about
the use of proceeds model vis-à-vis the enterprise level transition.

Financing Credible Transitions Climate Bonds Initiative

3. “can and need to get greener”, referring to firms having a“comprehensive strategy roadmap” consistent with an approved
GHG reduction trajectory (he cites IEA’s Sustainable Development
Scenario (SDS), and Beyond 2 Degree Scenario (B2DS)).
Nordea (Environmental Finance, 15 Oct 2019 58) wrote it was
important to take a wide view of the purpose of the labelled bondmarket. It was to move capital in the right way, not about who can andcannot do green. Green bonds great virtue was their “transparency”.
As the labelled bond market developed, it needed to have “ESG
integration” rather than binary in-out labels. He argued the transition
label needed to flesh out “strategic alignment” of the issuer rather thanfocus on what its sector is. In the current situation it was perverse thatan oil company felt it could not issue a green bond, but a bank lending
to the company could. He concluded saying while supportive of theconcept and need for transition, he was sceptical about the need fora transitional bond label or indeed the labelling of instruments moregenerally. He instead commended the transparency and disclosure thatthe use-of-proceeds model provided.

34

2° Investing Initiative (Environmental Finance, 31 Oct 2019 59) was
sceptical about the concept of green bonds. Firstly, individual green
use-of-proceeds bonds did not reduce investors’ exposure to climate
risks compared to vanilla bonds, because investors remained exposedto the overall climate risk of the issuer’s balance sheet. Secondly,
issuers and investors could claim kudos for buying / issuing green
bonds, even if the emissions performance was poor.
Du Pre was more approving of issuer-level performance measures.
He said: “Faced with these market dynamics, we think that Enel’sbond represents healthy progress. For one thing, it’s linked withissuer-level targets, which is more consistent with the ‘general
purpose’ nature of the bond. For another, it introduces a new
incentive for the issuer to meet the target, rather than nothing.”

Financing Credible Transitions Climate Bonds Initiative35

Annex 3: Stakeholder views – the detail
In order to obtain decent visibility on market views, the Climate
Bonds Initiative developed a questionnaire to undertake structured
interviews with a number of stakeholders interested in the conceptof transition bonds, including organisations that had issued labelledbonds. Altogether 27 interviews were completed across different
stakeholder groups.
Stakeholders

Interviews

Banks

6

Investors

7

Issuers

7

Policy maker/MDB

2

Think tank

5

Total

27

Views on the (application of the) concept of‘transition’
Desired focus for transition:
All commentators agreed that the focus should be on climatechange mitigation. This limited scope was favoured over inclusionof other environmental or social issues because of the conceptualand measurement issues in developing KPIs and thresholds, anddifferences in geographic contexts. One interviewee remarked thatthe definition and measurement of other environmental and social
issues was at such a nascent stage that no one could be expected tocredibly report performance.
Where to look for guidance on credible transition:
The EU taxonomy was cited by some interviewees as the benchmark
for defining ‘green’ or ‘climate-friendly’ activities. According to somefinancial institutions and energy companies, it sets the point of
departure for defining ‘transition’ activities. In their view, transition
activities need not meet the EU taxonomy’s mitigation thresholds,
but can meet some other, less demanding carbon mitigation
standard. This raises the issue of whether this alternate threshold is
sufficiently demanding (potentially breaching Principle 1), and who
decides on the appropriate threshold (Principle 2).
Some argued the thresholds should be set in the context of thenational decarbonisation strategy. For instance, SNAM saw
gas pipelines as providing essential energy infrastructure fortransporting low carbon gaseous fuels like biomethane or in futurehydrogen (though the company does not clarify its commitments
or planned activities in this respect), as suggested in Italy’s climate
strategy. One German energy company identified the transition as
being the eventual closure of coal and nuclear energy as per the
Energiewende’s (Germany’s policy of moving away from coal andnuclear toward renewables) concept of transition.
Which sectors are relevant and should be prioritised?
One interviewee said the ‘transition’ label should be limited to
manufacturing, building renovation (enabling activities), and theagricultural sector - i.e. hard-to-abate sectors where decarbonisationis necessary, but there is no easy pathway to zero emissions.
There was a polarisation of views about the role of natural gas
in the transition. The majority of interviewees thought it should

Financing Credible Transitions Climate Bonds Initiative

be excluded. However, issuers in the oil and gas sector and somebanks dissented from this view. They thought gas offered significant
emission reductions compared to coal and petroleum, and in time
CCS could be fitted to large point users of gas like power stations.
One interviewee argued that gas was the only viable fuel for somehigh temperature industrial processes (though one other interviewee
disputed this).
There were divided views about the role of nuclear power in thetransition. One proponent of nuclear argued that without it, GHG
emissions from electricity production would dramatically increase
because of a switch to natural gas; an opposing view was that
nuclear energy did not meet the “do no significant harm criteria” andwas unnecessary because of the emerging dominance and costeffectiveness of renewables.
Differences between transition, sustainability and the Just
Transition bonds
Interviewees across think-tanks, government and regulators agreed
that corporations needed to engage with sustainability across its
different facets. In principle, its scope included issues like circular
economy and nature-based solutions. One stakeholder stressed
corporate-citizenship issues like paying taxes, fair wages etc. These
were not the focus of a transition or green bond, but in the realms ofa sustainability bond.
One emerging market interviewee was concerned that the role
played by fossil fuels in resource-rich export-dependent countries
was overlooked by the EU taxonomy. The framing of transition
needed to take into account social issues, especially important insome economies. He argued the transition should not be viewed interms of climate alone, but the broader range of social, economic
and development SDG goals. (In conflict with the principles outlined
earlier). This multi-faceted approach was essential because a puremitigation focus would not be socially or politically acceptable inmany countries. For example, access to energy is often in conflictwith climate change mitigation. He introduced the concept of Just
Transition in which climate investments should be viewed in wider
context of protecting the interests of people whose livelihoods
are being transitioned-away from. This might include providing
alternative livelihoods, training or social welfare payments.
Stakeholders agreed enterprises were a long way fromoperationalising full ESG disclosure in a meaningful and decisionuseful way. The ‘materiality’ of particular ESG issues varied industry
by industry and across different regions. Non-carbon ESG issues (e.g.
water, biodiversity) were often considered as relevant as climate for
e.g. the mining sector in emerging economies.

Does green finance need a new label?
Views on whether a new ‘transition’ label was needed were highlypolarised even within stakeholder groups.
Why we need a different concept/label:
A number of underwriters and oil company issuers said the green
bond market was not engaging with the largest emitters (fossil-fuelextraction, non-renewables energy generation, manufacturing),or the hard-to-abate low-carbon-enabling sectors. If there was asufficient convergence of views, a transition bond label would provide
a useful recognition of companies or assets making a meaningful
reduction in their emissions and could help flag such companies’
transactions to investors.

36

What impact does transition need to achieve:
Many interviewees used AXA IM’s conceptualisation of ‘transition’as the point of departure from ‘green’.60 One bank was pleased withAXA IM’s contribution to the debate. They found the EU taxonomy
too restrictive, disqualifying many worthwhile activities from thelabelled bond market. The bank welcomed the opportunity to bringhigh emitting sectors in from the cold. The organisation also supported
the leadership taken by the oil and gas company Repsol with its 2017
green bond issuance, which met the ICMA Green Bond Principles but
would not today meet the EU taxonomy thresholds. The bank noted
the market had chosen to exclude Repsol from green bond funds. It
recognised the need for a different standard with which not-strictlygreen but other still useful investments should be judged.
One bank took the view that “any innovation is welcome, a moral
imperative even, to help flow capital into the right direction”, but it was
important to reserve the label ‘green’ for Paris Agreement compliant
deals. This bank thought the term ‘transition’ could be crafted to avoid
being accused of ‘greenwash’ by reserving its application to where
there was no Paris Agreement compliant investment, but where theinvestment lead to some material reductions in emissions.
In summary, proponents of a new label note that there areinsufficient bankable investment opportunities for investors
looking for green products, and that an additional label (if appliedconsistently and credibly) could widen the scope of potential
investment opportunities.

… the more-labels-more-confusion view
Motivation for a new label:Amongst the think-tanks interviewed, most were concerned about the
motives of sectors and financial institutions seeking to introduce the‘transition’ label. They argued energy-intensive sectors had to movestraight to zero carbon energy sources, leap-frogging lower carbon
fossil fuel options. Investment in new fossil fuels was not part of thetransition to a 2°C world, let alone a 1.5°C one. They were suspicious ofa corporate strategy that set zero- or low-carbon long-term goals. Even
if meant sincerely, these could be reversed by a change in management
or were contingent on financial conditions. Some interviewees referred
to BP’s “Beyond Petroleum” branding during John Browne’s tenure as
CEO, which was reversed after his departure. This agrees with our
Principle 5 – pledges alone are not enough.
Some market participants were nervous about the proliferation of labels:
It was flagged that the green bond market was well understood, and thus
questioned why another rival label needed to be created. There was also
the worry that new labels would do nothing to strengthen capital flows
into green investments. While AXA IM’s proposal would extend the
supply of labelled assets, the overall emissions reduction impact might
be slight. One banker was especially dubious about the ‘transition bondlabel’. He thought the idea was merely a ‘solution looking for a problem’.
A US investment manager said: “It all seems very straightforward to me,
so why do we need new or fancy new labels?” He recommended simply
using the green label and reporting duly.
Some felt the transition label would be used by investment
managers profiling themselves as socially responsible to pad out
their portfolios, given the shortage of available Paris Agreement
compliant green issuances. Instead of funnelling scarce green capital
into genuinely low carbon investments, it would allow firms to‘greenwash’ or ‘transition-wash’. They saw the following risks from atransition bond label: taking capital away from the areas that need it
most; validating corporates that were not substantially contributing
to the SDGs; and/or devaluing the credibility of existing labels.

Financing Credible Transitions Climate Bonds Initiative

Deciding a sufficiently demanding transition
trajectory (Principle 2)
There was strong support for KPIs quantifying transition to be aligned
to a sectoral ‘science-based’ trajectory. Two problems arose inoperationalising this, though: who should decide the science-based
decline trajectory for a sector? Should this trajectory vary according
to local circumstances or a nation’s state of economic development?
Both these issues were contested.
On the issue of who should define the concept of transition, one asset
manager thought it should be driven by asset owners, since other parties
had less incentive or were conflicted to develop a concept. Interviewees
spoke favourably about initiatives like the Science Based Target Initiative(SBTi), run by a coalition of NGOs and business groups, but it was noted
SBTI had not succeeded in assigning trajectories for the hard-to-treat
sectors like iron and steel or agriculture.
The Energy Transition Commission note that some hard-to-abatetransitions are conditional on innovations in other sectors. The
cost-effective synthesis of zero-carbon hydrogen could reduce theemissions in manufacturing and freight transport, for example.
One investor mentioned that corporate sustainability strategies
needed to adopt a materiality matrix and metrics addressing nonCO2 emissions also. The SASB’s framework could assist in identifying
parameters that are material.61

Transition in energy-intensive activities
Interviewers were asked about appropriate transition paths fordifferent energy-intensive activities. There was a difference of opinion
about ‘hard-to-abate’ activities like iron and cement production,
which cannot be made net-zero through fuel substitution alone andwill continue to be needed after 2050, and ‘stranded’ activities oil
and gas production - which could in theory be replaced by renewableenergy sources.
Activities requiring decarbonisation:
These are economic activities producing goods like agricultural
produce, minerals, metal production and cement that will probably
continue to be needed up to and beyond 2050, but for which there is
no widely adopted net zero emissions technology (yet).
One bank which lent to mining and extraction used a KPI-linked
structure for some of its loans. It said the size of the loans wereindividually too small to be issued as bonds but could in theory be
aggregated into a sustainability-labelled instrument.
A policy maker wanted to see the transition label to include
agriculture and land use because they are major sources ofemissions, and potentially large contributors to sequestration. Beef
and dairy’s methane emissions were a particular issue. This person
thought off-setting should only play a role when energy efficiency
opportunities had been exhausted.
For energy-intensive manufacturing, several think tanks and issuers
saw that any attempt for a region to force firms to reduce theemissions-intensity of production risked ‘carbon finance leakage’from enterprises outside the region. One interviewee said that
under existing policies “large-scale deployment of Paris-aligned
technologies is commercial suicide.”
One car manufacturer said its move away from fossil fuels could bemanaged without strong supportive price signals. Consumer pressureand government regulation made the switch to EVs attractive despite
the higher cost of production because consumers were happy to pay
a premium for innovative technologies.

37

‘Interim’ activities and ‘stranded’ activities:

Entity-level transition

For the oil and gas sector, one asset owner said that “the challenge
was not really transition but the elimination of these sectors”. With
such stranded activities, we need to push for significant reductionsin oil at least, as long as it doesn’t lead to asset-life extension. Manyinterviewees thought that oil and gas exploration and production
should not be included in ‘transition’ bonds as it ‘watered down theentire concept’. Some banks and energy companies, which saw theneed for the continued use of gas, were conscious that investment in
new plants could extend the use of fossil fuels and delay investment
in renewables. They suggested the definition of transition to include
a significant improvement in emissions (e.g. from energy efficiency,
or reduced flaring) and a plan to phase out the use of fossil fuelsby the issuer. One investment manager thought that the transition
label should be applied for breakthrough technologies like carbon
sequestration, focusing on real additional investments that would nothave been possible or happened in the absence of that (transition)
funding. There was some support for energy efficiency investments,
like small scale projects in the supply chain, to reduce emissions –think of petrol stations that replace diesel with solar PV or energy
storage for powering the pumps or gas capture replacing gas flaring.

Need for credible transition strategy:

One investment manager thought that the transition label should
be applied for breakthrough technologies like carbon sequestration,
focusing on real additional investments that would not have beenpossible or happened in the absence of that (transition) funding.

Aspects of credible strategy:

The energy companies and some banks were conscious of the ‘green
funding gap’. This referred to the resources needed to finance acompany’s entire strategy, and not just the Paris Agreement aligned
pockets of spending - which might only amount to a few per centof investments to begin with. There were on-going needs to financebrown aspects of the transition strategy, even as a company reduced
its emissions intensity. One NGO and the oil and gas interviewees
said there were constraints on how quickly such companies could
invest in the transition away from fossil fuels: oil majors were
exposed to climate risks in all parts of the hydrocarbon value chain.

• support for meaningful government policies like carbon taxes;

The oil and gas companies interviewed were, in theory, interested
in a labelled bond that could be used to fund their decarbonisation
strategies, but only if this bond be favourably received bystakeholders, and ideally if it lowered the cost of finance (though
they had no expectation of this happening). One oil and gas
representative argued that only the oil and gas super-majors
possessed the technical knowledge, logistical/operational experienceand equipment to rapidly scale-up carbon capture and storage as aclimate change mitigation solution. But they were sensitive to any
label backfiring and being negatively reported in the media. Reaction
to Repsol’s 2017 green bond had been duly noted.
One interviewee observed the phase-out of oil and gas should take
into account countries’ economic, social and development goals.
He thought the debate in taxonomy circles was too dominated bycarbon trajectories and thresholds, instead of the social and societal
impacts of moving away from fossil fuels in terms of loss of jobs instranded sectors and affected regions. There needed to be distinct
strategies for coal (write-down of stranded assets), gas (seen bysome interviewees as a ‘bridging fuel’), vehicular transport and waste
disposal. These should be context-specific.
Some people said transition should exclude new investments which
lock-in continued carbon emissions. This formulation might work if
the investment modifies an existing asset, but is difficult to apply to a
new asset, which, by its nature, locks in a degree of new emissions.
There were opportunities for mitigation within O&G’s business areas
like replacing diesel operated petrol-pumps with solar.
Financing Credible Transitions Climate Bonds Initiative

There was strong support from industry participants that a transition
label is only appropriate if the corporate strategy was aligned withthe objectives of the Paris Agreement. One investment manager
said: “[we] would not buy a green issuance for our green bond fundfrom a utility without a science-based target. The bond is otherwise
incoherent.” He thought the debate should focus on what constitutes
a meaningful transition and what is greenwash.
One NGO queried the use of proceeds model and thought it needed
to be supplemented with a ‘smell test’ of the company as a whole.
Another think-tank suggested that if there is to be a use-of-proceeds
model at the asset level, there has to be consistency at corporate
level: not with a token number of assets, but well with an articulated
investment plan for reducing emissions in line with the Paris
Agreement. This interviewee thought the ‘transition’ label could also
be used for significant reductions in emissions by sectors where there
is no economically viable Paris-agreement aligned alternative and theconcept of this transition is present in the attitude, marketing, public
messaging and general strategy of the firm.

Aspects of an enterprise level transition that were mentioned included:• support for the Paris Agreement in the company’s strategy;• short term KPIs to monitor whether the climate mitigation strategy
was on track; and• alignment with the TCFD’s recommendations on adopting astrategic response to future climate risks.
KPI linked coupons:
Many interviewees commented on the ENEL bond’s linking of the
coupon with not attaining emissions intensity targets. Some approved.
A few banks said they did not have a settled view on the merits yet.
One interviewee noted that the 25 basis points “was trivial comparedto the incremental costs for the company switching from oil and gas
to renewables”. Another contrasted the “direct and measureable”
commitments made by use-of-proceeds style green bond withthe voluntary and less clear-cut attribution of carbon savings from
KPI-linked coupons. One think-tank supported the switch of focus
away from “stock of green assets” to “delivered performance ona scientifically determined trajectory”. Deployment of low carbon
technology as a pilot was generally viewed as insufficient proof of
corporate level transition, but more as a useful proof of technicalfeasibility needed to implement the transition strategy.
What’s holding back strategy switches:
A number of issuers commented that in the absence of policy support,
it was impossible for some sectors to manifest their strategic intent tomake large-scale deployment of low energy solutions. Some think-tanks
opposed rewarding corporate strategic intent without solid performancetrack-record, as too many future strategies were vague and aspirational.

Other research undertaken on the transitionbond topic
There have been a number of surveys of investor attitudes totransition. For example, Natixis’s Transition Tightrope project surveyed
75 investors for their views on transition.62 When asked about theirunderstanding of transition bonds, 69% of interviewees supported“genuine and ambitious transition strategy of the issuer” and 47%

38

supported “2˚C alignment potential of the UoP”. Fewer believed thatusing the Green Bond Principles or Green Loan Principles (35%) was
sufficient. There was also muted support for allowing some flexibility
about transition options in developing countries (32%).
Interviewees were also asked about sustainability-linked instruments- where the coupon or loan margin determination was linked
to attainment of ESG KPIs. These proved quite popular withinterviewees, with 56% saying they were useful, and they would
invest. There was still queasiness, though: 12% of respondents
thought the instrument useful but they would not invest, and 18%
opposed the concept. Often proponents would look at the issuanceon a case-by-case basis. On the plus side, the KPI could be tailoredto the specifics of the company, but the worry was whether the KPIs
were meaningful for the challenge and properly science-based.

Endnotes
1. https://sustainabledevelopment.un.org/
2. UN FCCC SCF 2018 Biennial Assessment and Overview of Climate FinanceFlows Technical Report
3. https://climatepolicyinitiative.org/publication/global-landscape-ofclimate-finance-2019/ (accessed 22 May 2020).
4. IPCC 2018. Global Warming of 1.5°C. An IPCC Special Report on theimpacts of global warming of 1.5°C above pre-industrial levels and related
global greenhouse gas emission pathways, in the context of strengthening
the global response to the threat of climate change, sustainable development,
and efforts to eradicate poverty
5. United Nations, Inter-agency Task Force on Financing for Development,
Financing for Sustainable Development Report 2019 (New York: United
Nations, 2019)6. United Nations System Task Team on the Post-2015 United Nations
Development Agenda, background paper 1; and the report of the Green
Growth Action Alliance, “The Green Investment Report: the ways and means
to unlock private finance for green growth” (Geneva, World Economic Forum,2013).
7. As per ultimo April 2020 – counting transactions that are aligned with the
Climate Bonds Taxonomy.
8. https://www.climatebonds.net/resources/reports/green-bond-europeaninvestor-survey-2019. The total assets under management (AuM) of
respondents was EUR 13.7tn, and their total fixed income AuM EUR
4.3tn, with an average of EUR 90bn and median of EUR 34bn. The focusof this study was on Europe, given the region’s lead in terms of size andsophistication of responsible investment efforts. This survey and report [addlink] study was supported by Crédit Suisse, Danske Bank, Luxembourg Stock
Exchange and Lyxor Asset Management.
9. https://www.climatebonds.net/standard/taxonomy
10. https://ec.europa.eu/info/publications/sustainable-finance-tegtaxonomy_en#190618
11. https://www.globalcapital.com/article/b1hdjnwkdk1vjv/keep-transitionand-sustainable-bonds-separate
12. https://insights.nordea.com/en/sustainable-finance/transition-bonds/
13. From Article 6(1a) which sets out the framework for evaluating transition
activities in the EU Taxonomy: “For the purposes of paragraph 1, an economic
activity for which there is no technologically and economically feasible low
carbon alternative, shall be considered to contribute substantially to climatechange mitigation as it supports the transition to a climate-neutral economy
consistent with a pathway to limit the temperature increase to 1.5 degrees
Celsius above pre-industrial levels including by phasing out greenhousegas emissions, in particular from solid fossil fuels, where that activity: I. hasgreenhouse gas emission levels that correspond to the best performance inthe sector or industry; II. does not hamper the development and deploymentof low-carbon alternatives; and III. does not lead to a lock-in in carbonintensive assets considering the economic lifetime of those assets.”
14. Special Report on Global Warming of 1.5°C (SR15), October 2018. https://www.ipcc.ch/sr15/chapter/spm/
15. For land management, crop production and forestry, for example, there
is a high potential to reach net negative emissions and sequester significant
carbon. Transition pathways for these activities should reflect this, not simply
addressing reducing emissions but setting goals which maximise carbon
sequestration opportunities. Conversely, other activities may not be able toreach net zero emissions. Impoundment hydropower reservoirs, for example,
can emit methane, a potent GHG, but despite this can often be relatively low
GHG emissions alternatives to fossil fuels, with the additional critical benefit
that they also provide balancing and storage services to support intermittent
renewables.
16. CCS solutions applied directly at an industrial facility can be accounted forwhen considering the emissions of that facility as they are directly reducing
emissions within that activity and CCS is therefore not a distinct activity.
However, on-site tree planting around that facility should not be counted, norshould purchased forestry offsets.
17. For corporates, banks and governments respectively for example.

On appropriate indicators for assessing the adequacy of transition
ambition, the highest-scoring KPI was energy efficiency against
a 2°C sectoral decarbonisation target (79%). Other high-scoring
KPIs included share of low-carbon sources of energy supply (73%),
carbon intensity reduction per unit of output (69%), decarbonisation
medium/long-term targets at company or sponsor level (68%),
share of products or revenues enabling the low carbon transitionof others sectors (67%), and share of fossil fuel in energy supply(63%). There was scepticism about non-science based KPIs likeenergy efficiency gains against current baseline (57%) or low
carbon certifications e.g. Aluminium Stewardship Initiative (29%).
Respondents were keen to judge alignment against the overall
objective of the 1.5°C target. One response mentioned: “Energy
efficiency gains are not green if applied to coal power generation.”

18. https://www.enel.com/content/dam/enel-com/investors/greenbond/sdg-bond-sept_2019.pdf
19. https://orsted.com/en/Investors/Debt/Green-Financing
20. Circa two years after issuance of this bond in 2017, the share of green
energy that Orsted had achieved was above 70%, compared to 50% in 2016.
21. https://orsted.com/en/Sustainability/Our-strategy/A-world-that-runsentirely-on-green-energy
22. Some market observers express comparable thoughts in an analogy toother transactions, e.g. Innogy (linked to a fundamental restructuring offormerly heavily coal-reliant German electric utility RWE), GDF Suez / Engie
or EnBW.
23. https://www.repsol.com/imagenes/global/es/Repsol_Green_Bond_
Framework_tcm13-71041.pdf
24. Most of these doubts or criticism can also be applied - as an analogy toa different but related sector - to a much more recent green-labelled bondissued by Teekay Shuttle Tankers to finance hybrid (LNG-electric) oil shuttle
tankers.
25. https://cadentgas.com/nggdwsdev/media/Downloads/investor%20
relations/DNVGL-Transition-Bond-Framework-review.pdf
26. https://www.snam.it/en/Investor_Relations/debt_credit_rating/climate_action_bond.html
27. https://www.snam.it/en/Media/Press-releases/2020/Snam_new_
Transition_Bond_Framework_published.html, accessed 22 June 2020
28. https://www.snam.it/export/sites/snam-rp/it/investor-relations/debito_credit_rating/file/Transition-bond-framework-2020.pdf, accessed
22 June 2020
29. http://www.marfrig.com.br/Arquivos/Marfrig_Sustainable_Transition_
Bond_Framework.pdf
30. http://www.ebrd.com/focus-on-environment.pdf
31. https://www.environmental-finance.com/content/analysis/supportingtransition-through-green-bond-issuance.html
32. Isabelle Laurent and Carel Cronenberg, EBRD: https://www.
environmental-finance.com/content/analysis/supporting-transition-throughgreen-bond-issuance.html?pf=print 2/7
33. https://www.climatebonds.net/standard/taxonomy . Since 2018,
adaptation criteria are increasingly being introduced too.
34. The buildings criteria are location-specific purely to take account ofdifferent climatic factors affecting demand for heating, cooling and lighting,and the significant variability in building stock in different locations. The
waste-to-energy criteria are location-specific as the advanced state ofdevelopment of recycling and similar alternatives in the EU and the EU policy
push for a circular economy means that waste-to-energy facilities are noteligible for certification in the EU – but they are in the rest of the world.
35. https://ec.europa.eu/info/publications/sustainable-finance-tegtaxonomy_en
36. This was the TEG’s interpretation of Article 6(1a) which set out theframework for evaluating transition activities: “For the purposes of paragraph
1, an economic activity for which there is no technologically and economicallyfeasible low carbon alternative, shall be considered to contribute
substantially to climate change mitigation as it supports the transition to a
climate-neutral economy consistent with a pathway to limit the temperature
increase to 1.5 degrees Celsius above pre-industrial levels including byphasing out greenhouse gas emissions, in particular from solid fossil fuels,
where that activity: I. has greenhouse gas emission levels that correspondto the best performance in the sector or industry; II. does not hamper thedevelopment and deployment of low-carbon alternatives; and III. does notlead to a lock-in in carbon-intensive assets considering the economic lifetimeof those assets.”
37. https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-reportgreen-bond-standard_en.pdf
38. The PBOC categories can be seen in more detail in Appendix 2 of thisRoadmap for China document https://www.iisd.org/sites/default/files/
publications/green-bond-guidelines-next-stage-market-growth-en.pdf

Financing Credible Transitions Climate Bonds Initiative

39. Defined as: the construction and operation of devices or facilities
conducting coal washing and processing, using coal by quality andclassification, utilisation technologies such as gasification that are easy forpollution treatment.
40. https://ieefa.org/china-disqualifies-clean-coal-technology-from-greenbond-funding/
41. Other initiatives that also provide benchmarks or frameworks for defining
whether emission reductions in a project or individual company are in linewith the Paris Agreement include the Science-Based Targets Initiative andCicero’s shades of green approach. This may include reference to the UN
SDG. To aid issuers, the GBP have published a ‘High-Level Mapping to the
Sustainable Development Goals’.
42. https://www.icmagroup.org/assets/documents/Regulatory/GreenBonds/Climate-Transition-Finance-WG-ToR-FINAL221119.pdf
43. https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017TCFD-Report-11052018.pdf
44. https://www.unglobalcompact.org/library/5712
45. http://www.climateaction100.org/
46. And to be covered in future: coal mining; chemicals; oil & gas distribution;
services; consumer goods; other basic materials; other industrials.
47. https://www.sasb.org/standards-overview/download-current-standards/
48. SASB guidance for oil and gas extraction - https://www.sasb.org/wpcontent/uploads/2018/11/Oil_Gas_Exploration_Production_Standard_2018.
pdf
49. https://globalinvestorcoalition.org/
50. Description largely taken from (but shortened): https://www.iigcc.org/
download/iigcc-paris-aligned-investment-initiative/?wpdmdl=2292&refresh=5e4bec2c6b67a1582033964
51. Corporate Knights Inc. includes the sustainable business magazine
Corporate Knights and a research division that produces rankings andfinancial product ratings based on corporate sustainability performance. The
Council for Clean Capitalism was established in 2012 as a multi-industry
group of Canadian companies dedicated to advocating economic and social
policy changes supportive of responsible corporate behaviour.
52. https://www.corporateknights.com/channels/climate-and-carbon/cleantransition-bonds-unlock-1t-oil-sands-opportunities-15403846/
53. For example, CTBG state that fossil fuel extraction will need to achieve aminimum 25% reduction in well-to-refinery lifecycle analysis GHG emission
to qualify for allocation of proceeds. Similarly, 25% is the minimum reduction
in GHG emission intensity, for GHG emissions within the company’s control,
expected for non-fossil fuel commodities
54. https://realassets.axa-im.com/content/-/asset_publisher/
x7LvZDsY05WX/content/financing-brown-to-green-guidelines-fortransition-bonds/23818#useofproceeds
55. https://www.blackrock.com/corporate/literature/whitepaper/viewpointtowards-a-common-language-for-sustainable-investing-january-2020.pdf &https://www.environmental-finance.com/content/news/blackrock-weighsin-on-taxonomy-debate.html
56. https://www.environmental-finance.com/content/analysis/sustainablefinance-its-all-about-transition!-part-one.html
57. https://www.environmental-finance.com/content/analysis/sustainablefinance-its-all-about-transition-part-two.html
58. https://www.environmental-finance.com/content/analysis/green-bondsa-different-take-on-additionality.html
59. https://2degrees-investing.org/wp-content/uploads/2019/06/2018Green-bonds-updated-paper.pdf
60. https://www.axa.com/en/spotlight/story/forming-a-bond-supportingthe-energy-transition. This is described further in Annex 2
61. See Annex 1 for a brief description of the SASB framework
62. https://gsh.cib.natixis.com/api_website_feature/files/
download/9272/2019_investor_survey_transitioning_of_brown_industries_
full_results_natixis_green___sustainable_hub.pdf

39

Report authors: Anna Creed, Manuel Adamini,
Prashant Vaze and Bridget Boulle
We would like to thank all the people who had input into this paper
as interviewees and reviewers.
To discuss further, please contact Anna Creedanna.creed@climatebonds.net
Find the full paper at:
https://www.climatebonds.net/transition-finance
Design: Godfrey Design© Published by Climate Bonds Initiative, September 2020www.climatebonds.net

Written by Climate Bonds Initiative

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