Issuer-level strategy the focus for climate transition

The focus on issuer-level guidance rather than instrument-based principles is a clear difference from the GBPs, SBPs, sustainability bond guidelines (SBGs) and sustainability-linked bond principles (SLBPs).

The GBPs, SBPs and SBGs provide principles and guidelines for use-of-proceeds (UOP) bond instruments. The SLBPs, introduced in June 2020, cover bonds issued for general corporate purposes but which have their coupons linked to sustainability performance. This marked an awareness by the GBP SBP that issuer-level strategy is becoming the most important factor for investors.

The SLPBs also introduced the concept that targets need to be core and material to a company’s operations, as well as ambitious. The Climate Transition Finance Handbook takes this to another level: it is a thematic overlay focusing on issuers’ climate transition strategies to complement the issuance of any instrument, whether UOP or for general corporate purposes, to fund climate transition.

Adam Matthews, London-based director, investment team – ethics and engagement at the Church of England Pensions Board and co-chair of the Transition Pathway Initiative, said at the handbook launch event that it represents the GBP SBP building the architecture for the capital markets to play their role in supporting transitions.

“Companies are starting to detail how they can get from where they are today to alignment with the goals of the Paris Agreement. Key to achieving this will be the ability to access finance that can enable the transition to happen at pace in a credible, transparent way that is consistent with those goals,” Matthews commented.

While the guidelines can be used by any issuer, the focus is clearly on hard-to-abate sectors. Denise Odaro, head of investor relations at International Finance Corporation in Washington and chair of the GBP SBP executive committee, explains: “To achieve the global goal of net zero by 2050 we need to beckon to the high-emitting sectors to partake in transition. This handbook offers the bridge for these hard-to-abate sectors to credibly access green, social and sustainability [GSS] bond financing, to enable them to take the steps needed to arrive at our overall objective of meeting Paris Agreement goals.”

Paris goals are the ultimate aim and thus also the starting point for the Climate Transition Finance Working Group. Yo Takatsuki, head of ESG research and active ownership at AXA Investment Managers in London and working-group co-chair, said at the pre-launch press conference: “There was a very strong feeling within the working-group members that achieving the Paris Agreement is the most important goal of all. We are not talking about business-as-usual decarbonisation.”

Using the handbook’s guidelines to frame bond issuance implies a more strategic direction for issuers. As such, compliance may prove to be more onerous even than issuing a use-of-proceeds product like a GSS bond, if an issuer does not already have a transition strategy in place.

The handbook recognises that issuers may be effectively starting from scratch, either due to constraints within their industry or because they are making a new commitment to transition.

Robert White, executive director, head of green and sustainable hub - Americas at Natixis in New York, said at the pre-launch press conference: “The guidelines have been written to support issuers at various points in their transition journey, but it’s on a best-efforts basis. At the very least, issuers need to be able to articulate to the market how they are progressing against each of the recommended elements. It’s a way for issuers to signpost how they are developing plans to expand or enhance their transition strategies.”

The handbook also aims to ensure that issuers can make use of existing frameworks, methodologies and reporting documents. Farnam Bidgoli, head of sustainable bonds, EMEA at HSBC in London, explained at the launch event: “The handbook is meant to incorporate a view on what is happening globally and ensure that we are aligned with other recommendations. It is not to duplicate work or add to reporting requirements but rather to clarify and highlight what is critical for debt issuance when it comes to climate transition finance.”

Paris Agreement goals cannot be achieved without high-emitting sectors joining the climate transition journey. But not all companies in these sectors have green or social assets to fund with UOP bonds. Even if they do – or if they consider SLBs – there are reputational risks to consider given the heightened public scrutiny such issuers face.

These are the companies and sectors that most need access to sustainable funding if they commit to climate transition, though – because adapting entire business models typically requires substantial capex and possibly also opex commitments.

The Climate Transition Finance Working Group recognised the barrier to entry. The four elements in the handbook (see box) show issuers how they can position their debt issuance within a transparent and science-based climate transition strategy.

Using the tools in the handbook, which emphasise engagement, transparency and disclosure, issuers should be able to develop confidence to access sustainable financing credibly and without fear of reputational risk or accusations of greenwashing.

The handbook also acknowledges other challenges for companies in hard-to-abate sectors. In particular, these include variation between companies within a sector and the limits on individual entities’ ability to move the dial – constraints can be imposed by external factors such as regulation and policy.

Dialogue and transparency are key in helping investors understand what a company is doing and the constraints it is operating within. The handbook aims to provide a bridge for issuers in high-emitting sectors to engage with investors via a common language to articulate transition strategy.

Takatsuki said at the launch event: “Dialogue is crucial. What investors are looking to see is a willingness to take the first step. This leads to something meaningful, ambitious and aligned to the Paris Agreement.”

Johannes Böhm, ESG analyst at Union Investment in Frankfurt, added: “Determining the shade of green of a particular transaction comes down to taking a deep dive together with the issuer. When you engage in dialogue, this is the point when you get an honest sense of how ambitious and credible the issuer is in tackling its own transformation toward a more sustainable business model.”

By focusing on communicating issuer-level strategy to investors, the authors of the handbook recognise that sophisticated investors are looking beyond labels. As Matthews said: “If you are in a hard-to-abate sector, whatever label of bond you issue, you need to demonstrate this kind of information.”

As such, the handbook focuses on the outcome of achieving the Paris Agreement goals and credibility by aligning with climate science. Takatsuki explained: “Labelling is how you signal to the market and wider stakeholders how you are aligning with end outcomes and the credibility around it.”

The working group was therefore happy to leave the label or choice of debt instrument to issuers and the investors to decide. As Paul O’Connor, executive director and head of EMEA ESG debt capital markets at J.P. Morgan in London, said at the launch event: ‘It’s up to the issuer to build a rationale and construct a case to use that label, and it’s up to the investor to accept it. The handbook is all about the music being played, not about the instrument or the orchestra. If the music is right, we will make progress.”

The focus on the overarching theme of climate transition also enables issuers to incorporate broader concepts into their transition strategies and debt issuance. The handbook’s third element introduces the concept of just transition, for example.

As White said: “This is issuer-level guidance so the issuer may not just be issuing a green bond or a SLB. It could be doing a sustainability bond that also incorporates social-bond elements.”

He explained that an issuer can deploy various levers to achieve its climate transition strategy. For issuers in certain sectors – especially greenhouse-gas-intensive sectors –rapid decarbonisation can have material social impact, including on employees. “Providing guidance on any investment or expenditures related to just transition is very helpful in this context, and it is also tied into a number of the Sustainable Development Goals,” said White.

Deploying the concept of a just transition enables issuers to make transition as painless as possible, if not positive. O’Connor explained: “In the oil and gas sector, for example, companies can look at skills transferability into the hydrogen economy. It’s not just a question of shutting down stranded assets and walking away – that is the worst outcome for everyone. It’s about retraining and support. These transitions are not without opportunities if approached in a thoughtful way.”