Sustainable finance: why transition bonds and loans are not popular even as demand for green and sustainable products is growing

Name: China installs record number of solar panels on rooftops in race for carbon neutrality
Uploaded: 2022-02-02T06:00:31.000Z
Duration: 1 min 5 s
Description: China installs record number of solar panels on rooftops in race for carbon neutrality

Difficulty in defining and standardising the hurdles that projects need to overcome to qualify for transition finance is to blame, deal arrangers and asset managers say

Demand for sustainable investment is growing rapidly and there is ample room for transition finance to grow, Bank of America executive says

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Wind turbines in China’s Gansu province. Transition bonds issuance globally nearly tripled in each of the past two years, but lags behind green bonds, sustainability bonds and sustainability-linked bonds. Photo: Reuters

Eric Ng

Published: 2:00pm, 2 Feb 2022Updated: 3:03pm, 2 Feb 2022

Transition finance – or labelled bonds and loans that help companies transition their carbon-intensive operations to climate-neutral outfits aligned with global green ambitions – has failed to become mainstream despite rapid growth in recent years.

Difficulty in defining and standardising the hurdles that decarbonisation projects need to overcome to qualify for transition finance has been blamed, deal arrangers and asset managers said.

“The fact that transition bond and loan labels have not been used heavily is probably because there is understandably some caution by issuers and borrowers, given there isn’t an agreed set of standards for using such labels,” said Jonathan Drew, head of ESG Solutions at HSBC’s global banking and markets division. “Some may feel the label doesn’t give sufficient clarity, which is key in transition planning, and therefore feel it opens them to risk of criticism.”

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China installs record number of solar panels on rooftops in race for carbon neutrality

Transition bonds issuance globally nearly tripled in each of the past two years, from US$585 million to US$1.67 billion in 2020 and US$4.56 billion last year. Still, the combined value of last year’s nine deals pales in comparison to the US$485 billion of green bonds, US$180 billion of sustainability bonds and US$91 billion of sustainability-linked bonds issued, Refinitiv data shows.

Moreover, mainland China’s US$1.08 billion and Hong Kong’s US$296 million in transition bonds made up virtually all of the deals in Asia-Pacific last year.

The proceeds of green and sustainability bonds are earmarked for specific projects with environmental and social benefits, such as wind farms and waste recycling facilities.

The use of proceeds from sustainability-linked bonds, however, is not restricted, but their coupon rates vary based on the attainment of sustainability targets set by the issuers.

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