Climate transition finance and sovereign SLBs the main focus of The Principles update

The Climate Transition Finance Handbook was launched in 2020 to give guidance to issuers on a trajectory to reduce greenhouse gas (GHG) emissions on how they could credibly issue sustainability themed bonds. The 2023 update acknowledges that there have been some use-of-proceeds (UOP) transition labelled bonds. However, rather than push for more labelled transition bond issuance, it encourages issuers to reference the handbook to communicate their GHG emissions reduction strategy when issuing green, sustainability or sustainability-linked bonds.

Nicolas Pfaff, deputy chief executive and head of sustainable finance at the International Capital Market Association, explains: “We accept that transition can be a sub label – like a blue bond or a gender bond. It is fine to label a UOP bond which is focused on transition projects as a transition bond. However, when you get to transition as a trajectory, particularly for companies in hard-to-abate sectors, this is where sustainability-linked bonds (SLBs) are at their best. So we prefer to look at transition as a theme which can be attached to a green, sustainability or sustainability-linked bond by referencing the handbook and aligning with its elements.”

In this way, the handbook can be referenced to complement any bond covered by the Principles and the rigour they bring to transactions. As Isabelle Laurent, deputy treasurer at European Bank for Reconstruction and Development and chair of the Principles, says: “At the Principles, we think in terms of the level of ambition and robustness, irrespective of what your starting point is. Referencing the handbook in a green, sustainability or sustainability-linked bond will reinforce its credibility – it will result in credible, ambitious and robust transactions.”

She adds that this is especially important for companies in high-emitting sectors, which may be sitting on the sidelines of the sustainable bond market due to concerns about greenwashing. “We feel the more guidance we can offer, the easier it is to encourage these companies in – and it is vital to get them on board if we are to meet the Paris Agreement objectives.”

The Sustainability-Linked Bond Principles have been modified to make it easier for sovereign issuers to issue SLBs. In addition, an updated KPI registry has been published, with new metrics for sovereigns and social issues.

To date, only two sovereigns have issued SLBs – Uruguay and Chile. There are inherent challenges for sovereigns issuing in this format – such as what penalty to apply if KPIs are not met and the difficulty of binding future governments to long-term commitments made by their predecessors.

But, as Laurent says: “The market has responded well to the two sovereign SLBs. SLBs can be a very meaningful mechanism for many sovereigns – including those from emerging markets. The fact that a UOP element can be built into the SLB structure could also appeal to those sovereigns that want to highlight their overarching sustainability strategies in addition to their sustainability projects.”

Two key revisions were announced for the Social Bond Principles (SBPs). First, the Principles have clarified that the need to identify the target population for a social bond is a core requirement. Secondly, reference to “just transition” has been introduced to all documents referenced by the SBPs.

The Principles have also published additional Q&As for green, social and sustainability bond securitisation. In addition, there are updates to the core recommendations for impact reporting for green bonds, and impact reporting metrics for energy efficiency and renewable energy. Finally, there is a revised mapping to the Sustainable Development Goals, as well as updated issuer information templates and external review forms.