The Climate Transition Finance Handbook is designed to be used by issuers to demonstrate how their green, social, sustainability or sustainability-linked bonds fit into their overall climate transition strategies. A related Q&A document has also been published.
The Handbook provides guidance to capital markets participants on expected practices and actions relating to climate transition and also clarifies the information that should be made publicly available to investors in connection with the issuance of ‘use of proceeds’ bonds aligned with the Green and Social Bond Principles or Sustainability Bond Guidelines, or general corporate purpose bonds issued in line with the Sustainability-Linked Bond Principles. It is well recognised that capital markets will play a key role in the climate transition process (which is needed to meet the global objectives enshrined in the Paris Agreement to keep global temperature rises this century well below 2 degrees Celsius and try to limit the temperature increase to 1.5 degrees Celsius) by providing financing for issuers who want to change their businesses to address climate change risks.
The Handbook does not provide definitions or taxonomies of transition projects (but notes the work being done by the EU in relation to the EU Taxonomy, Japan's public and private initiatives on transition finance, Canada's National Standard for Green and Transition Finance and the Climate Bond Initiative's Financing Credible Transitions Project).
The Handbook's recommendations are based on the work of ICMA's Climate Transition Finance Working Group and analysis of existing climate change disclosure frameworks developed by trade and regulatory bodies and the scientific community and consideration of their relevance to "use of proceeds" or sustainability-linked bonds. The recommendations have four key elements which should be referenced in connection with any use of proceeds or sustainability-linked bond issuance and the Handbook states that such disclosures can be included in a company's annual report, framework document or investor presentation, provided they are publicly accessible to investors. The recommended independent review could be included as either a second party opinion as part of the transaction documentation or as part of an issuer's ESG reporting. The Q&As also recommend that an issuer articulates how the identified use of proceeds fits into the achievement of its overall climate transition strategy.
The four key elements of the recommendations are:
- Issuer's climate transition strategy and governance: The Handbook states that the establishment of a corporate strategy to address climate change-related risks is a pre-requisite to issuing a transition-labelled instrument. An issuer's climate transition 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". This will usually need to go beyond identifying the issuer's climate-related expenditures to "develop a broader corporate strategic intention to address climate change risks and opportunities in the long-term" and should respond to stakeholder expectations by seeking to play an active role in achieving the Paris Agreement objectives.
Disclosures on corporate strategies can be aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures or similar frameworks and such disclosures may be made in annual reports, dedicated sustainability reporting, statutory filings and investor presentations. The Handbook suggests that the strategy should include a long-term target to align with the goals of the Paris Agreement, interim targets on the trajectory towards the long-term goal, disclosure on the issuer's strategic planning on decarbonisation and alignment with long-term goals, clear oversight and governance of transition strategy and evidence of a broader sustainability strategy to mitigate relevant environmental and social factors and contribute to the UN SDGs.
The Handbook highlights that an issuer could instruct an established climate change scenario provider to inform the content of the issuer's strategy (such as the Network for Greening the Financial System climate scenarios) or could establish an in-house scenario itself. The recommendations state that the provision of an independent technical review of the issuer's strategy may assist investors in determining the credibility of the issuer's strategy as regards how well it addresses climate change risk issues. The review should address information on the alignment of the issuer's long-term and short-term targets with the overall scenario and the credibility of the issuer's strategy to reach the targets.
- Business model environmental materiality: The Handbook states that climate transition financing should be sought for funding needed for an issuer's activities which are the main drivers of its current and future environmental impact and that the climate transition trajectory, as far as it relates to financing, should be a material factor and not an incidental aspect, to the future success of the issuer's business model. The trajectory should also consider the prominence of an issuer's climate impact on the environment and on society and seek to mitigate negative impacts. The Handbook acknowledges that externally provided comfort on materiality considerations may not always be appropriate but notes the existing market guidance on materiality provided by accounting standards bodies and suggest that additional guidance from accountants may be needed.
- Climate transition strategy to be "science-based" including targets and pathways: The issuer's climate strategy must reference science-based targets and transition pathways. The issuer's planned trajectory should be quantitatively measurable, aligned with or benchmarked against recognised, science-based trajectories (where they exist), publicly disclosed, include interim milestones and be supported by independent assurance or verification. Science-based targets are targets that are in line with the scale of reductions needed to keep the global temperature rise below 2 degrees Celsius above pre-industrial temperatures. The Handbook states that an aim to align business plans with a 1.5 degrees Celsius trajectory "will be perceived as most credible to the increasing proportion of market participants". The Handbook suggests that existing disclosure frameworks (such as those published by the TFCD, the Sustainable Accounting Standards Board and the Climate Disclosure Project) may assist issuers in preparing for disclosure of their climate transition plans and notes that further guidance and frameworks may emerge in the future. The Handbook sets out a list of various information which should be disclosed including short, medium and long-term greenhouse gas reduction targets and the methodologies applied. The Handbook notes the existence of a number of service providers offering to independently review and offer opinions to investors on whether an issuer's proposed decarbonisation strategy is aligned with science-based trajectories deemed necessary to limit climate change to safe levels.
- Implementation transparency: In addition to disclosure of the issuer's climate transition strategy, the Handbook also recommends that information on the underlying investment program, such as capital and operational expenditure (including R&D-related expenditure) , should be provided "to the extent practicable" as well as information on how the investment program supports implementation of the transition strategy including details of any divestments, governance and process changes. The Handbook recommends that issuers should report in qualitative and quantitative terms on the climate-related outcomes and impacts that these expenditures are intended to result in and how they have incorporated consideration of a just transition into their climate transition strategy, including "social" expenditures such as the impact of such strategy on workers and communities. Disclosure of capex and opex and other financial metrics including the percentage of assets/revenues/ expenditures/ divestments may be made via the annual report, website or sustainability report. The Handbook suggests that verification of capex and opex plans is unlikely to be appropriate given the difficulty in predicting forward-looking expenditures, but issuers may want to consider providing an analysis of the extent to which outcomes align with original expenditure plans.
The Handbook is designed to be used by issuers at different states of their transition journey (including carbon intensive industries who are hesitant to access the green bond market) and provides that issuers should align to the Handbook on a best-efforts basis, disclosing how they are progressing, future plans for developing a transition strategy and providing updates on their progress.
While the Handbook does not result in a transition bond "label" as such, the Q&As do state that issuers wishing to label instruments with a climate transition "label" may consider referencing the Handbook in connection with the issuance as the "Climate Transition Finance Handbook 2020" and using the CTF logo.
Authored by Rachel Pleming.
