Sustainalytics

Sustainable Finance Solutions
Transition Bond Second-Party Opinions
Introduction toTransition

Use-of-Proceeds
and Benefits ofTransition Bonds

Our Approach toAssess Transition
Bond Frameworks

Sustainalytics
Overview

Introduction to Transition
The green bond market has seen major growth in recent years. There is, however, a strong recognition that
achieving international climate goals will require significant reduction of GHG emissions from carbon-intensive
industrial activities that to date have not been the focus of green finance and for which low-carbon solutions are
generally not yet available at scale due to major technological and/or systemic barriers. Those are commonlyreferred to as transition sectors.
According to climate models, achieving climate change mitigation
ambitions as outlined in the Paris Agreement requires a global
decarbonization by 2050.1 Achieving low-carbon production
over time will require significant amounts of capital for thetransition sectors to develop technologies and modify production
processes. An increasing number of financial institutions,
regulatory and industry initiatives are focusing on the inclusionof carbon-intensive industries in the sustainable finance market
with the aim of helping to incentivize their decarbonization.

While international climate goals are defined at the level ofthe economy as a whole, achieving climate goals requires thedecarbonization at the level of economic activities. Due to a
distinct set of challenges and barriers faced by each economicactivity, the transition pathway differs across different industries– from steel production to cement production to shipping, among
other areas. Major international organizations such as theInternational Energy Agency and the Intergovernmental Panel on
Climate Change (IPCC) have carried out extensive research andanalysis to map out pathways for various industries that arealigned with the overarching goals of the Paris Agreement.

Transition through Use-of-Proceeds Bonds
The sustainable finance market has seen several initiatives emerge that speak to transition finance, such as the Transition Pathway
Initiative and the Science Based Targets Initiative, under which a growing number of companies are setting emission reduction targets
and reporting on their progress. The International Capital Market Association (ICMA) has established a Transition Finance Working Group,and the EU Taxonomy explicitly classifies some activities as transition activities.
Use-of-proceeds bonds are emerging as an important instrument to finance transition activities and projects. When supported by clear
eligibility criteria and a credible transition strategy, transition bonds can facilitate a shift of a company´s business activities along atransition pathway compatible with long-term climate goals.

Investor diversification
for sectors that havetraditionally been excluded
from the green bond market
but have a key role to play inaddressing climate change

Reinforce yoursustainability strategy
through commitments
to investors

KEY BENEFITSFOR ISSUERS
OF TRANSITIONBONDS

Enhance visibility ofyour bond, company andsustainability activities

1 IPCC 2019: https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_Summary_Volume_Low_Res.pdf

Increase investor dialogue andengagement that facilitates a better
understanding of your businessOur Approach to Assessing Transition Bond Frameworks“Transition” can be considered at the level of whole economies, sectors, companies, or the individual economic activities that they carryout. When it comes to use-of-proceeds bonds, however, it is at the level of activities that transition operates. Sustainalytics’ approach,therefore, focuses on transition as the decarbonization of economic activities along emissions-reduction pathways that are consistent
with the economy-level goal of net-zero carbon by 2050.
Evaluating the alignment and credibility of a transition bond framework requires an assessment of both issuance-level considerations
and issuer-level considerations. Our issuance-level assessment relies on Sustainalytics’ own transition taxonomy, which defines sectorspecific eligibility criteria that are grounded in international science-based targets. Given that the transition of many industrial activities
will occur over decades, Sustainalytics’ framework assessment also gives importance to an issuer’s long-term transition strategy.

ISSUANCE-LEVELCONSIDERATIONSISSUER-LEVELCONSIDERATIONSa) Use of proceeds: Alignment of financed
business activities and projects with
Sustainalytics’ transition eligibility criteriaa) Alignment of the issuer’s transition strategy
and commitments with internationallyestablished decarbonization pathwaysb) Project evaluation and selectionb) Alignment of the use of proceeds with theissuer’s strategy and implementation planc) Management of proceedsd) Allocation and impact reporting

SPO-Key Benefits
An SPO demonstrates the credibility of the use-of-proceed bond and is required by many investors in the sustainable financemarket. It provides potential investors with assurance that the use of proceeds, as set out in the framework, are aligned to market
practices and expectations.

Independent Opinion thatprovides additional
assurance to investors

Support issuers in positioning
themselves favorably in the market
and widen their investor based

Align with market
best practices

Why Sustainalytics

25 YEARSof developing innovative solutions

35% MARKET SHARE
on sustainable bonds in 2019*

600of the world’s leading asset
managers and pension funds

Awards* Source: Environmental finance: Sustainable Bonds Insight 2020

Are you interested in learning about how a Second-Party
Opinion can support your transition strategy?
Contact us today to connect with our team of experts.

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The information, methodologies, data and opinions contained or reflected herein are proprietary of Sustainalytics and/or its third parties suppliers (Third Party Data), and may be made available to third parties only in the form andformat disclosed by Sustainalytics, or provided that appropriate citation and acknowledgement is ensured. They are provided for informational purposes only and (1) do not constitute investment advice; (2) cannot be interpreted as anoffer or indication to buy or sell securities, to select a project or make any kind of business transactions; (3) do not represent an assessment of the issuer’s economic performance, financial obligations nor of its creditworthiness.
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