Transition finance fortransforming companies
Avoiding greenwashing when financing
company decarbonisation
DISCUSSION PAPER

10 September 2021

Authors: Anna Creed and Michelle Horsfield
With thanks to all those who had input into this paper as the Transition Programme Advisory Panel andreviewers.

Key messages•

The IPCC Special Report on Global Warming of 1.5 Degrees, Summary for Policy Makers, stresses that
limiting global warming to 1.5°C would require rapid and far-reaching transitions in land, energy,
industry, buildings, transport, and cities. Global net human-caused emissions of carbon dioxide (CO2)
would need to fall by about 45% from 2010 levels by 2030, reaching net zero around 2050.1•

This message is now filtering through:o 61% of countries, 9% of states & regions in the largest emitting countries and 13% of cities
over 500k in population have now committed to net zero emissions. 2
o Of the world’s 2,000 largest public companies, 21% now have net zero commitments,
representing annual sales of nearly USD14tn.3
o 129 signatories representing GBP43tn in Assets under Management (AUM) have signed up to
the net zero asset managers initiative since its launch in December 2020. They represent
almost half of the entire asset management sector globally in terms of total funds managed. 4•

The sustainable financial markets are booming: Green, Social and Sustainability (GSS) bonds andSustainability Linked Bonds (SLBs) collectively reached USD496.1bn in H1 2021 as issuancesurged.5 This includes an increasing number of types of use-of-proceeds (UoP) bonds including‘Transition Bonds’, of which 18 have been issued to date.6•

The growth in SLBs has been substantial: in H1 2021 they formed 6% of the total labelled debt issuanceeven though the first SLB was only issued in September 2019 (by ENEL). The high emitting sectors thatare crucial to a successful economy-wide transition (including industrial sectors and fossil-fueldependent sectors) are far more prominent in the SLB market than the UoP market.

•

Given their forward-looking key performance indicators (KPIs), all SLBs are arguably inherently abouttransition, whether a climate, broader green and/or social transition. For a decarbonisation transition
specifically, they represent a fantastic opportunity for companies’ net-zero targets to be linked up withaccess to sustainable finance.

•

But many of these early examples of SLBs and transition bonds have raised concerns in the market.
Primary concerns are around the relevance, reliability, and ambition of transition pathways. KPIs havebeen set by the company and are therefore difficult to benchmark against peers or wider goals such as
the Paris Agreement targets. There has been concern that some of these issuances have been‘business-as-usual’ by another name. So, while the market has seen impressive growth, it has often
been difficult to assess the impact and ambition of each bond. The market will not grow to its fullpotential if this is not addressed.

•

Climate Bonds Initiative (Climate Bonds) established its Climate Bonds Standard and Certification
Scheme since 2014, and in that time has Certified over USD150bn of UoP bonds.

•

Climate Bonds has always recognised the importance for all sectors of the economy to go green. We
have set eligibility criteria for use-of-proceeds across the renewable energy, buildings, transport, water
infrastructure, waste management, forestry and agriculture sectors. Work is ongoing to develop thesame for a number of high emitting sectors including cement, chemicals and steel. This will form thebasis of an expanded range of use-of-proceeds bonds certification into sectors often labelled astransition.

•

It is also Climate Bonds’ intention to certify instruments beyond use-of-proceeds bonds, including SLBs
and similar (e.g,. Sustainability Linked Loans - SLLs). The intention is to provide transparency over the1

https://www.ipcc.ch/2018/10/08/summary-for-policymakers-of-ipcc-special-report-on-global-warming-of-1-5c-approved-by-governments/' Black, R., Cullen, K., Fay, B., Hale, T., Lang, J., Mahmood, S., Smith, S.M. (2021). Taking Stock: A global assessment of net zero targets,
Energy & Climate Intelligence Unit and Oxford Net Zero : Taking stock: A global assessment of net zero targets'.
3
Ibid.
4
Net Zero Asset Managers Initiative - Home
5 ‘Sustainable Debt Market: Summary H1 2021’, Climate Bonds Initiative. cbi_susdebtsum_h12021_02b.pdf (climatebonds.net)
6 Ibid2

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Transition finance for transforming companies

Climate Bonds Initiative

science-based criteria for credible SLBs and similar instruments, and assurance for investors that thoserequirements have been met in respect of any certified issuance. Consideration is also being given to
the certification of companies (i.e. not in association with any particular financial instrument).
•

This paper presents Climate Bonds’ proposal of the five hallmarks of a credibly transitioning company,
i.e. a company whose transition is rapid and robust enough to align with the global goal to nearly halve
emissions by 2030 and reach net zero by 2050, in line with the Paris Agreement. These would be thekey elements that would be the focus of assessment for certification, and all five hallmarks would need
to be satisfied.

•

They address 1) the requisite ambition of company level targets and 2) demonstrate the company’s
willingness and ability to deliver on those forward-looking targets, Specifically, the Hallmarks are:
1. Paris-aligned targets
2. Robust plans
3. Implementation action
4. Internal monitoring
5. External reporting.

•

The intent is to bridge the gap between existing market guidance that is tailored specifically to SLBs andhave good take-up but are lighter touch in detail (such as ICMA’s Sustainability Linked Bond Principles),and the deeper company-level assessment frameworks available that are more comprehensive but
perhaps too complex for wide market take up. This proposal is to address concerns from issuers andinvestors on the burden of information and reporting requirements, while maintaining robustness andcredibility.

•

The proposal complements existing environmental, social, and governance (ESG)frameworks andmethodologies but goes beyond them and is specific to fixed income instruments. It emphasises key
governance elements that are important indicators of a company’s willingness and ability to deliver on
its decarbonisation targets, but also adds the granularity needed to ensure that those targets areambitious and in line with the agreed climate goals. It moves away from a world of relative measures
such as best in class, sector benchmarking or improvements compared to a historic baseline’, to themore absolute measures tied to transition pathways that are common to all participants in the sector.
This approach has worked well in the green use-of-proceeds market and is reflected in the upsurge ingreen or sustainability taxonomies worldwide – i.e. standardised classification schemes incorporating
common eligibility criteria such as the EU Taxonomy. It requires scope 1, 2 and 3 emissions to beaddressed and short, medium and long term targets to be set.

•

Under this proposal, the transition green label would be split into three categories:oooGreen – already at net zero
Green transition – on a common sectorial transition pathway that aligns with net-zero
Interim transition – working towards the common sectoral pathway

Crucially, the third category of interim transition has a time-limited window, perhaps to 2025. Thiswindow enables all companies to positively engage with material decarbonisation, but its time limited
nature ensures that the substantial change needed is not endlessly pushed into the future.
•

3

Further discussion and development is needed to complete and finalise these proposals. Not least,
there are some technical complexities around setting company boundaries for the purpose of
assessment. But we welcome discussion and collaboration to take this work forward: please contact
Climate Bonds to discuss.

Transition finance for transforming companies

Climate Bonds Initiative1. Introduction
This paper explicitly addresses the challenge of the climate mitigation transition, and specifically, a proposal forassessing the credibility of a company’s decarbonisation. Of course, economy-wide decarbonisation of the scaleand speed required by the goals of the Paris Agreement cannot be achieved without due considerations of a“just” transition. Citizen participation, job creation and measures to address the social and economic impacts
from sunset sectors and activities are key elements of a just transition to a low carbon economy. In addition, it isessential that all environmental, social and economic aspects critical to the delivery of the Sustainable
Development Goals are simultaneously addressed. Transition in relation to these factors needs further
consideration and is not addressed in this paper but will be an essential complement to it.
This paper is a companion piece to the ‘Financing Credible Transitions’ paper produced by Climate Bonds
Initiative in partnership with Credit Suisse in September 2020.7

No-one can be left behind in addressing climate change
The climate mitigation trajectory the world must undertake by 2030 to meet the goals of the Paris Agreement is
steep and front-loaded, demanding immediate and far-reaching action across all sectors of the economy and in
all regions to achieve a net-zero global economy and a more resilient and equal society. The EU has a statedambition to reduce emissions by 55% by 2030 and reach climate neutrality across the whole continent no later
than 2050. China has announced the target of peak emissions by 2030 and net-zero by 2060.
Critically, no industry or organisation can be left behind. While progress has been made in expanding renewableenergy supplies and reducing our reliance on fossil fuels in the energy and transport sectors particularly, manyother activities continue at levels of emissions that have the potential to stall or undermine the low carbon
transition.
Addressing this means companies producing goods and services needed into the long term are rapidly andprogressing decarbonising their activities (this includes in ‘hard-to-abate’ sectors such as cement, steel,aviation8). Alongside this, it means companies producing goods and services that cannot be aligned with a low
carbon economy, and for which substitutes exist, ‘transition away’ from their current activities re-orientate theirbusiness around activities that can be so aligned (for example, a fossil fuel energy generation company reorientating its business to generate energy from renewables). And it means the rapid ramp up of activities whichenable either of the above to happen.
There is a huge opportunity for finance in the transition to a low carbon economy
Estimates suggest that an annual USD6.9tn in infrastructure investment and between USD1.6tn and USD3.8tn
for the energy transition, is required to meet the Paris Agreement targets. 9 Driving private capital towards
transition investments is key to scaling up finance: public money alone is not sufficient for the investment
needed.10
And growing action to drive that change
According to a recent study out of Oxford University 11, 61% of countries, 9% of states and regions in thelargest emitting countries and 13% of cities over 500k in population have now committed to net zero

7

That paper unpacks the types of decarbonisation transitions needed across the economy, presents 5 principles for a credible transition,
evaluates transition related financial instruments to date and considers any implications for transition labelling.www.climatebonds.net/files/reports/cbi_fincredtransitions_final.pdf
8
For example where the high emissions manufacturing process needs to be radically decarbonised over that time through measures such as
switching fuel sources, implementing new technologies or installing new production processes.
9
Climate Investment Opportunities: Climate aligned bonds &issuers 2020 at https://www.climatebonds.net/files/reports/cbi_climatealigned_bonds_issuers_2020.pdf
10
ibid
11
https://ca1-eci.edcdn.com/reports/ECIU-Oxford_Taking_Stock.pdf

4Transition finance for transforming companies

Climate Bonds Initiativeemissions. At the same time, of the world’s 2,000 largest public companies, 21% now have net zerocommitments, representing annual sales of nearly USD14tn'. 12 This is a start, but not enough.
Shareholder action can be credited with the initial momentum for encouraging companies to be moretransparent and make stronger commitments to climate action through initiatives like Climate Action
100+. It is accompanied by the likes of the Transition Pathway Initiative that benchmarks company
transition plans. The Say on Climate campaign advocates for shareholder say on climate transition actionplans. For many companies, more of their debt is held in the fixed income market and the investors andadvisors in this sector are putting increasing pressure on corporates to set out the ir decarbonisation
goals and targets. Since its launch in December 2020, 128 signatories representing USD43tn in Assets
under Management (AUM) have signed up to the Net Zero Asset Managers initiative. They represent
almost half of the entire asset management sector globally in terms of total funds managed. 13 In asimilar style, the UN convened Net Aero Asset Owner Alliance represents USD6.6 trillion AUM from 40
institutional investors.
The sustainable finance market is booming, and increasingly attractive to transitioning companies
GSS bonds and SLB’s) collectively reached USD496.1bn in H1 2021 as markets surged. See Figure 1.
Within this, Green (UoP) Bonds are the most mature instruments. Kicked off by the European Investment Bank
(EIB) in 2007, in 2020 USD290bn of issuance hit the market with issuers including corporates, banks,municipalities, sovereigns and many others. At current rates of growth, it is expected that USD1trillion will be
issued annually by 2023.14 The Green (UoP) Bond label has a long history of being used to raise finance forcompanies that are not yet ‘near-zero’ and need to decarbonise, for example, UoP relating to Buildings andTransport are both very well represented in the green bonds market.
Beyond the green label, a variety of ‘other UoP bonds have emerged in recent years. See Box 1. These include
the explicitly labelled ‘Transition Bonds’. By the end of 2020, 13 Transition (UoP) Bonds had been issued,
including from the European Bank of Reconstruction and Development (EBRD) and energy company SNAM, andan additional 5 were issued in the early months of 2020, including from Bank of China. See Appendix 1 for thefull list. Interestingly, this label has attracted interest from companies who have made little foray into labelledgreen bonds.
Other formats beyond UoP bonds, such as the relatively recent Sustainability Linked Bonds (SLBs), have also
emerged. As (usually) general purpose debt tied to company-level performance indicators, SLBs are proving
attractive to issuers who don't have sufficient capital expenditures connected to sustainability projects, tosmaller issuers that might lack the capacity to implement effective tracking or reporting practices required foruse of proceeds instruments, or more generally to issuers who simply prefer to set performance indicators andreporting requirements at company level, rather than dedicated tracking and reporting of specific eligible
projects and assets.
The growth in SLBs in the first half of 2021 has been substantial, with volumes of USD32.9bn, forming 6% of thetotal labelled debt issuance. And this includes issuance from companies who have previously issued UoP bonds.
High emitting sectors that are critical to a successful economy-wide transition, including industrial sectors andfossil fuel dependent sectors, are far more prominent in the SLB market than the green UoP market (even whenviewing transition as a subset of green), where they are still largely absent. See Figures 2a and 2b. For example,
the oil and gas sector is not widely active in the green bond market, with Repsol’s foray receiving criticism, yet
the reality is that the oil and gas sector will also need to transition. Italian oil and gas company ENI was one of
the bigger SLB’s issued in the first half of 2021 with its USD1.2bn SLB. This may be as operators in those sectors
are at an earlier stage of their transition and so see greater potential to engage with investors via forwardlooking SLBs.

12' Black, R., Cullen, K., Fay, B., Hale, T., Lang, J., Mahmood, S., Smith, S.M. (2021). Taking Stock: A global assessment of net zero targets,
Energy & Climate Intelligence Unit and Oxford Net Zero : Taking stock: A global assessment of net zero targets'.
13
Net Zero Asset Managers Initiative
14
Climate Bonds Sustainable Debt Market Summary H1 2021 athttps://www.climatebonds.net/files/reports/cbi_susdebtsum_h12021_02b.pdf 1

5Transition finance for transforming companies

Climate Bonds InitiativeGiven their forward-looking KPIs, all SLBs are inherently about transition, whether a climate, broader green, and/or social transition. For a decarbonisation transition specifically, they represent a fantastic opportunity forcompanies’ net-zero targets to be linked up with access to sustainable finance.
It is not the intention of this paper to investigate why some instruments are preferred to others, or to suggest
some are of more importance than others. A plurality of different instruments that companies can choose
between can only accelerate the transition – the ultimate objective – though we note that the variety of labels
used across these instruments can be confusing and unwelcome for investors. Low interest rates continue tocontribute to increased demand for all types of bonds particularly from high yield issuers and instruments withlong duration. The demand for debt instruments with a focus on sustainability continues to increase. The
number of dedicated funds and those with softer labels such as ESG, Sustainability, and SDG is growing all thetime. 15 In Europe, the ECB remains the largest buyer of bonds, including those labelled green and as of January
2021, SLB’s have been eligible as both central bank collateral, and as assets for both the Asset Purchase
Programme and the Pandemic Emergency Programme. Further, if individual instruments are issued in at least
benchmark size (USD500m) they will be eligible for inclusion in broad market indices, hence, will be consideredby mainstream investors too. This momentum must be seized through all and any measures possible.
More broadly, we expect policy initiatives globally to increase the emphasis on sustainable investment, including
finance for transition. For example via the implementation of the European Union’s Sustainable Finance Action
Plan and the inclusion of ‘transitional activities’ in the EU Sustainability Taxonomy. In April 2021, the Financial
Services Agency, Ministry of Economy, Trade, and Industry; and Ministry of the Environment of Japan, publisheddraft guidelines on climate transition finance.i The guidelines are aimed at promoting financing for businesses
that are either already decarbonised (e.g., renewable energy) or are transitioning towards that - in order torealise Japan’s goal of a carbon-neutral society by 2050.
Box 1: Green, Social and Sustainability (GSS) Bonds
Use of Proceeds (UoP) bonds. Defined by the allocation of proceeds to specific environmentally or socially beneficial
projects, assets activities, or expenditures. This category includes the following labels:
•
•
•
•
•
•
•

Green Bonds - Proceeds allocated to climate and/ or environmentally beneficial projects.
Social Bonds - Proceeds allocated to socially beneficial projects
Sustainability Bonds - A hybrid of green and social bonds, proceeds are allocated to a mix of environmentally andsocially beneficial projects.
Blue Bonds - In the main a subset of green bonds, but with proceeds allocated to ocean based projects
Climate Resilience Bonds - A subset of green bonds, with proceeds specifically allocated to climate related projects
Transition Bonds - In the main a subset of green bonds, often with proceeds allocated to decarbonising assets or
projects
Pandemic Bonds - In the main, a subset of social bonds, with proceeds allocated to addressing pandemic relatedsocial issues, such as healthcare or employment. But may be allocated to projects with both social andenvironmental impacts.

Sustainability Linked Bonds (SLBs). Proceeds of SLBs are usually not allocated to specific projects, assets or activities but
used for general purposes. The sustainability angle comes from the issuing entity making forward commitments to futuredelivery of sustainability outcomes, often in the form of company level key performance indicators (KPIs). In some cases,
the cost of capital is linked to achievement of those KPIs.
Hybrid: Sustainability-linked green bonds (SLGBs). A hybrid that ties the use of proceeds model of a green bond with theperformance-based structure of an SLB. The first SLGB was issued by Japanese construction company, Takamatsu, in March
2021. There are expectations that this structure will gain traction rapidly over the coming years.

15

BlackRock’s EM focused active BGF Emerging Markets Impact Bond Fund employs norms-based screening, along with a proprietary GSS
taxonomy and ESG integration in issuer-level analysis.15 SSGA’s new State Street Sustainable Climate Bond Funds range uses Climate Bonds’
data as an input into the fund methodology to scale up green bonds, along with a proprietary screening to help mitigate and adapt forclimate impact and exclude controversial issuers.15 Examples of other recent product additions include green ETFs from Horizon ETF andL&G.15,15 The proliferation of these investment solutions is in keeping with an upward trend in sustainable fund inflows, as noted by N ASDAQ.

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Transition finance for transforming companies

Climate Bonds InitiativeFigure 1 Growth in sustainable finance instruments 2016-2021 first half

Source: Climate Bonds Initiative
Figure 2a: Use of Proceeds Bonds by sector allocatedproceeds

Figure 2b: SLBs by issuing sector

Source: Climate Bonds Initiative

Success means full accountability and no greenwashing
As the sustainable finance market expands to include high emitters and high emitting activities at greater scale,one key challenge is the need to demonstrate the credibility of the entity’s future transition and avoid
greenwashing.
So far, the market response to transition bonds and SLBs has been mixed. While investors welcome the inclusionof more types of entity into the sustainable debt space, the primary concerns are around the relevance,
reliability, and ambition of transition pathways. KPIs set have been entity-specific and difficult to benchmark
against peers or wider goals such as the Paris Agreement targets and there has been concern that some of theseissuances have been ‘business-as-usual’ by another name. So although on paper the market has seen impressive
growth, it has often been difficult to assess the impact and ambition of each bond. The market will not grow to
its full potential if these concerns are not addressed.

7

Transition finance for transforming companies

Climate Bonds InitiativeFor example, ENI issued an SLB in June 2021. ENI is notable in the sector for its commitment to include lifecycle
emissions (scope 3). This framework made a step in the right direction for fossil-fuel-based entities to start theirtransition journey, by outlining commitments to reduce emissions from existing activities and stating entity
ambition to invest in renewables. However, the genuine ambition of the instrument could have beenstrengthened if it was set in the context of a wider corporate strategy in line with 1.5oC. The framework would
have benefited from greater detail on the transition plan for the next few years and how capital will beallocated.
Expanding the Climate Bonds Certification Scheme
Climate Bonds’ focus to date has been UoP bonds. Climate Bonds screens all labelled UoP bonds for inclusion in
the Climate Bonds Database to facilitate market tracking and intelligence. Separately, the Climate Bonds
Climate-Aligned database includes unlabelled bonds issued by a pool of entities that derive at least 75% of theirrevenues from climate-aligned activities Climate Bonds has also developed and runs the Climate Bonds Standard
and Certification Scheme - a labelling scheme with Climate Bonds Certification awarded to bonds meeting thescience-based climate mitigation and adaptation criteria for eligible UoP and fulfilling management andreporting requirements aligned with the pillars of the Green Bond Principles. Over USD150bn of UoP bonds havebeen Climate Bonds Certified to date.
Climate Bonds has always recognised the importance of all sectors of the economy going green. Collaboratingwith external experts, eligibility criteria for use-of-proceeds across the renewable energy, buildings, transport,
water infrastructure, waste management, forestry and agriculture sectors have been defined. Work is now
ongoing to develop similar eligibility criteria and climate transition pathways for other high emitting sectors
including cement, chemicals, steel and oil and gas. This will form the basis of an expanded range of UoP bonds
certification into sectors often labelled as transition.
It is also our intention to certify instruments beyond UoP bonds, including corporate SLBs and similar (e.g.
Sustainability Linked Loans - SLLs) to provide guidance to issuers and assurance to investors around thecredibility of those instruments which can at present prove difficult to evaluate due to lack of consistency inapproaches and metrics used by different issuers. This will require assessment both of the company’s transition
KPIs, and their ability to deliver on their targets. Such certification would follow the requirements set for UoP
bonds, namely a standardised (common) rule set, binary assessment, simplicity, transparency, and science-based
criteria.
Commercial and development banks (with their large loan portfolios), municipalities, sovereigns and other public
entities are perhaps the ultimate ‘mixed portfolio companies’. In the coming months, Climate Bonds willconsider further how this framework could be used or adapted to assess the transition of such entities. This will
be key to assess SLBs and other transition related instruments from such issuers. For example, it has beenreported that Brazil is laying the groundwork for a sovereign bond issue linked to its ESG credentials.
As assessment of SLBs requires assessment of company-wide transition KPIs and strategies, it is a small step toalso then certifying companies transition agendas, irrespective of any associated financing instrument. Climate
Bonds is also considering the certification of any company articulating and implementing transition. Suchcertification would offer a valuable element of ‘environmental due diligence’ for any stakeholder in thatcompany interested in its transition, including shareholders, investors, supply chain partners, and customers.
A framework for eligibility for Certification
Chapter 2 presents Climate Bonds view on the five hallmarks of a credibly transitioning company. These are thekey elements that would be the focus of assessment for certification. They address 1) the requisite ambition interms of company-level targets set and 2) demonstrating the company’s willingness and ability to deliver on
those forward-looking targets.
This proposal aims to bridge the gap between existing market guidance tailored specifically to SLBs which havegood take-up but are lighter touch in detail16, and the deeper company-level assessment frameworks available
that are more comprehensive but perhaps too complex for wide market take up. See Figure 3 for a schematic

16

In particular, ICMA’s Sustainability Linked Bond Principles released in June 2020 that has been followed by over 80% of sustainability-linked
bonds, and this share is expected to increase over time.

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Transition finance for transforming companies

Climate Bonds Initiativerepresentation of this gap. The Hallmarks focus on what is essential to demonstrate a credible transition rather
than trying to cover all components that may be relevant. This is to address concerns from issuers and investors
relating to the burden of information and reporting requirements, while maintaining robustness and credibility.
It complements existing ESG frameworks and methodologies but goes beyond them. It emphasises key
governance elements that are important indicators of a company’s willingness and ability to deliver on its
decarbonisation targets, but also adds the granularity needed to ensure that those targets are ambitious and inline with the agreed climate goals. It moves away from a world of relative measures such as ‘best in class’,‘sector benchmarking’ or ‘improvements compared to a historic baseline’, to the more absolute measures tied
to transition pathways that are common to all actors in the sector. This approach has worked well in the green
UoP market and is reflected in the upsurge in green or sustainability taxonomies worldwide.
Figure 3: Climate Bonds Certification of company transitions fills a gap in the market

Requesting your input
For the reasons highlighted above, this paper has a very broad intended audience:• It provides guidance to any organisation looking to articulate and implement a credible climate
mitigation transition strategy, including but not limited to those raising finance explicitly for that.
• It aids investors by promoting accountability of companies in their sustainability strategy andavailability of information necessary to evaluate their investments, in SLBs, SLLs, equity etc.
• It assists underwriters by moving the market towards expected approaches to structuring anddisclosures that will facilitate credible transactions.
It is also a proposal, presented for discussion that seeks input and contributions. We have been fortunate to beable to build upon existing frameworks for assessing corporate transitions and transition strategies and there ismuch coherence between that guidance and this proposal. We do not wish to ‘re-invent the wheel’ or confuse
the market. However, we are not in full agreement in all aspects, and we look forward to discussing these areasof divergence in order that collectively we give clear and consistent advice and support to the market.

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Transition finance for transforming companies

Climate Bonds Initiative2. Hallmarks of a credible company transition
Introduction
Five Hallmarks of a credible company climate mitigation transition are identified:
1.
2.
3.
4.
5.

Paris-aligned targets
Robust plans
Implementation action
Internal monitoring
External reporting.

To some extent, this represents a hierarchy of performance. There is value in public commitment to ambitious
targets (Hallmark 1), but these are only convincing when the enabling environment has been created to deliveron them (Hallmark 2). But this alone is not sufficient. Public commitments can be made in good faith (or not)but still not be followed through. Evidence of change is important (Hallmark 3) and capex/opex investments andstrategic changes to the business provide information on the direction of travel of a companies' transition
strategy. Thus far, these are only the steppingstones in advance of delivery against the selected targets(Hallmark 4). External reporting is always important to build trust in the market (Hallmark 5).
The requirements for each of these Hallmarks are summarised in Figure 4. Before delving into the detail of each,
it is important to recognise the principles that set the intent:• To be attractive to investors (and other stakeholders), company transitions need to be credible.
Specifically this means they need to be:• Science based, i.e., aligned with the climate science.
• Testable, and so consideration is given to 1) what should be assessed, 2) over what time period, 3)
how it should be credibly demonstrated.
• To be usable by large numbers of companies and investors (and other stakeholders), the requirements
need to be:• Relatively simple, focussing on critical information, particularly that which acts as a meta indicatorof multiple aspects of good performance.
• Not reinvent the wheel, for this reason, we draw heavily on existing guidance and frameworks,
though streamlining where we think appropriate to minimise demands on companies.
• Consistent over time and companies – to enable comparability across companies and toencourage company participation by setting clear and stable requirements.
We note that these Hallmarks can be applied to assess the adequacy of transition in respect of the attainment ofother environmental and social goals, although the science and timeframe is less clear in many of those cases.
Although this wider scope is of critical importance, it is not the focus of this paper.

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Transition finance for transforming companies

Climate Bonds InitiativeFigure 4: The Hallmarks of a credibly transitioning company

1. Paris-aligned
targetsa) Select sector-specifictransition pathwayaligned with Paris
Agreement goalsb) Set company-specific
KPIs that align as earlyas possible with thatpathway
Pathway and targets tobe science based,
address all material
emissions (scope 1, 2 &3) and address short,medium and long term

2. Robust plansa) Set the strategy andplan to deliver on those
KPIsb) Prepare associatedfinancing plan detailed
cost estimates andexpected sources offunding

3. Implementation
action4. Internalmonitoringa) Capital expenditure,operating expenditurea) Track
performanceb) Other actions
detailed in thestrategyb) Re-evaluate
and recalibrate
KPIs as neededc) Put in placenecessary governanceframeworks to enactchange

5. External reportinga) External reporting and independent verification on the KPIs and strategy to deliver (per Hallmarks 1 and 2)b) Annual reporting of independently verified progress in terms of action taken and performance against targets(per Hallmarks 3 and 4)

HALLMARK 1: Paris-aligned targets
There are two key elements to target setting:
The first is the selection of a common sectoral decarbonisation pathway, a pathway that shows how that sector
will align with the collective goal of keeping global warming below 2 degrees and ideally 1.5 degrees, per theParis Agreement. We call this the sectoral green transition pathway.
This pathway does not simply reflect a sector average, or best-in-class, but an absolute, forward-looking pathwaythat is technologically feasible and ensures the sector aligns with overall net zero emissions economy goals.
In its Special Report on Global Warming of 1.5°C (SR15) the Intergovernmental 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% from 2010 levels by 2030 and down to net zero globally by 2050.
This pathway must be common to all companies in that sector / practicing that economic activity. 17 There may
be some opportunity for flexibility here, particularly in the early stages of transition. Higher emissions in some17

it is important that companies use a common source for their decarbonisation goals, and do not attempt to define their own companyspecific sector decarbonisation pathway. This leads to a lack of comparability between companies and increases the risks of collective
emissions reductions failing to meet the scale and speed needed to meet our common targets. It is also time and cost-inefficient.
International efforts to harmonise taxonomies are a recognition of this important principle of common criteria for good performance. Theremay, of course, be considerations at play affecting the relative ease or difficulty of establishing common GHG thresholds in different contexts
or locations, while balancing other development needs (e.g. degree of economic development or maintaining resource security). For thisreason, there may be some flexibility in applying the climate science in different regions and contexts – but again, this should be determined
as a collective level, e.g. through science-based regional taxonomies which are harmonised internationally, not through bespoke approaches.
As a note of caution, targets that align with NDCs cannot automatically be taken to represent credible transitions to 1.5°C goals, at least at
this time, as in aggregate, NDCs do not equal even a 2°C world.

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Transition finance for transforming companies

Climate Bonds Initiative

parts of the economy or sector may be compensated for by reductions elsewhere. However, this flexibility
reduces as the overall proportion of carbon neutral or near-zero carbon activities increases towards 100%.
Many sources of credible transition pathways are now available for companies to utilise, from individual
institutions defining transition pathways on a sectoral basis (e.g. Transition Pathway Initiative, ACT Initiative,
SBTI) to voluntary or regulated taxonomies (e.g. Climate Bonds and EU Taxonomies respectively) establishingcommon criteria on an economic activity basis. These include targets for high-emitting sectors that will be ofparticular relevance for transition. There are certainly gaps in this guidance which does not have full coverage
across economic activities18, and in some cases lays out targets for good performance today, but not transition
pathways to define targets going forward19. There are some inconsistencies in the guidance between different
sources due to differences in underlying assumptions, which can cause confusion. Further work is needed toaddress these issues and provide greater assistance to corporates and investors.
The second is the set of company-specific key performance indicators (KPIs) selected by the company todescribe how and when the company will catch up with/ follow/ outperform that sectoral green transition
pathway. Let’s call these the company KPIs.
Ideally, every company would already be on or exceeding their sectoral green transition pathway. But many
companies have been slower to start the transition and will be playing catch up. What is important is that theircompany-specific KPIs and associated performance levels for those KPIs clearly articulate whether or not they
are currently on that sector specific transition pathway, and if not, when they will align with and continue tofollow that pathway.
These KPIs will reflect the commitment, willingness and ability of the company to decarbonise. To collectively
achieve the global emissions reductions target, it is critical that decarbonisation is rapid and front-loaded, andtherefore, those KPIs and performance targets should align with the relevant sectoral green transition pathway
as soon as possible and continue to follow that pathway (or better, out-perform it) from then on.
Both the common sectoral green transition pathway and the company-specific KPIs should describe adecarbonisation trajectory over the short, medium and long term. As noted above, decarbonisation needs to be
rapid and front loaded, but we also need to ensure that we are designing and implementing long term
programmes that will deliver the change needed over the long term. Therefore, it is proposed that company
KPIs are identified for key milestone dates, and ideally the same milestone dates to enable greater comparability
between companies, at least in the same sector. Suggested milestone dates and associated KPIs might recognise
the following three stages:•••

The short term i.e., now to 2025, for which period it is reasonable to expect a high degree incertainty and detail in planning and associated KPIs; andThe medium term i.e., 2025 to 2030, for which period it is reasonable to expect well-defined plans
and associated KPIs that recognise the critical collective milestone of halving emissions by 2030,
though recognising those might be subject to change; andThe long term, i.e., 2030 to 2050, for which period it is reasonable to expect broad plans that canmap the pathway to align with the collective milestones set out in the Paris Agreement, though
recognising a greater level of uncertainty and flexibility as information this far into future is subject
to greater change. An issue at present is that many companies have a plan until 2030, but then areblank until 2050 for which they pledge net-zero without an indication of the pathway to get there.

This is important however short the term of any transition related financial instrument. If claims are being madethat any particular instrument is linked to or directly financing a part of the overall company transition, that can
only be a credible claim if the longer-term transition strategy and KPIs are explained, and it is clear how any
particular investment contributes to or is part of that.

18

For example, most Taxonomies are ‘green’ taxonomies, they address economic activities that will be needed in the future and often set
GHG performance levels for them that will ratchet down over time. However, they do not address economic activities that need to bephased out, so called ‘stranded activities’ so do not address the necessary speed and scale of ‘transition away’, critical information for target
setting for companies practicing those activities. And of course, even for non-stranded activities, the green taxonomies do not havecomplete coverage at this time. The full range of manufacturing activities for example is rarely covered, nor mining.
19 For example, the EU Taxonomy regulation requires that all large companies disclose what proportion of their revenues comply with thecriteria in the EU Taxonomy and therefore are sustainable. It includes high emitting activities that need to transition e.g. cement and steel,and aviation (forthcoming). But the criteria for those activities are static – they represent thresholds for good performance for today but nopathways for tomorrow. The regulation notes that the criteria for all ‘transitional activities’ in the Taxonomy will be reviewed every three
years, but there is no indication of the likely forward pathways. The Climate Bonds Taxonomy is a little more forthcoming, with transition
pathways for some sectors including buildings and transport, but not for most.

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They should address all material emissions. We have seen examples where issuers have come to market
omitting KPIs which address material sources of their emissions. This raises concerns for investors as incomplete
accounting for emissions makes it difficult to determine whether the company is making a comprehensive
transition or just ‘cherry-picking’ low-hanging fruit, which would raise questions over greenwashing. Transition
cannot be credible without addressing all material emissions.
This includes scope 1, 2 and 3 emissions. On scope 3 emissions specifically, upstream scope 3 emissions
embedded in purchased goods or services should be addressed in the selected KPIs, as the company has achoice over who it purchases from and therefore associated embedded emissions in those inputs. For
downstream scope 3 emissions, whether and how these are addressed in the KPIs depends in large part onwhether the activity of the company is ‘stranded’, and the company needs to transition away from it or not.
For example, KPIs for a company engaged in the stranded activity of coal-fired electricity generation should
address downstream scope 3 emissions via KPIs associated with the ‘turning off of the tap’ for those scope 3
emissions, e.g. decommissioning of those generation facilities.
Whereas KPIs for a company engaged in an activity that needs to continue into the longer term should address
downstream scope 3 emissions directly where they can exercise control over those emissions. For example, a car
manufacturer knows the future operating emissions impact of any vehicle it produces and should be movingfrom fossil fuel to electric powered vehicle manufacture to minimise downstream scope 3 emissions.
KPis may be expressed in either a greenhouse gas (GHG) metric or another proxy indicator. GHG is a simple andwell understood metric that enables straightforward comparability across companies in a sector, and a rapid
assessment of whether the company’s transition is aligned with the targets for the sector, and therefore
sufficiently rapid and robust. However, there may be other ‘proxy’ indicators which are also of merit. A foodprocessor might set a KPI relating to the percentage of commodity purchases from farms or supply chainscertified as being under climate-smart farming methods for example. A company switching from coal torenewables energy generation might set a KPI relating to the percentage of coal fired generation that will be
decommissioned by a specified date.
Where non-GHG KPIs are used, the impact in terms of GHG emissions and how and for how long it deliversalignment with decarbonisation pathway for that sector should be clearly described.
A company might select a KPI relating to reductions compared to business-as-usual. Indeed, such metrics areoften attractive to investors who seek some form of ‘additionality’ or measurable impact arising from theirinvestment, [and they are recognised/ supported in ICMAs Sustainability Linked Bond Principles]. However, as
noted above, credible transition means aligning with forward looking sectoral green transition pathways,
common to all those in the sector, that take into account future carbon budgets at a global collective level.
Setting company-specific KPIs that are expressed solely as a reduction compared to the company's own BAU are
insufficient. The measure of success must not be how large or small a company's change is relative to its own
performance - but whether the result will be compatible with the collective emissions reductions targets
needed.20 Therefore again, where KPIs are framed in terms of reductions compared to BAU, these targets should
be recalibrated to express how they align with the forward-looking transition pathways for that sector.
Note 1: Squaring the circle on sectoral transition pathways and company net zero targets. The proposal above isthat all companies should seek to align with common, sectoral decarbonisation pathways. But many of thosepathways do not target net zero emissions by 2050.
Different industries will have greater or lesser potential to reduce emissions/ increase sequestration over time,
meaning that the end goals and speed of transition will vary substantially by sector. But the shared requirement
for all is to reduce emissions to the minimum as fast as is possible. Given the speed of change required to alignwith the Paris Agreement, the majority of sectors will face a steep short term decarbonisation trajectory.
From a purely scientific perspective, every activity needs to decarbonise well before 2050. Some sectors will beable to reach net zero well before 2050. For example, for car manufacturing, low carbon technologies (electricvehicles) are readily available and well established in the market, and in some jurisdictions competing highcarbon technologies will be increasingly prohibited e.g., there are to be no sales of new petrol and diesel cars
20

One implication of this is that a company can be deemed to be credibly in transition while it is only making a small step change in the shortterm, if it has already, previously taken a large step change to decarbonise. In this case, it would effectively be continuing to deliver a 'lowcarbon' product or service, and so long as its future targets are aligned with overall decarbonisation targets for that sector. Convers ely, acompany that is making a large step change may still not be deemed to be making a credible transition if it is so far behind the curve that
despite that large step change it still lags behind the transition pathway for the sector in which it operates.

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after 2040 or earlier in some EU countries. However, some sectors face significant barriers to decarbonisationthat are material to defining their pathways. Such barriers may be economic and/or technological or may bepolitical or face a high degree of dependency on external factors. For example, the scale up of the use of green
cement is, in part, blocked by its lack of safely record as major construction companies require a 20-year safety
record.
Conversely, other activities may not be able to reach net zero emissions at all but should still be recognised in an
economy wide transition. 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 criticalbenefit that they also provide balancing and storage services to support intermittent renewables.
For fossil fuel companies moving towards renewables, the substitute renewable technology is already wellestablished, the issue is how fast existing fossil fuel energy generation facilities should be and can be
decommissioned.
With this disparity in mind, some sectors will need to do the heavy lifting in the short term while the barriers toscaling up of other sectors is reduced. For companies in sectors with greater decarbonisation potential,
emissions reductions should be front loaded as much as possible. For companies in sectors that will always havesome residual emissions that cannot be eliminated, ideally compensatory measures should be taken to counter
those unavoidable emissions. For all companies, offsets should not be used to delay decarbonisation of theunderlying activity, but if they are used, they should be clearly and separately identifiable as additional actions
on top of efforts to directly reduce emissions and follow the sectoral green transition pathway. This would help
to provide full transparency and so not distract from tackling emissions that can be reduced.
Note 2: An optimum number of KPIs?
It is important to avoid the proliferation of KPIs, in order to keep assessment and comparability as
straightforward as possible. Of course, a single metric of lifecycle GHG emissions for each activity of thebusiness would be the most comprehensive, but where this is not possible, and particularly where non-GHG
indicators and metrics are used, efforts should be made to adopt ‘meta-KPIs’ which address as wide a scope ofemissions as possible whether directly or indirectly. What is critical is that collectively the KPIs address the corebusiness areas and all material sources of emissions for that business.
In respect of SLBs, setting three KPIs is common – where one or two are ‘core’ and the others more ‘peripheral’.

HALLMARK 2: Robust plans
1. Establish the transition strategy and action plan that enables the delivery of those company-specific KPI’s
Forward delivery against the company-specific KPIs selected under Hallmark 1 will only be credible if supported
by a transition strategy and associated action plan that detail how the company will get from the current
situation to where it needs to be to deliver on the selected KPIs.
It should describe in a step-by-step qualitative way the strategic objectives, orientations and policies, withparticular emphasis on how the short-, medium- and long-term milestones reflected in the selected KPIs will bereached. The plan should aim to break the timeline down into 3-5 year intervals, recognising that less detail will
be possible towards 2050. More specifically, the plan should detail:
•

•

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The current position. Each company will be at a different place in the journey towards a low carbon
economy and the plan (and associated KPIs) should reflect where the company is today. A clear
understanding of the current sources of emissions and the opportunities and risks of the low carbon
transition should be detailed. This sets the scene for the nature of the changes that are needed.
In broad terms, the nature of the changes that will be made to deliver against the selected KPIs. Thesechanges might include:o decarbonise ongoing activities (e.g., though technology or efficiency improvements, oralternative inputs)o diversify activities and product mixes
o exit activities that cannot be brought in line with net zero economy emissions goals,
ideally via organic tail out or decommissioningo actions to address emissions of supply chain both up and downstream of the business.
N.B. Where options are unclear or none appear to be available, research and development plans
should be articulated.

Transition finance for transforming companies

Climate Bonds Initiative•The specific actions to be taken to deliver the changes: This action plan will define the changes thatwill be made to achieve the selected company-specific KPIs. It could be made up of a number of subplans. For example:• Technical plan for addressing the performance of sold products• Human Resources plan for ensuring the right provision of skills e.g., changes to staff training• Purchasing plan for supplier engagement e.g., renegotiation of supplier relationships• Marketing and Sales plan for client engagement• Business development plan for new business lines• Comms and PR plan for policy engagement
An assessment of delivery risks and a description of the measures being taken to mitigate those should
be provided.

2. Determine the associated financing plan
All changes have financing implications in respect of the volume, timing and risk-return profile of finance needed
to implement those changes. A financing plan is a tangible indicator of credibility in intent and ability to carryout the actions highlighted in the transition strategy and provides assurance to existing financial backers that thecompany will remain profitable during the transition.
The financing plan should address the needs and commitments for any capital expenditure (CapEx), operating
expenditure (OpEx), merger and acquisition activities and research and development expenditures (R&D)
necessary for the delivery of the transition strategy, in order that capital stock, working capital and overallbusiness streams are aligned with the company specific KPIs selected under Hallmark 1. For some companies,
capital allocation plans that support a repositioning of the capital stock will be critical. For others, operating
expenditure may be more significant, including costs of retraining and redeploying staff or decommissioning
stranded assets, or staff costs to operationalise low-carbon production practices.
The financing plan should be supported by a clear methodology that the company uses to determine thealignment of capital and other expenditures with its company-specific KPIs. The methodology should detail how
the company evaluates the alignment of capital expenditure decisions, projects and plans with its selected KPIs.
It should also disclose the percent of aligned capital expenditures and detail the year in which capital
expenditures in carbon intensive assets will peak.
3. Put in place necessary governance mechanisms
For organisations that are decarbonising ongoing activities, this is not dissimilar to regular business-as-usual. For
example, the activities might ‘just’ be about new electric furnaces to provide alternative clean energy supply, or
upgrading engines to take a new fuel source – but there is no change to product or customer relationships, noneed to build up new markets, no need to decommission whole activities etc.
In these situations, the selection of appropriate KPIs, supported by a transition strategy and finance plan to fundthe actions detailed under that strategy, and a demonstration that those actions are being carried out on theschedule described in that strategy should be sufficient to consider the transition to be credible. That is, it isarguably less critical to revise existing governance structures, processes and incentives to enable the delivery of
the transition strategy. The only exception to this might be where economic or technological challenges meanthat those changes take place over a longer period, bringing greater risk of non-delivery against the selected KPIs
due to changing personnel, priorities or resource availability.
However, for simplicity it is proposed that no assessment of governance factors (such as Board oversight ofclimate change, Board climate related capabilities / competencies, or executive renumeration linked to theselected KPIs) is required for companies undergoing these types of transitions.
However, in ‘transitions away’ where the transition involves more fundamental transformations of a company,
there is greater risk of non-delivery against the selected KPIs. In these circumstances, more assurance is neededthat the governance systems are in place to enable and drive through those changes over a long period of time.
Therefore, it is proposed for companies undertaking these types of transitions, there is a requirement for Board
oversight of climate change and Board climate related capabilities / competencies to ensure that the necessary
leadership is in place. However, it is not essential for executive renumeration to be linked to the selected KPIs.
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4. Board sign-off
The Board signs off a formal document in which the company commits to the selected targets, strategies andfinance plans.

HALLMARK 3: Implementation action
For multiple reasons, there could be a lag between the establishment of the Transition Plan and selection ofcompany-specific KPIs, and delivery against those KPIs. It can take time to raise the finance, deploy it, and thenhave associated capex or opex accumulate and ‘bed in’ sufficiently to deliver on the selected KPIs, for example
time to build new low-carbon infrastructure, to train and/ or redeploy staff. For this reason, interim indictors of
performance can be important to evidence progress in the delivery of the transition strategy.
These interim indicators include early action in the form of the roll-out of the capital expenditure plan, changes
to operating expenditure, decommissioning / phasing out activities, changes to supplier relationships, andtraining undertaken by Board or Senior Executives.

HALLMARK 4: Internal monitoring
1. Ongoing re-evaluation and recalibration of headline targets
Selected targets should be regularly reviewed and recalibrated to reflect changing operating conditions andmarket developments such as new technologies coming online sooner than expected. Processes should be inplace for such recalibration to tighten stringency where possible and overall to ensure continuous
improvement.

2. Tracking performance against selected KPIs
The company should have processes in place to track performance against the selected KPIs, and to trackdelivery of the underlying actions to deliver those KPIs. This should include selection of appropriate tracking andestimation tools, including but not limited to GHG performance tools, and any equivalents for KPIs which are
not expressed in terms of GHG emissions. This process can be described as a feedback loopback back toHallmarks 2 and 3.

HALLMARK 5: External reporting
External reporting and independent verification are well established in the green use-of-proceeds bond market.
These are carrying through to SLBs and other entity level assessments. The requirements on this are captured in
the ICMA SLB Principles.
1. External reporting
Companies to publicly disclose the following information up-front:• Selected target KPIs and the rationale for those KPIs, in line with the principles established underPart 1: Selection of KPIs, e.g., relevance and materiality, scientific basis.
• How those KPIs will be calculated (e.g. what emissions will be included) and the tools andmechanisms by which performance against those KPIs will be tracked.
• The narrative transition strategy, detailing the changes the company will make to deliver the target
KPIs
If disclosure is in connection to the raising of fixed-term finance, e.g., issuing an SLB, then particular emphasisshould be placed on the KPIs and strategy over that term. However, it should not be limited to that. Credible
transition requires demonstrating the long-term intent and forward momentum to achieve fully climate-aligned
targets, particularly for companies with long-life assets or long-term transitions to make.

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Climate Bonds InitiativeAnd on an ongoing basis, publicly disclose up-to-date information on• Performance against the selected KPIs, reporting at least annually• Explanation of the contribution of the main factors driving that performance, referencing theactions noted in the Transition plan. This includes providing information on:i. Alignment of capex with the transition strategy and revised business operations. Notingthat capex is a key performance indicator for financial market participants to consider,particularly where the company is undertaking capex over a period of time as a precursor
to changing GHG footprint of the company.
ii. Other actions scheduled to be undertaken as noted in the transition strategy e.g.
diversification of product lines, decommissioning of assets, revised supplier relationships
etc• If performance is falling behind that planned in the Transition Strategy, information on the
mitigating action being taken and the implications for a revised Transition Plan and delivery against
the selected KPIs.
Where there are concerns over commercial confidentiality, the approach of the green bond market which canbe mirrored here is for public disclosure remaining at a higher level, with full, detailed disclosure to the verifying
or certifying party.
2. Independent verification
The publicly disclosed information should be supported by a verification assurance report from an independent,
external verifier with relevant expertise, such as an auditor or environmental consultant

What these proposals do not incorporate
Appendix 2 summarises the key requirements of a number of existing frameworks for evaluating company
transitions. As noted above, the intention of this proposal is to focus on what Climate Bonds considers to be thecritical ‘meta-indicators’ of a credible company transition, in the interests of achieving a balance between
sufficiency of information and efficiency of the process for adoption by the maximum number of users. With
that in mind, for full transparency and discussion, below common elements in other assessment schemes thathave not been incorporated into the hallmarks described above are highlighted.
1. Lobbying on policy / membership of trade associations
This issue is recognised in some frameworks including ACT and CA100+ indicator 7 as an important indicator of
the strength of commitment to transition strategy, however it often has a relatively low weighting in the mix offactors assessed. It could be assumed that organisations who have a robust transition plan and associated KPIs
that have been publicly disclosed would not jeopardise their credibility by engaging in driving policies that are incontravention to their stated low carbon vision (whether this is done publicly, through industry associations orlobbying behind closed doors). More pragmatically, as this issue is notoriously difficult to assess, there is no
specific requirement on policy engagement in this framework.
2. Board leadership and executive renumeration
As noted above, governance factors relating to Board leadership is necessary for companies undertaking‘transition away’, but not for those undertaking ‘transition within’. Executive renumeration is not considered anessential factor for either.
While governance measures can be important enablers of an organisation’s willingness and ability to deliver on
their transition plans, organisations should increasingly be held accountable for direct transition or
decarbonisation action and impacts e.g. capital expenditure shifts, as per Hallmark 3, and the monitoring of
performance against the KPIs, as per Hallmarks 4 & 5.
3. Supply chain engagement
Whilst it is recognised that many companies will engage with their supply chains as part of their transition plan,
this framework sets no targets in respect of those engagements.
However, as noted above, the sector-specific pathways and the company-specific KPIs that should be tracking
them may well include consideration of the emissions upstream and downstream. This may or may not require
direct supply chain engagement, depending on the maturity of the market and the ability to source or supply
complaint products or services without a targeted supply chain engagement strategy.
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Climate Bonds Initiative4. GHG data validation
GHG emissions data can be externally verified by a third party and many jurisdictions already have this as arequirement. This is not explicitly recognised in this framework as Certification under the Climate Bonds
Standard already requires approved external verifiers to provide assurance over the credibility of performance.
5. The performance linked coupon in SLBs etc
There are mixed views on what, if anything, can be inferred about the credibility of the company’s transition
from the performance linked coupon offered by the issuer. In particular, there is no clear evidence on thenecessary materiality of the incentive to change corporate behaviour, particularly to date where many KPIs
appear not to have been set at sufficiently high ambition levels, instead simply bedding in easy-to-reach targets
that do not move the needle on business-as-usual. The reputational risk of failure to achieve the selected KPIs is
likely to be a more important consideration.
For this reason, the materiality of the incentive does not presently form part of the assessment of the company’stransition credibility.

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3. Evaluating overall performance
What level of performance is good enough to represent a ‘credible transition’?
1. All Hallmarks must be satisfied
As outlined in the ‘Financing Credible Transitions’ paper, pledges to align with 1.5°C global warming limit, oreven policies, procedures and governance practices which influence and guide operating performance in theright direction, are not sufficient to evidence 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, alongside thecredibility of plans to continue to meet those plans going forward.
For this reason, companies need to perform well for all of the Hallmarks, including each element within eachHallmark. We do not propose a weighting or scoring mechanism that balances out these factors as we do notbelieve high performance in one compensates for lower performance in another. The Hallmarks have been
deliberately streamlined to focus on the elements that are essential. Not weighting different elements of the
proposal also has the advantage of relative simplicity and transparency.
2. Shades of transition – need for differentiation?
Companies delivering against company-specific KPIs that are moving towards, but are not yet aligned with, thesectoral green transition pathways described in Hallmark 1 part 1 are not yet doing enough. Though their efforts
to ‘catch up’ are important and deserve recognition, they should be distinguished from companies that have
moved earlier or faster and have already sufficiently decarbonised to align with common sector-specificdecarbonisation pathways.
Therefore, we propose two different transition categories (and potentially different transition labels)21:
Green transition: Where actual GHG emissions and other achieved company-specific KPIs align with oroutperform the appropriate sectoral green transition pathway.
Interim transition: Where actual GHG emissions and other achieved company-specific KPIs are catching up to theappropriate sectoral green transition pathway. Here the company may have set the wheels in motion via
strategies and capital expenditure, but the impact has not yet filtered through at sufficient scale.
However, even then, it may be that only a time-limited ‘grace period’ is allowed for any company to berecognised as ‘interim transition’. For example, up to but not beyond 2025. Before the end of that period, allcompanies should have progressed from ‘interim transition’ to ‘green transition’. This window enables allcompanies to positively engage with material decarbonisation, but its time limited nature ensures that thesubstantial change needed is not endlessly pushed into the future. See Figure 5 for a graphical representation.
Figure 5: Interim versus green transition illustrated

21

Over the long term many companies will potentially backslide, as transition does not happen in a vacuum but will be affected by a varietyof economy, technological and market factors. So, movement between these categories is possible.

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Climate Bonds Initiative3. Some degree of subjectivity seems unavoidable
Practically speaking, it is a much simpler and more robust process to set and assess the performance ofcompanies in terms of their delivery or not of expected operating metrics such as GHG metrics and/ or othercompany-specific KPIs (i.e. Hallmarks 1, 4 and 5). It is more challenging to assess the credibility and future
effectiveness of plans to meet those targets going forward (Hallmarks 2 & 3), as this is a much more subjective
assessment of how targeted, feasible, complete and resilient those plans are.
Guidance is required to define what constitutes good enough in respect of these elements. We continue toexplore how existing frameworks and assessment methodologies can be utilised through a collaborative
partnership.

Applying these requirements to a complex company
1. Making a binary assessment
As noted above, it is proposed that a company needs to meet all elements of all Hallmarks to be deemed to becredibly transitioning to a low carbon aligned future.
Where a company practices a number of economic activities (whether multiple instances of the same economic
activities such as multiple cement manufacturing facilities with their own capex plans and revenue streams, or
instances of a variety of economic activities such as . a company producing passenger vehicles and commercial
buses) it is necessary to i) separately assess their targets, plans, strategies, capex and other actions for eachactivity, and then ii) recombine them to determine overall company performance.
The first 'separation' stage can be complex in practice but is conceptually straightforward. It requires targets,
transition strategies and finance plans to be separately identifiable for each business stream, within a coherent,
unified company strategy and plan that is nuanced enough to consider the interactions and inter-linkages
between all business streams of the company. If separately identifiable in this way, then company revenues andcapex can be allocated for separate assessment – as is the required methodology for company sustainability
disclosures in line with the EU Taxonomy.
The second 'recombining' stage poses more challenges. What if part of the company is following the appropriate
transition pathway, but another is not? What do you say about the performance of the company overall?
One approach is simply to report performance for each business stream. This provides full transparency, butalso a complex response to answer the overall question 'is the company adequately transitioning'?
A commonly adopted approach is to weight multiple business streams according to relative value (e.g., byrevenue share or GHG share) to give an overall score which is then subject to a straightforward pass threshold.
This approach is used by Climate Bonds for its assessments of ‘climate aligned bonds’: where >75% of revenue isattributed to workstreams that meet our climate aligned criteria, the company (and its bond) is determined tobe ‘strongly aligned’. Where >95% is so attributed, the company (and its bond) is determined to be ‘fullyaligned’).
Some green bond issuers (normally banks) have also taken this approach, with 90% being a commonly accepted
pass threshold. Examples of this include Iceland’s Islandsbanki and Norway’s Sparebank that provide general
corporate purpose loans to issuers deriving 90% of revenues from green business.

2. Setting the boundary of the company
A further complexity in practice is where to set the boundary of a company. This is a non-trivial issue as different
boundary approaches can lead to significant differences in emissions in scope and the strategies to address
them.
Looking at the boundaries of a purely legal entity seems too narrow given how fragmented company structures
can be. But including all companies linked under the same ownership may well be too broad. A logical boundary
for the purpose of setting credible KPIs and transition strategies and plans would be a boundary of operational
control. This can be defined in either financial or operational terms. This seems most logical for transition
planning as the alternative of equity share only reflects economic interests. However, different users might
prefer different boundaries such as equity share for investors and there may need to be flexibility in boundaries
to allow for company disclosure depending on what is most representative.
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Whilst many initiatives refer to the GHG Protocol that was devised from financial reporting standards and offers
either control or equity, others like the ACT initiative prefer the ‘levers of change’ approach that encourages awider accountability for emissions that reaches beyond the company boundary. Further consideration is needed
regarding what that might mean in practice and comments are welcomed.

A last thought – company assessments for UoP bonds
Climate Bonds’ view has always been that UoP stand independently of the issuer. If UoP relate to a wind farm,that wind farm exists and is providing low carbon energy, regardless of other activities of the issuer.
However, we recognise that investors voice strong support for any issuance to be accompanied by a company
level carbon reduction strategy – particularly for transition related UoP bonds, to provide some assurance that
the UoP issuance is part of a wider, credible transition strategy of the issuer.
At present, most investors who materially care about the transition strategy of a company will have their own
models in place to assess whether that company complies with investment preferences and this assessment ismade independently of the UoP of an instrument. Such models are proprietary and require resources including
but not limited to standardised data, and intellectual capital. Investors are repeatedly asking for better
standardisation and consistency of data, greater disclosure, and wider availability to facilitate these assessments.
The proposals outlined in this paper could form the basis of complementary assurance at issuer level. But wesuggest they could be further streamlined for use-of-proceeds bonds. A key element would be for the issuer tooutline the Paris-aligned target setting and plans to deliver that, and how the allocated use of proceeds
contributes to that wider transition strategy (Hallmarks 1 and 2).

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Appendix 1: Transition (UoP) Issuance to dateIssuer nameLabelCountry

Amount USD

Issue dateCadent Gas Limited

Transition

UK

743 m

19-03-21

Castle Peak Power FinanceTransition

HK, China

300 m

03-03-21

Snam

Transition

Italy

606 m

15-02-21

Snam

Transition

Italy

303 m

15-02-21

Bank of China Ltd (Hong Kong)

Transition

HK, China

278 m

14-01-21

Snam

Transition

Italy

667 m

07-12-20

EBRD

Green transition

Supranational

130 m

24-11-20

EBRD

Green transition

Supranational

20 m

20-11-20

EBRD

Green transition

Supranational

56 m

19-10-20

Castle Peak Power FinanceTransition

HK, China

350 m

22-06-20

Snam

Transition

Italy

565 m

17-06-20

Cadent Gas Limited

Transition

UK

567 m

11-03-20

EBRD

Green transition

Supranational

83.8 m13-12-19

Credit Agricole CIBTransition

France110.1 m27-11-19

EBRD

Green transition

Supranational

55.0 m13-11-19

EBRD

Green transition

Supranational

555.7 m17-10-19

Marfrig

Transition

USA

500.0 m06-08-19

Castle Peak Power FinanceTransition

HK, China

500.0 m25-07-1722

Transition finance for transforming companies

Climate Bonds Initiative

Appendix 2: Alignment with existing guidance
We have been fortunate to be able to build upon existing approaches and material on transition and this framework has drawn heavily on the material from the Transition
Pathways Initiative and the Climate Action 100+ benchmark, CDP’s initiatives (Assessing low-Carbon Transition Initiative and Science Based Targets initiative), UN’s Race toZero, ICMA’s SLB Principles and the recommendations of TCFD. Each of these was designed for the purpose of:•••

improving information to investors, orto offer guidance to corporates, orto drive ambitious corporate action.

We have also benefitted from the following approaches where we are aligned in aims, but they are not detailed enough to include here:
Race to Zero 1.5o business playbook - A framework to guide decisions in a company preparing for the transition
TCFD - Recommendations for disclosing climate related information to inform investors understanding of climate risk
ClientEarth Principles for Paris alignment were drafted to bridge the gap between ambition and action. The principles state that a strategy has to be reasonable, transparent
and accountable.
The table below summarises these other frameworks. The shading in the table denotes the degree of alignment between the content of these other frameworks and the
proposals under the Hallmarks described above. Specifically:-

Dark green depicts requirements in other frameworks that are highly aligned to those in these Hallmarks
Light green reflects requirements in other frameworks that are similar to those in these Hallmarks.

Climate Bonds

ACT

SBTI

TPI

CA100+ICMA

CDSB

Hallmarks of acredibletransition by acompany

A framework for assessing acompany’s willingness andability to transition to ensure
making an active contribution
and is transforming.

A framework to guidea company intranslating science
into a target to ensure
it’s ambitious.

A framework by asset
managers to evaluate acompany’s transition
based on publicly
available information

A benchmark. An expression of
investors’ expectations of whatcompanies should be doing set
around 10 indicators

Guidelines thatrecommend
structuring features,
disclosure andreporting.

Sets standardised
format to reportenvironmental
information

C1 scope
C2 Significancethresholds
C3 Greenhouse gases
C8 Level of Ambition
C9 Absolute vs.
intensity
C16 Scope 3 screening

MQ4 GHG reduction
targets

2. Long, medium, and short-termemissions targets

1. Selection of KPIs

Req 4 Sources ofenvironmental
impacts

1. Select appropriate and ambitious targets
Select common
1.1. Select KPI’s
2A Carbon Performance
sector-specificmetricstransition
3B transition roadmap
pathwaySelect aligned
company-specific
KPIs

1.2. Selectalignedcompanyspecific KPIs

2. Establish the enabling environment
Establish strategy 2.1 Establish
to deliver the
strategy to
KPI’s
deliver the KPI’s

Determinefinancing plan
Put in placenecessary
governanceframeworks

2.2 Determine
financing plan
2.3 Put in placenecessary
governanceframeworks

3. Action to set the wheels in motion
Capital
3.1 Capital
expenditure
expenditure
Other actions

Stakeholder
engagement
policy3.2 Otheractions

2B Carbon performanceassessment
4A Carbon performancetargets

1B Maturity of existing
decarbonisation strategy
2C Strategic analysis
3A long term vision

Initial phase performance
module 2 material
investments cover this4B Strategic plan
4C Board commitment
5A Definition
5B Implementation
Initial phase performance
module 9 policy engagement
covers thisInitial phase performance
module 7 supplierengagement covers this
4. Monitoring of performance against targets

Transition finance for transforming companies

Carbon performanceassessment compareswith sector specificbenchmarks

2. Long, medium, and short-termemissions targets

2. Calibration of
Sustainability
Performance Targets(SPTs)

1. Net zero GHG emissions by 2050
5.1 Strategy to meet GHG reduction
targets

8.1 Board oversight of climatechange8.2 Remuneration arrangements
8.3 Board climate related
capabilities/competencies

Req 1 Governance
Req 2 Mgmt
policies, strategy
and targets.

The company is working todecarbonise its capital stock
3. Bond
Characteristics (e.g.
variation of the
coupon)
MQ10 support efforts tomitigate climate change
MQ11 Trade association
MQ19 consistency policy
to trade associations
C20.1 Supplier orcustomer engagementtargets

Climate Bonds Initiative

Req 5 Performanceand comparative
analysis

Also MQ7 Targets for
reducing GHG emissions
and MQ14 LT targets
MQ3 Commitment toaction on climatechange
MQ16 Climate changerisks and opportunity
into strategy
MQ 19 Internal price ofcarbonMQ6 Board oversight
MQ15 Remuneration for
Execs

4C board commitment
3C Board engagement

Supply chain

24

C7 Progress to date
C10 Method validity
Rec 6 Choosing anapproach
C14 Approaches
C21 Requirementsfrom sector specificguidance

7.1 Lobbying position aligned with
Paris Agreement
7.2 Trade association lobbying
consistency and 7.3 Process toensure this

CAPEX/OPEX
expenditure

4.1 CAPEX/OPEX
expenditure

2A Carbon performance
metrics
2B carbon perf assessment
4A Carbon performancetargets

MQ14 targets for
reducing GHG emissions

Other actions

4.2 Otheractions
5. Ongoing reporting and monitoring to evidence compliance with all of the above
Public disclosure
5.1 Public
Rec11 Where toof KPI’s anddisclosure ofdisclosestrategy to
KPI’s andC24 Target validity
deliverstrategy todeliver
Annual reporting
5.2 Annual
5C monitoring
C22 Frequency
on progress
reporting on
progress
Recalculation of
C23 Mandatory target
targets
recalculation
Data validation

25

Transition finance for transforming companies

Climate Bonds Initiative

6.1 Future Capex alignment

6.2 Methodology for aligning capital
expenditures
No – just whether
they’re aligned to thepathway or not

10.1 Support for TCFD
recommendations

10.1 Support for TCFD
recommendations

Req 8 Reporting
policies

4. Reporting

Req 9 Reporting
periodReq 10
Restatements

MQ9 Verification of data

5. Verification