Transition bonds: finance houses join transition efforts


Transition bonds are now being used by finance houses to address energy transition. Companies can benefit from these bonds given current and future trends in the sector.

What transition bonds are

With the purpose to achieve zero-carbon emissions and contribute to the battle against global warming, these bonds are assets designed to help companies raise capital.

Assets target “brown-industries” like some within the oil and gas sector. The goal is to ensure those projects will invest in a rapid transformation to a resilient and low-carbon economy.

Possibly of your interest: Finance houses join the rush toward supporting the energy transition

This year, several banks received some criticism regarding inaction towards energy evolution. Asset managers worldwide have been putting pressure on banks to conditionate their credits to oil and gas polluting companies.

Now, banks must take action, and some of them already started to scrutinize climate change risks, previously under-appreciated. Globally, finance houses are asking companies to accelerate their transformation strategies.

However, some efforts have received “greenwash” accusing statements from companies. While it is easy for some companies to issue green bonds, other energy producers may not meet easily those criteria.

That is why regulation seems crucial for future actions in this regard.

The opportunities

The Paris Agreement establishes a goal to limit global warming increases to no more than 2 centigrade degrees annually. Some companies will need to double or triple their clean energy investments to address such numbers.

In that sense, the energy transition represents a significant opportunity for banks.

According to the global agreement, the world needs to invest $14 trillion over the next 30 years in clean, sustainable, and renewable energy to meet the net-zero carbon emissions target.

That is why fifty financial and environmental organizations gathered last year to form a climate transition financing workgroup.

The Climate Bonds Initiative will set a common legal framework for transition bonds. This initiative seeks to make those assets credible and reliable for international companies to comply with.

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For instance, mostly European banks have started to use their bonds with oil and gas projects. Also, some of them began to include cleaner energy programs and investments in their portfolios; BBVA, BNP, Paribas, ING, Société Générale, and Standard Chartered are some examples.  

The Italian group, Enel, also issued a transition bond in September this year. This asset stipulates penalties for the company if cleaner energy goals are not reached. What these actions mark are a precedent and the next step in transition debt finance.

Another way banks are increasing energy transition participation is through Special Purpose Acquisition Companies (Spacs), also known as blank cheque companies. These firms are especially devoted to providing brown industries tools to deploy their energy transformation strategies.

Source: information from an original news story by Financial Times.

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