Four elements of the handbook

The Climate Transition Finance Handbook comprises four pillars that aim to give issuers the building blocks to show how they can credibly communicate their alignment with global climate goals when raising funds in debt markets for climate transition-related purposes.

The pillars require a climate transition strategy to be strategic, material, science-based and transparent. Means of disclosure are addressed within each element, and verification is also recommended for the first three.

The first element is an issuer’s climate transition strategy and governance, which encompasses strategic, issuer-level intentionality. The strategy should clearly communicate how the issuer intends to adapt its business model to make a positive contribution to the transition to a low-carbon economy.

Farnam Bidgoli, head of sustainable bonds EMEA at HSBC, said at the handbook launch event that the concept of climate transition finance depends on the credibility of the issuer’s overall commitments and practice when it comes to climate transition.

She added: “There was clear consensus within the working group that climate transition finance should not be marginal to what the issuer is doing but rather should be part of a holistic strategy to adapt the business model to make a positive contribution to the transition to a low-carbon economy.”

According to Bidgoli, the governance aspect of this pillar aims to ensure that, in addition to senior-level oversight of the climate transition strategy, the strategy sits within a broader sustainability approach that mitigates other environmental and social externalities and contributes to sustainable development more broadly.

When it comes to disclosures to investors seeking to assess the credibility of a strategy, the working group points to existing guidance such as the Task Force for Climate-related Financial Disclosures and other frameworks. The handbook also recommends a technical review of a strategy including alignment of long- and short-term targets with the overall scenario and the credibility of the issuer’s strategy to reach the targets.

The second element is business-model environmental materiality. Paul O’Connor, executive director and head of EMEA ESG debt capital markets at J.P. Morgan, said at the launch event: “The idea here is to ensure that, if a transition finance market emerges, it is focused on issuers and industries that could make best use of it. It’s an effort to make sure we don’t have ideas in play that won’t move the needle very far.”

In other words, the focus is on the issuers and industry sectors that have most to contribute to the overall effort to deliver Paris Agreement goals. This element suggests that the climate transition trajectory as far as it relates to financing should be a material factor to the future success of the business model, as opposed to being an incidental aspect.

O’Connor said there are a number of ways to think about materiality – including whether a business’s prospects will be impaired by government intervention to limit carbon emissions, or whether a business is exposed to technology change that would result in demand for a product dropping off as a result of other low- or zero-carbon alternatives becoming available.

Also important, he added, is the extent to which the level of emissions and a company’s overall contribution is significant in the broader context.

“There is a lot of flexibility here,” O’Connor said. “The sectors in play are very different from each other, and the companies within those sectors have different operating contexts. We need maximum flexibility to allow potential issuers of transition finance instruments to talk about materiality in a way that makes sense for them.”

Ultimately, he added, this is all about disclosure and transparency and building a dialogue with investors.

The third element is that a climate-transition strategy should reference science-based targets and transition pathways. Bidgoli explained: “The key takeaway here is that investors expect that a transition trajectory should be quantifiably measurable and benchmarked against science-based trajectories where they exist, and that this should be publicly disclosed and independently verified.”

The handbook recommends that issuers leverage the work that is already happening at the corporate level, using existing frameworks and methodologies, to provide disclosure in this aspect.

The fourth element is implementation transparency. The idea is for issuers to provide transparency over the expenditures that will help them achieve their climate-transition strategy. These could be R&D-related, relevant operating expenditures, or any costs outside business as usual that are incurred to deliver the strategy.

Important here, said O’Connor, is for issuers to give investors an understanding of what proportion of overall financing and capex and opex flows within the business is linked back to the climate transition strategy.

He commented: “We need to see the money behind the strategic intent so investors can be reassured that the flows are happening in a way that is leading to a meaningful scaling.”