Financing brown to green: Guidelines for Transition Bonds

  • 03 July 2021 (5 min read)

Financing the fight against climate change needs to shift up a gear and evolve. Since the introduction of green bonds, capital markets have made great strides in recent years to ensure that investment capital can fund projects mitigating global warming. But this is not enough – more needs to be done.  

At AXA Investment Managers, we are aiming to do more – we are calling for the establishment of a new type of bond, distinct from green bonds, which we are calling “transition bonds”.

While green bonds are intended for issuers to use the proceeds to finance environmentally-friendly projects, we see a significant gap where investors could step in and deliver real impact for companies which are not yet at this stage.

There is an opportunity to provide finance to companies, which are ‘brown’ today but have the ambition to transition to green in future. This includes firms that are not able to issue green bonds today, due to a lack of sufficiently green projects for which they can possibly use bond proceeds.

Transition bonds are intended to provide financing for such companies i.e. most businesses in the world today. We believe that this new form of financing can play a vital role in supporting the transition to a low-carbon society.

The guidelines that we set out here are not the finished article but are intended to kick-start a dialogue between issuers, investment banks, investors, policy makers and wider stakeholders.

We want to be at the centre of this dialogue and welcome your views. These guidelines represent part of our effort, to take the lead in establishing a new market for transition finance.

Transition: The journey to change

Climate transition is built on the premise that shifting our energy mix away from what we have today, to what is needed to limit global warming to the ‘1.5-degree world’ – will take incremental steps, and time.

The Intergovernmental Panel on Climate Change has stated that to reach a 1.5-degree world, the average investment in the energy system needs to be around $2.4trillion per year between 2016 and 2035, representing around 2.5% of global GDP. 

By 2050, annual investment in low-carbon energy technologies and energy efficiency needs to be increased by roughly a factor of five from today.

In the electricity generation sector for example, fossil fuels must decline, and clean renewable sources need to increase in the overall balance.

In the International Energy Agency’s (IEA) Sustainable Development scenario – an accelerated clean energy transition plan which will put the world on track to meet goals related to climate change – universal access and clean air – global demand for coal needs to fall by more than 50% by 2040.

As a result, the share of fossil fuels in electricity generation should drop from nearly 40% today to less than 10% in 2040.

In our view transition bonds are intended for companies which are:

  • in greenhouse gas-intensive industries such as materials, extractives, chemicals and transportation
  • in industries which currently do not (and for the foreseeable future may not) have sufficient green assets to finance but do have financing needs to reduce their greenhouse gas footprint of their business activities, as well as their products and services

Transition bonds defined

Transition Bonds are any type of bond instrument where the proceeds will be exclusively used to fully, or partly finance, or refinance new and/or existing eligible transition projects, and which are aligned with the Transition Bond Guidelines.

We are calling for a high level of transparency and propose following the same structure as existing approaches to Green Bonds Principles, Social Bonds Principles and Sustainability Bonds Guidelines. Our transition bond approach is framed around the four core components of:

  1. Use of proceeds
  2. Process for project evaluation and selection
  3. Management of proceeds
  4. Reporting

Use of proceeds

Transition bonds’ key characteristic is that the proceeds raised are used to finance projects within pre-defined climate transition-related activities. The eligible Transition Project categories include, but are not limited to:


  • Cogeneration plants (Gas powered combine heat and power (CHP))
  • Carbon Capture Storage
  • Gas transport infrastructure which can be switched to lower carbon intensity fuels
  • Coal-to-gas fuel switch in defined geographical areas, with defined carbon avoidance performance
  • Waste-to-energy


  • Gas powered ships
  • Aircraft alternative fuels


  • Cement, metals or glass energy efficiency investments – such as to reduce clinker ratio, use of recycled raw materials, smelting reduction and higher recycling

Process for project evaluation and selection

Transition bond issuers should give investors a clear description of the eligible assets, the eligibility criteria and the asset selection process. They should explain why these projects are important to finance from the perspective of commercial transformation and climate transition. We encourage detail on the projects’ environmental objectives, alongside expected outcomes and impacts.

They should also consider whether these projects could lead to negative externalities which may harm other environmental and societal aims, such as those described in the United Nations Sustainable Development Goals.

Management of proceeds

The issuer should have sufficient guarantees in place to ensure the proceeds are effectively allocated to the eligible projects. This means the net proceeds of a transition bond should be tracked in a formal internal process, once the transition bond is outstanding, with the method verified by external audit.

Reporting requirements and key measures of impacts

Transparency is critical to investors. Issuers should prepare and maintain readily available and up-to-date information on the use of proceeds as well as informing investors of any material changes. Regular and comparable reporting on the environmental performances and outcomes of the financed projects is important.

Detailed impact assessments are good practice and we increasingly consider this type of reporting as necessary to our assessments and analysis. It allows us to measure and report on the environmental performance and impact of our portfolios. We also consider it evidence of a company’s capability in understanding the positive impact of its commercial activities on society and the environment. In this regard, we would ask transition bond issuers to publicly report:

The proportion of financing vs. re-financing

The projects to which proceeds have been allocated (and if relevant the remaining unallocated proceeds) with the amounts allocated to each project

The projects’ estimated environmental and social performance and impact with appropriate indicators. We encourage issuers to use the indicators developed by the Green Bond Principles notably through its Impact Reporting Working Group. Explanation of the underlying methodology to assess impact is welcome. The indicator should be provided at an aggregated level and where possible also reported as per million euros invested in the bond for investors to directly calculate the impact of its investment. For example, this can include measures such as:

  • avoiding greenhouse gas emissions. This should be considered in line with the IEA’s pathway for a CO2 emissions trajectory to limit the average global temperature increase to 2°C, known as the ‘2°C scenario’.
  • energy efficiency gains for industrial activities which consume a lot of power
  • improvements in availability and access to cleaner energy
  • reduction in the use of natural resources such as water and food commodities
  • increasing resilience of operations to climate change including reductions in production or supply chain disruptions

We encourage issuers to externally certify this information via an external audit and to publish this information in their annual report.

Issuer’s sustainability strategy

Alongside the issuance-level components, we also want to establish clear expectations on the issuer’s broader environmental strategy and practices. This is an additional component not currently explicit within the Green Bond Principles but which many leading investors in the market – such as AXA IM – are already actively considering when assessing green bonds for investment1 . We believe the consideration of issuer-level practices is particularly important to legitimise transition bonds as an environmental investment.

Transition bond issuers should clearly communicate what climate transition means in the context of their current business model and their future strategic direction. Senior management and board directors should make a commitment to align their business with meeting the COP21 Paris Agreement goals.

The issuer’s transition strategies should be intentional, material to the business and measurable. The Transition Bond must fit into the broader transition strategy. This should be defined by quantified short and long-term environmental objectives. Transition Bonds should be a tool to principally finance a share of the issuer’s spending necessary to achieve targets.

Bond issuers are increasingly announcing environmental targets for 2030 or even as far in the future as 2050. While long-term objectives are welcomed, we ask for quantified shorter targets to assess the issuer’s progress against its own transition pathway. We also encourage issuers to explain their board and senior management’s strategic decision-making process and the capital expenditures needed to meet these targets. Issuers should ensure that their broader sustainability practices, such as policies and programmes, are capable of helping achieve the objectives.

In this way, we hope that a new market for transition bonds can be established. We believe transition bonds have the potential to give companies a new source of financing for the transformation of their business activities, that they could represent a new and attractive asset class for investors – and ultimately accelerate the fight against climate change.

This article first appeared in Financial News

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