Opening transition pathways

KangaNews talks to Yo Takatsuki, head of ESG research at AXA Investment Managers (AXA IM) in London, about the ground-breaking guidelines for transition bonds his firm published in June 2019. Takatsuki was instrumental in formulating the guidelines. He shares his insights into the urgency of opening up the transition pathway so carbon-intensive industries are encouraged to work towards aligning with the Paris Agreement.

Why does AXA IM think transition bonds are important?

The first and foremost consideration we have as a large provider of capital to industry, governments and markets generally is the role we can play in achieving the Paris Agreement goals.

Over the last few years, we have been directing capital away from some areas – such as coal and power plants – and investing it into green assets. We have done this on behalf of our parent insurance entity, AXA Group, as well as third-party clients including Australian super funds.

We think this will continue and it’s important as a strong signal we can send to the market. For example, we currently have around €5.5 billion (US$6.1 billion) invested in green bonds. The credibility and robustness of green bonds is important. However, we cannot get away from the fact that 10 years into this market, although it has grown a lot, it has largely been limited to supranational, sovereign and agency (SSA) issuers, commercial banks and electricity utilities in Europe and North America.

What we haven’t seen in the green-bond market is what I would call the bulk of the real-world economy. The 20th-century post-war economy has been built on heavy industry and manufacturing. When we talk about the challenge of achieving the Paris Agreement goals, it’s these areas that we need to transition. They include carbon-intensive industries such as chemicals, manufacturing, cement, real estate, and car transport, as well as the extractives companies themselves, which provide the supply side.

We felt something needed to be provoked, to change, to ensure that these companies could be encouraged and motivated to go down the path of meeting the Paris Agreement goals. This is what is called the transition pathway. One of the tools we think will help in the fixed-income space is transition bonds.

It’s interesting that it was an asset manager that came up with the guidelines.

We felt that with transition bonds, investment banks would be conflicted in trying to publish guidelines, while a single issuer never carries the breadth of the market as issuers can be quite narrow in their views. A not-for-profit or second-party opinion provider doesn’t carry the weight necessary to publish guidelines.

There are really only two groups that could feasibly and credibly publish guidelines. One is regulatory bodies such as the Bank of England. But it’s unlikely they would want to be prescriptive about exactly how it’s done. The other is a large global asset manager like AXA IM, which is a holder of securities in the entire global economy.

We felt it was our responsibility to add to the debate in moving forward the push to corporate decarbonisation.

Another option would have been a body like the International Capital Market Association (ICMA), which has already published green and social bond principles as well as sustainability-bond guidelines.

AXA IM sits on the ICMA Green Bond Principles (GBP) executive committee, which is composed of eight investors, eight green advisory investment banks and eight green-bond issuers. Together, we have made a commitment to oversee and guide the future of the market.

AXA IM published the guidelines not as the final picture but as a way to provoke discussion. We know for such a thing to become a market reality we need a broad cohort of participants to agree on the common language and guidelines that will be the basis for issuers to come to market with transition bonds.

I’ve spent a lot of time the last four months working with ICMA. A working group has been set up, called the Climate Transition Finance Working Group. AXA IM is a co-chair, alongside HSBC and J.P. Morgan. Terms of reference for transition bonds have been published on the ICMA GBP website.

We are now working out who will participate in the group – I’ve had more than 50 applications from a wide range of stakeholders. You can tell this is a big area of interest.

“What we haven’t seen in the green-bond market is what I would call the bulk of the real-world economy. The 20th-century post-war economy has been built on heavy industry and manufacturing. When we talk about the challenge of achieving the Paris Agreement goals, it’s these industries that we need to transition.”

At the ICMA annual conference in June 2019, the idea was raised that with so many types of thematic bonds, the market may be becoming too complex. Do we really need another label for transition bonds or are they just another form of green bond?

The issue of having one more label is very low down the pecking order in my considerations. We already operate in a complicated and jargon-ridden financial market. What we need to be thinking about are the ways in which we can achieve the greater end.

We believe transition bonds are a way to do this. Others may disagree. But to me this is not an issue of simply asking whether we need another label. If others don’t want to have labels, they are welcome to participate in the ICMA working group and make their point. The working group is there for this – to make sure there are no unilateral decisions.

How do you measure transition?

This is an area where there has been a lot of debate thus far. My view is that our role is not to define transition. There are already credible, science-based institutions out there – like the Science-Based Targets Initiative and the Transition Pathway Initiative. There is also the work the Institutional Investors Group on Climate Change (IIGCC) has done around Climate Action 100+. All these have looked at the concept of climate transition for carbon-intensive industries.

One of the important tasks of the ICMA working group is to make sure the other bodies’ work and input is reflected in what we do.

We will take expert knowledge, developed, refined and resourced elsewhere, and then work out how this applies within the context of fixed income, firstly, and then within the context of use-of-proceeds bonds. There will be a lot of scrutiny of issuers’ practices around climate strategy and climate performance.

There seems to be another kind of transition happening – from use-of-proceeds product to looking at issuers’ overall sustainability performance. From what you’re saying, a transition bond crosses both these concepts – it involves use of proceeds but there’s also an assessment at the issuer level.

That’s right. The green bond is quite an ingenius structure in that one of its achievements has been significantly to improve investors’ expectations around transparency and commitment from a bond issuer. There’s an accountability element to these bonds that didn’t exist in the fixed-income market before.

The use-of-proceeds tool is focused on specific issuance. The broader activities of a corporation will not necessarily hinder investment in the bond. Although some investors – AXA IM included – do quite a lot of issuer-level homework on the green bonds they buy, in general nothing is stopping the world’s most polluting company with a large green-assets base from issuing a green bond.

I describe the nuanced difference between green and transition bonds as follows. Say I said to you I’m not fit and I really need to do some exercise so I’ll run five kilometres a week. Then I asked that every time I did this, you gave me 10 dollars. You would probably say this sounds reasonable, as it would be good for my health. This is like a green bond.

For transition bonds, there’s a slightly different nuance. Imagine I said to you I’m really unfit so I’m going to run one kilometre a week, can you give me 10 dollars each time I run? You would probably say you didn’t think that was sufficient. But what if I said in three years’ time I would be running a marathon and in two years’ time I’ll run a half-marathon? It’s just that today, because I’ve done no exercise for many years, I can do only one kilometre. You might then be inclined to sponsor me.

What counts in the story of transition is the long-term ambition to decarbonisation, with interim targets in place to contextualise the progress. As a result, the issuer-level information that gives context and colour, meaning, direction and commitment to the specific activities being financed is increasingly important.

The good thing is that considerably important developments have happened in the last couple of years to facilitate this. One example is the establishment and rollout of the Task Force for Climate-related Financial Disclosures (TCFD). With this, we have specific language and a framework for thinking about climate disclosure. There are now expectations around governance and understanding the risks to a business. Companies are already grappling with these issues and investors are increasingly wanting to see this happen.

A lot of the work of Climate Action 100+ is trying to get companies to commit to and publicly support the TCFD framework so they start reporting against it.

We want to make sure the work we are doing in this pocket of the fixed-income market is consistent with the broader objectives investors have in trying to help achieve the Paris Agreement goals.

Like the GBP, AXA IM guidelines on transition bonds have four core components – use of proceeds, process for project evaluation and selection, management of proceeds and reporting. Transparency and disclosure are obviously key elements. ICMA has analysed transparency and disclosure for green and social bonds. How will these be assessed and verified for transition bonds?

One of the conversations I’ve been having with companies and investment banks is around the iteration that is likely to happen in the transition-bond market. If you look back at the evolution of green bonds, for example, the early bonds were nothing like the products we are seeing in the market today.

The same thing needs to happen with transition bonds – it will be an iterative process to get all the elements in place. The answer cannot just be AXA IM saying what a transition bond is, how to measure transition and what transparency and disclosure are required. At some point, we will start to have large, public issuance of what we consider to be transition bonds – and other market participants might take a different view.

Through this natural, iterative process of the market’s response, the concept of transition bonds will be refined. No amount of theorising and writing down on paper will be a replacement for the market actually happening.

“Those that come into the market early are pioneers. They will benefit from the pioneering spirit but on the other hand there will be more scrutiny on these deals. Issuers’ internal narrative about climate alignment and what it means to help achieve the Paris Agreement goals has to be resolved before they look at this type of product.”


In this context, you must be delighted with the Crédit Agricole transition bond issued on 27 November. The 10-year €100 million (US$111 million) bond was issued as a private placement subscribed by AXA IM and is the first bond to be issued under the AXA IM transition-bond guidelines.

Yes. We have been working with Crédit Agricole since the summer. Our idea was to work on a private placement that would be a proof of concept for transition bonds. We approached Crédit Agricole because it is a leading bank in the green-bond space and we have a high level of respect for the bank, we value its expertise in this market.

Why did you choose a bank that already issues green bonds rather than a company that is transitioning from brown to green?

We are having these conversations with corporates. But sometimes it takes a bit of time for issuers to get their internal work in place to be able to issue labelled bonds. In this test-case scenario, we were working to a tight timeline.

When we spoke to a handful of corporates about this, some didn’t have funding needs, others wanted to wait and see how the market develops and still others said they were supportive of the idea but the challenge was meeting the deadline.

Now that we are not time-limited, we are talking to a lot of issuers and investment banks to encourage them to look into issuing transition bonds. I’m hoping we will start to see more of these deals in 2020.

What were the main challenges and lessons from working with Crédit Agricole on the transition bond?

Those that come into the market early are pioneers. They will benefit from the pioneering spirit but on the other hand there will be more scrutiny on these deals. I would say issuers’ internal narrative about climate alignment and what it means to help achieve the Paris Agreement goals has to be resolved before they look at this type of product.

If an issuer wants to come to market we are here to support and partner with them in the journey to transition. We believe this is the most important way for all of us as a society to reduce the temperature we’re headed for – we want to keep it to an increase of no more than 1.5 degrees. But first, every individual corporate issuer needs to set its narrative around climate change.

In other words, a company-wide focus on climate change can no longer be just a nice-to-have.

Yes. This is not an issue of specific deals. They are only the small detail. What we want is a mindset change. That’s the paradigm shift governments, corporations and investors are going through.

I would add that there’s a genuine need for urgency so we can’t park this paradigm shift. We all have to challenge one another in a positive, constructive way to do this together.