He adds that it became apparent in the wake of COP28 that there are complicated conversations to be had about financing fossil fuel companies and those in other hard-to-abate sectors. “The simple message is that the sustainable bond market has nailed the financing of climate transition at scale for renewables, green transportation and buildings. What we need to do now is resolve how an issuer from the fossil fuel sector or the hard-to-abate industries can come to market with something that today is not sustainable, but at the same time has a credible transition trajectory,” says Pfaff.

The ICMA paper offers a way for these companies to start the conversation. It calls on them to voluntarily adopt transition plans aligned with frameworks such as the Principles’ Climate Transition Finance Handbook, the International Sustainability Standards Board’s Sustainability Standard 2 and the European Sustainability Reporting Standard 1.

The paper summarises a transition plan as an entity-level, forward-looking disclosure on decarbonisation ambition, targets, actions, means, and financial and other resources that are of strategic nature and supported by effective climate governance. It also defines three types of transition (see box).

Özgür Altun, associate director, sustainable finance at ICMA in Paris, says this kind of plan “gives the most confidence to investors because it offers a forward-looking path to decarbonisation”. In this sense, he adds: “Having a transition plan offers assurance against carbon lock-in risk because the plan offers a promise that goes beyond the life of a bond.”

A credible transition plan aligned to existing frameworks is much more than “a nice thought piece that outlines a strategy”, Altun continues. “One of the things that makes a transition plan particularly substantial is that there is a commitment to set apart the opex and capex a company has promised to invest for its decarbonisation. In this sense, a transition plan is an investment plan – which makes it very substantial and concrete from investors’ perspective.”

Although the concept of transition plans has been discussed for some time – for example, they are mentioned in many standards and frameworks – right now there is no mandatory requirement for a company to put one in place. Nevertheless, the ICMA report urges companies in hard-to-abate sectors to start work on creating credible and aligned transition plans – for a number of reasons.

First, as Altun explains, the ICMA report identifies three initiatives that lead the association to believe transition plans will become mandatory before long. The first is the EU’s corporate sustainability due diligence directive, which, Altun says, may oblige certain large companies to adopt a transition plan.

“Second, under the umbrella of the Glasgow Financial Alliance for Net Zero, some financial institutions are already voluntarily adopting transition plans,” he continues. “We expect this will end up creating pressure on the real economy due to the focus on financed emissions. Finally, we believe in a market dynamic created via disclosure on the asset management side that will push investees to adopt transition plans where climate risks are material.”

There is more to it than responding to what is coming, though. As Pfaff says: “It is clear from COP28 that progress on financing hard-to-abate and fossil fuel transition has been limited, and there is a risk of reaching a stalemate. However, if these industries take voluntary steps in anticipation of mandatory requirements to develop credible transition plans integrating all the great market and official advice that is out there, they have the reference points to start a constructive and fruitful conversation with the capital markets.”

One of the key value propositions of the new ICMA report is the way it clearly explains many of the global initiatives Pfaff refers to. He continues: “We can no longer pretend we don’t know how to finance hard-to-abate transition. Backed up by all the experience we have had in the development of the sustainable bond market, we are saying voluntary early adoption of transition plans is a much better way to go than waiting for them to be required by regulation.”

The paper focuses on the bond market as ICMA believes this will be the main source of finance for the transition “I found it very striking to see, from COP28, the extent to which finance at scale is not being mobilised by the official sector,” Pfaff comments. “When considering where we will get the money to finance transition, the debt capital market is your best bet.”

A transition plan also goes a long way to allaying fears of reputational risk, Pfaff adds. “One thing that can paralyse an issuer in the fossil fuel or hard-to-abate sectors is greenwashing risk. We are saying to these issuers, develop a credible transition plan – it gives you a solid foundation for an intelligent, informed conversation with all your stakeholders. I would go so far as to say that having a transition plan is now simply good governance.”

In addition, having an integrated transition plan offers access to other sources of funding. Pfaff explains: “The beauty of a transition plan is it can be used to talk to sustainable bond investors as well as equity investors and bank creditors. You don’t need a different plan for each of these.”

It is also ICMA’s hope that transition plans will kick-start the struggling sustainability-linked bond market – generally viewed as the most suitable instrument to finance transition trajectories (see box).

Click here to download a copy of ICMA’s Transition Finance in the Debt Capital Market report: https://www.icmagroup.org/News/news-in-brief/icma-publishes-a-new-paper-on-transition-finance-in-the-debt-capital-market/