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1、Transition Finance in the Debt Capital MarketFebruary 20242Transition Finance in the Debt Capital MarketThis publication is an ICMA staff paper benefitting from the input of ICMA committees and members but does not necessarily represent their views.ICMA Authors:Nicholas Pfaff,zgr Altun and Stanislav

2、 Egorov.Enquiries to:infoicmagroup.org Press enquiries to:pressofficeicmagroup.orgThis paper is provided for information purposes only and should not be relied upon as legal,financial,or other professional advice.While the information contained herein is taken from sources believed to be reliable,IC

3、MA does not represent or warrant that it is accurate or complete and neither ICMA nor its employees shall have any liability arising from or relating to the use of this publication or its contents.Likewise,data providers who provided information used in this report do not represent or warrant that s

4、uch data is accurate or complete and no data provider shall have any liability arising from or relating to the use of this publication or its contents.International Capital Market Association(ICMA),Zurich,2024.All rights reserved.No part of this publication may be reproduced or transmitted in any fo

5、rm or by any means without permission from ICMA.3Transition Finance in the Debt Capital MarketTable of contentsExecutive summary 4Introduction 6Market considerations and guidance 7The lenses of transition 7Transition finance guidance from the Principles 9Other market and official sector frameworks 1

6、0Transition-themed transactions in the debt capital market 11Transition-themed green and sustainability bonds 11Labelled“climate transition”bonds 11Sustainability-Linked Bonds 12Scope for further market development 12Expanding the market with official guidance 14Integrating transition in taxonomies

7、14Pathways and roadmaps for hard-to-abate industries 15Benchmarking ambition 16From disclosures and reporting to transition plans 17Disclosures as a foundation 17Transition plans as the next step 18From voluntary adoption to mandatory requirement 20Broader policies to support transition 22Conclusion

8、s 24Transition finance is available but not yet where it may be most needed 24Issuers can aim to overcome reputational concerns with official and market guidance 24The voluntary adoption of standardised transition plans could unlock the market 24Appendix A Key actions&disclosures for an integrated t

9、ransition plan under CTFH,IFRS S2,ESRS E1,&UK TPT 25Appendix B Summary comparison of key transition-related actions&disclosures under CTFH,IFRS S2,ESRS E1,&the UK TPT 26Appendix C The integration of transition in taxonomies 33Transition as an activity with an outcome 33Project and“whitelist”based ap

10、proaches 34The“traffic lights”approach 35Integrated approaches 36Transition as a managed phase out 37Appendix D-Non-exhaustive list of existing transition financedefinitions 384Transition Finance in the Debt Capital MarketExecutive summaryThe Climate Transition Finance Handbook(CTFH),published in 20

11、20 by ICMA was arguably ahead of its time by identifying the need for organisation level disclosures and strategy to underpin an issuers transition related capital financing.It underlined the importance of the credibility of an issuers Greenhouse Gas(GHG)emissions reduction strategy,commitments,and

12、practices;while defining the goal of transition finance as realising the objectives of the ParisAgreement on Climate Change.It characterises transition as an organisation-level challenge that can be translatedinto a key financing theme for both use-of-proceeds and sustainability-linked bonds.Transit

13、ion finance as a concept covers different objectives and ambitions.We identify three different overlapping definitions in general use currently for transition finance.These can be differentiated from the wide to the narrow lens of what transition finance is understood to be achieving and include eco

14、nomy-wide transition,climate transition,and hard-to-abate transition.In Appendix D,we provide a non-exhaustive list of existing transition finance definitions from other leading sources.There is often confusion that the only contribution that sustainable bonds make to climate transition is through l

15、abelled“climate transition bonds”,a subcategory of sustainable bonds representing currently 0.4%of the market.Considering climate transition holistically,the green and sustainability bond market to date has been largely dedicated to the financing of decarbonisation of energy,buildings,and transport

16、sectors.Similarly,the new sustainability-linked bond(SLB)market is focused on climate transition finance with 69%of SLBs having GHG reduction and/or renewable energy increase targets.It remains,however,difficult for companies in the fossil fuel sector and the hard-to-abate industries to raise transi

17、tion finance because of a lack of consensus on acceptable and credible technologies and trajectories,and“greenwashing”fears for issuers and investors alike.This is illustrated by the modest amounts raised by issuers from these sectors which are equivalent to an estimated 3.6%of green,sustainability

18、and sustainability-linked bond issuance to date.Both the official sector and the market are nonetheless providing guidance that can spur the further expansion of transition finance in the sustainable bond market.Firstly,the complexity of transition is being conceptualised in taxonomies as economic a

19、ctivities with an outcome,a list of approved technologies or projects,and/or a phase-out of specific facilities or even industries.These also reflect differences and priorities between jurisdictions and regions.In Appendix C,we provide an overview of how various taxonomies incorporate transition per

20、spectives.Secondly,guidance has been developed by some jurisdictions in the form of pathways and roadmaps aiming to provide transition trajectories notably for fossil fuels and the hard-to-abate sectors which issuers can refer to.In parallel,the formalisation of corporate sustainability reporting an

21、d standards by the International Sustainability Standards Board(ISSB)and the European Sustainability Reporting Standards(ESRS)is an opportunity for the mainstreaming of transition plans.Transition plans may unlock the potential of transition finance in the sustainable bond market by:(i)providing a s

22、trategic context to evaluate the consistency of issuer level transition and sustainability commitments;(ii)helping issuers avoid controversy related to potential carbon lock-in risk in their individual projects and investments;and(iii)enhancing sustainability-linked bond target setting and KPI selec

23、tion while offering context for the evaluation of failed targets and circumstances beyond an entitys control.Transition Finance in the Debt Capital Market5We note however that although transition plans are referenced in the ISSBs IFRS S2 and in the ESRS,this does not clearly translate into a require

24、ment beyond disclosure.Regulation may nonetheless lead to mandatory transition for corporates in key jurisdictions.In the EU,the Corporate Sustainability Due Diligence Directive(CSDD Directive)includes a disposition requiring certain large EU and non-EU companies,and financial institutions to adopt

25、1.5C compatible transition plans.For real economy corporates,this would essentially imply adapting business models to address climate risks,and where relevant,invest the CapEx and OpEx required for decarbonisation.We propose,however,that the market precedes or accompanies regulation by promoting the

26、 voluntary provision of transition plans by issuers,especially in the fossil fuels and hard-to-abate sectors.Considering the technical reporting aspects,it should be possible for an entity to align with IFRS S2,ESRS E1,the work of the UK Transition Plan Taskforce(UK TPT),as well as the recommendatio

27、ns of the CTFH,by publishing an integrated transition plan.As a contribution to their widespread voluntary adoption,we are publishing a structure for such an integrated transition plan with two documents in appendix which are:(i)Key actions&disclosures for an integrated transition plan(Appendix A)an

28、d(ii)Summary comparison of key transition-related disclosures&actions under CTFH,IFRS S2,ESRS E1,&UK TPT recommendation(Appendix B).6Transition Finance in the Debt Capital MarketIntroduction ICMA has been at the forefront of transition finance since the publication in 2020 of the Climate Transition

29、Finance Handbook(CTFH)developed by the Executive Committee of the Principles1,as well as by underlining the importance of integrating transition considerations in taxonomies through its publications and responses to consultations.Similarly,the release of guidance for Sustainability-Linked Bonds with

30、 the Sustainability-Linked Bond Principles(SLBP),also in 2020,was conducted with the intention of facilitating the development of a product that could especially serve transition finance.The debate on transition is now at the centre of both policy and market considerations,with notably calls for gre

31、ater market-led financing.In parallel,progress has been made on official guidance on transition as well as on standards for corporate sustainability reporting.In this publication,our focus is on how capital markets,and more specifically sustainable bonds,are financing the transition and what can be

32、done to further scale their contribution by leveraging both market and official guidance.The greatest challenge is the financing of the hard-to-abate sectors where market participants need as much direction as possible on technologies and industry trajectories while avoiding the risk of carbon lock-

33、in and,more generally,controversy and greenwashing concerns.In this paper,we consider the latest recommendations from the Principles and other market and official sources.We break down transition finance into different categories while analysing the extent to which the sustainable bond market is fin

34、ancing the transition.We review the progress of international taxonomies to integrate transition,as well as consider latest developments on guidance for sectoral pathways and industry roadmaps.Furthermore,we explore the recent progress for international corporate reporting standards and their implic

35、ations for the availability of transition plans.Wethen take a deeper dive into ongoing international work on transition plans and make proposals for the convergenceof best practice on transition plans.We also refer briefly to the wider policy considerations of transition.1.The Executive Committee is

36、 the leadership body of the market initiative behind the Green,Social,Sustainability and Sustainability-Linked Bond Principles (the“Principles”)supported by ICMA.7Transition Finance in the Debt Capital MarketMarket considerations and guidance The lenses of transitionThere is often confusion around t

37、he use of terminology in sustainable finance,which is compounded by genuine conceptual shifts affecting certain definitions over time.This is something that ICMA identified early on in 2020 with its publication Sustainable Finance-High-level definitions.Discussions around transition finance illustra

38、tes this,with the OECD referring for example to there being“neither a consensus definition of transition finance,nor a set of technical criteria or qualifying sectors or technologies that are commonly agreed upon”(OECD Guidance on Transition Finance).We believe that there are currently at least thre

39、e different overlapping definitions in general use for transition finance.Thesecan be differentiated from the wide to the narrow lens of what transition finance is understood to be achieving that we list and illustrate below:-Economy-wide transition refers to transformation of the entire economy wit

40、h the objective of meeting the goals of the Paris Agreement but also wider sustainable objectives(e.g.biodiversity or circular economy)embedded in taxonomies,or with reference to the UN SDGs(see for example G20 Sustainable Finance Report).-Climate transition covers the goals of the Paris Agreement a

41、nd the target of achieving Net Zero but typically with a narrower sectoral or industry focus especially on the energy and high-emissions sectors(see the OECD Guidance on Transition Finance).-Hard-to-abate transition emphasises the specific challenges of reducing the emissions of the fossil fuel and

42、hard-to-abate sectors,or promoting more sustainable alternatives to their output(see for example Japans roadmaps for GHG-intensive industries).In Appendix D,we provide a non-exhaustive table bringing together existing definitions of transition finance used in official and market guidance to which we

43、 refer below.Economy-wide TransitionClimateTransition Hard-to-abate Transition8Transition Finance in the Debt Capital MarketTransition finance guidance from the Principles The CTFH represents seminal guidance from the Principles identifying the importance of organisation-level related disclosures an

44、d strategy to underpin an issuers transition-related capital financing.It aims to clarify the issuer-level practices,actions,and disclosures to credibly position the issuance of use of proceeds or sustainability-linked instruments to finance the transition,particularly of“hard-to-abate”sectors2.It c

45、haracterises transition as a theme for both use-of-proceeds and sustainability-linked bonds while recognising that aclimate transition label may nonetheless be used in addition for certain transactions by issuers.The CTFH underlines the importance of the credibility of an issuers GHG emissions reduc

46、tion strategy,commitments,and practices.It defines the goal of transition finance as the realisation of the global objectives enshrined within the ParisAgreement on Climate Change to keep the average global temperature rise this century well below 2C above pre-industrial levels and to pursue efforts

47、 to limit the temperature increase even further to 1.5C.The CTFH further recommends that disclosures be based on analysis and existing climate change disclosure frameworks developed by relevant industry groups,regulatory bodies and the scientific community regarding climate change mitigation and ada

48、ptation.It identifies four key elements around which issuers should communicate their transition commitments.These are:1.Issuers climate transition strategy and governance;2.Business model environmental materiality;3.Climate transition strategy and targets to be science-based;and4.Implementation tra

49、nsparency.The CTFH acknowledges that GHG emission reduction pathways must be tailored to the sector and operating geographies of an issuer,and that issuers generally have different starting points and are at different transition stages and on different pathways.It therefore does not aim to provide d

50、efinitions or taxonomies of transition projects but rather recognises the variety of efforts in this area globally by both market and official sector initiatives to achieve the Paris Agreement goals.Updated in 2023,the CTFH incorporates specific reference to Scope 3 reporting where material,as well

51、as more detail on science-based trajectories and the emissions reduction transition path including well below 2C scenarios at minimum.It also contains new details about carbon cost assumptions,phase out plans for carbon intensive activities,and disclosure of any locked in emissions.Furthermore,it ge

52、nerally focuses on user friendliness with annexes including a non-exhaustive list of wider official and market guidance for climate transition themedgreen,sustainability,and sustainability-linked bonds.2.Examples of“hard-to-abate”sectors from Anthony Robert Hobley,“Tackling the harder-to-abate secto

53、rs:Join the conversation on 7 July,”WEF,July 1,2020;Max hman,“Unlocking the Hard to Abate sectors,”World Resources Institute;Energy Transitions Commission,“Mission possible:Reaching net-zero carbon emissions from harder-to-abate sectors”,November 20189Transition Finance in the Debt Capital MarketCTF

54、H Infographic10Transition Finance in the Debt Capital MarketOther market and official sector frameworksSubsequent to the release of the CTFH,there have been numerous market and official sector efforts to provide guidance through frameworks for transition finance in the capital markets and more broad

55、ly.We highlight below some significant initiatives directly addressed at market participants:The transition framework of the Climate Bonds Initiative(CBI)is built on two foundations;the“Transition Principles”presented in the paper“Financing Credible Transitions”(2020)and the five“Hallmarks”presented

56、 in the paper“Transition finance for transforming companies”(2022).In 2023,CBI released:(i)Sustainability-Linked Bond Database Methodology;(ii)Guidance to assess transition plans;(iii)Transition Finance Consensus Mapping;(iv)and,together with EBRD and Green Climate Fund,Financing the Corporate Clima

57、te Transition with Bonds:APractical Guide.In May 2021,Japans Basic Guidelines on climate transition finance were formulated in collaboration with the Financial Services Agency(FSA)and Ministry of Economy,Trade and Industry(METI);and Ministry of the Environment,explicitly based on the CTFH.They follo

58、w the CTFHs focus on organisation level disclosures and strategies with a greater focus on enabling companies to explicitly label their related financing in the capital and loan markets as“transition bonds”or“transition loans”.In October 2022,the OECD published its Guidance on Transition Finance,set

59、ting out elements of credible corporate climate transition plans,which aim to align with the temperature goal of the Paris Agreement.Among other things,the OECD Guidance is relevant to corporates developing transition plans and seeking to identify the most salient elements of existing initiatives,as

60、 well as to financial market participants planning to provide finance for the implementation of net-zero strategies.In June 2023,the European Commission published its recommendations on transition finance to support market participants wishing to obtain or provide transition finance by offering prac

61、tical suggestions.Specifically,these include definitions for the concepts of“transition”,“transition finance”,“transition plans”,that showcase the use of various EU sustainable finance tools,especially of the EU Taxonomy,for transition,and aim to guide market participants on how to introduce proport

62、ionality,especially for SMEs.In October 2023,the ASEAN Capital Markets Forum(ACMF),which represents ten national securities regulators in southeast Asia,published its Transition Finance Guidance.It addresses how entities may assess or demonstrate a credible transition in ASEAN to obtain financing fr

63、om capital markets,making use of relevant resources as needed.Its aim is to accelerate the efforts of financial institutions to direct finance to transitioning companies and create incentives for real economy companies to build more ambitious and credible transition plans.Several certification and a

64、ssessment schemes are also particularly relevant for issuers in debt capital markets.Over 4200 companies have set targets approved by the Science Based Targets initiative(SBTi)3 or made commitments to do so,representing 34%of the global economy by market capitalisation.SBTi does not however yet prov

65、ide certification for some sectors including oil&gas.The existing CBIs certification has also recently been extended to cover entity-level transition and SLBs including for basic chemicals,cement,shipping,and steel sectors.Among other things,the CBIs certification requires an issuer to meet quantita

66、tive emission thresholds over a pathway,at least by 2030,and commit to align with declining thresholds through 2050.Sustainable Fitch also provides transition assessments(focused on high-emitting sectors),and Moodys offers NetZero Assessments.In June 2022,the Principles released the Methodologies Re

67、gistry to help issuers,investors,or financial intermediaries identify the relevant resources to guide their transition.This is a non-exhaustive,yet comprehensive list of available tools,methods,scenarios,and initiatives dedicated purely to the validation of specific emission reduction trajectories/p

68、athways,especially in the context of the Element 3 of the CTFH which requires transition strategies to be science-based.3.SBTi is a corporate climate action NGO that works in partnership with CDP,the United Nations Global Compact,World Resources Institute(WRI),the World Wide Fund for Nature(WWF)and

69、We Mean Business Coalition commitments.It develops standards for setting science-based targets for companies and financial institutions and validates science-based targets,to ensure their alignment with the Paris Agreement to limit global warming to 1.5 C.11Transition Finance in the Debt Capital Mar

70、ketTransition-themed transactions in the debt capital marketThe CTFH argues that transition is best conceived as a theme that can be financed by green and sustainability bonds,as well as SLBs,while recognising the development of a“climate transition”label adapted notably to certain jurisdictions and

71、 regions.The sustainable bond market plays a major role in financing economy-wide and climate transition,as defined above,including by financing transition projects and entity trajectories.It does not yet however finance at scale the transition of companies in the fossil fuel sector and the hard-to-

72、abate industries.It is also important to note that transition can be financed by unlabelled bonds in the broader debt capital markets,such as through investments in vanilla bonds of companies with transition plans,although this is not a topic covered in this section.We review below the contribution

73、of the sustainable bond market to transition finance.Please also see the infographic at the end of the section which summarises available market data.Transition-themed green and sustainability bondsThe sustainable bond market is indeed largely focused on climate transition finance as we have defined

74、 it above(i.e.with the objective of meeting the goals of the Paris Agreement and achieving Net Zero).We estimate that 90%of issuance in the green bond market to date relates to the financing of climate transition.The CBI has estimated4 that 80%of allocations from the green bond market between 2014 a

75、nd 2021 went to the decarbonisation of energy,buildings,and transport sectors,which are essential to that objective.Moreover,some official sector studies5 find a positive correlation between green bond issuance with GHG disclosure and emission intensity reduction at entity-level.If we focus,however,

76、on hard-to-abate transition finance as described above in the section on the“Lenses of transition”which includes fossil fuels and hard-to-abate industries such as chemicals,metals&mining,airlines,cement,steel,and shipping,the picture is different.We have identified 114 issuers of green and sustainab

77、ility bonds from these fossil fuel and hard-to-abate sectors representing USD71 billion of issuance to date(of which 44%are from the fossil fuel industry).All together these bonds represent only 2%of the total outstanding for green and sustainability bonds.Labelled“climate transition”bondsSeparately

78、,labelled“climate transition”bonds represent for the time being less than 0.4%of the outstanding sustainable bond market and in many cases refer to green or sustainability bonds that have been marketed with an additional climate transition label.This segment may however see significant development i

79、n Asia,with Japan notably being at the forefront of an effort to develop labelled transition bonds both in the corporate and sovereign sector.Japans effort is supported by official guidance at the label and project level(Basic Guideline on climate transition finance and roadmaps for GHG-intensive in

80、dustries).To date,Japanese corporates have issued approximately the equivalent of USD3 billion of labelled climate transition bonds.The government of Japan has announced that it will issue 20 trillion yen of GX Economy Transition Bonds(over USD140 billion)over the next 10 years of which 800 billion

81、yen(USD5.4 billion)were issued as 10-year Japan Climate Transition Bonds on 14 February 2024.It released the Japan Climate Transition Bond Framework in November 2023.4.See CBIs Sustainable Debt Global State of the Market 2021.5.See ESMAs paper on the Environmental impact and liquidity of green bonds

82、.12Transition Finance in the Debt Capital MarketSustainability-Linked BondsSustainability-Linked Bonds(SLBs),a recent addition to the sustainable bond universe with dedicated Principles first published in June 2020,are particularly suited to the financing of corporate transition.Contrary to use-of-p

83、roceeds bonds,SLBs are focused on issuer-level sustainability targets benchmarked by Key Performance Indicators(KPIs).Theissuance of SLBs grew rapidly,reaching approximately USD246 billion end-2023.Organisations issuing SLBs,of which 89%are corporations,measure the sustainability performance of thes

84、e instruments with targets mainly focused on climate transition.As illustrated at the end of this section,it is estimated that 69%of KPIs referenced by SLBs are climate transition finance related(carbon/GHG emissions,renewable energy).To take a closer look at the transition role of SLBs,we conducted

85、 a review of SLBs issued from January 2022 to December 2023 based on a sample accounting for 84%(USD104 billion)of the SLB market in the stated period.60%of issuers from our sample reported that their targets had received approval from SBTi(noting that no documentation was found for 13%of the sample

86、).As referenced above,SBTi approval is a good proxy for correlating an organisations sustainability performance targets with a climate transition objective.SLB issuance from hard-to-abate and fossil fuel sector issuers reached USD48 billion.This represents 20%of the total SLB market of which 12%for

87、companies from hard-to-abate sectors and 8%for fossil fuel companies.Scope for further market developmentWhile both green and sustainability bonds as well as SLBs have been largely dedicated to climate transition finance,the picture for transition finance in the hard-to-abate industries and fossil f

88、uel sector is different.To date,financing from green,sustainability and sustainability linked bonds to these sectors comes to an estimated USD119 billion,representing only 3.6%of the total outstanding amount for these bond categories.Furthermore,even if the SLB market appears more open to transition

89、-themed issuance from the fossil fuel and hard-to-abate industries,the size of that market would need to grow significantly beyond its current total of USD246 billion(6%of the total sustainable bond market)to finance at scale their transition.There remains therefore significant scope for the further

90、 development of fossil fuel and hard-to-abate transition-themed transactions for both use-of-proceeds bonds and SLBs,as well for the development of the SLB market generally.The progress with relevant official and market guidance that we discuss in the subsequent sections is promising and can help in

91、 this respect.13Transition Finance in the Debt Capital MarketSustainable bond market contribution to transition financeAs of January 2024,outstanding sustainable bond issuance is USD4 trillion in total.Source:Bloomberg Climate Transition FinanceSource:Bloomberg Source:Natwest(based on a tracked samp

92、le oflargepublictransactions)Hard-to-abate transition financeSource:Bloomberg Source:BloombergGreenSocialSustainabilitySustainability-linkedSustainable bond issuance by type(in USD bn)$2,316$67357%17%$824 20%6%$256Climate transition projectsOther projects90%10%$2766bn$321bnClimate transition project

93、s in the green&sustainability bond market(in USD bn)Carbon/GHG reduction and/or RE increaseOther69%31%Climate transition KPIs in the SLB marketOtherHard-to-abate sectors80%7%13%$194bn$30bn$18bnFossil fuelsHard-to-abate&fossil fuel transitionin the SLB market(in USDbn)Other sectorsHard-to-abate secto

94、rs98%2%$3002bn$71bnHard-to-abate&fossil fuel transitionin the green&sustainability bond market(in USDbn)14Transition Finance in the Debt Capital MarketExpanding the market with official guidanceThrough evolution and innovation,official sector and market guidance is increasingly providing tools that

95、can expand the scope of transition finance.Evolving taxonomies are integrating transition in a variety of ways with notably a focus on avoiding carbon lock-in in interim and“amber”transitions while specific guidance is also targeting transition for the hard-to-abate industries.Integrating transition

96、 in taxonomiesIn sustainable finance,taxonomies serve as a key reference system for market participants to align with activities,assets,and/or project categories that deliver on key climate,green,social,or sustainable objectives with reference to identified thresholds and/or targets.Alongside market

97、-based taxonomies6,there are around 40 jurisdictions which have developed or are in the process of developing taxonomies.Taxonomies represent key guidance for issuers of sustainable bonds.The non-exhaustive and high-level green project categories of the Green Bond Principles do not constitute a taxo

98、nomy.However,the Principles highlight the existence of national and international taxonomies and encourage issuers to disclose taxonomy alignment of their green projects as well as the related eligibility criteria and any green standards or certifications referenced in project selection,if any.The S

99、LBP and ICMAs Illustrative SLB KPI Registry also recognise the use of taxonomy for KPI purposes.We have highlighted in earlier publications7 that taxonomies were often originally deficient in integrating transition notably by focusing on identifying activities and projects that are or will be in the

100、 medium term sustainable or Paris-aligned.They were therefore criticised for being potentially static and binary while underestimating the potential of innovation.These concerns are being addressed through both the evolution of early taxonomies and novel approaches in later ones.Safeguards to avoid

101、carbon lock-in are a recurring theme.In Appendix C,we provide an overview of the transition related aspects of leading official and market taxonomies.We categorise these taxonomies transition approaches as(i)transition as an activity with an outcome(e.g.EU Taxonomy);(ii)project and“whitelist”based a

102、pproaches(e.g.Chinas Green Bond Catalogue);(iii)the“traffic lights”approach(e.g.the ASEAN Taxonomy);(iv)integrated approaches(e.g.,the CBI Taxonomy and Sector Criteria and the Singapore-Asia Taxonomy);(v)transition as a managed phase-out(e.g.the Singapore-Asia Taxonomy).However,there may be overlaps

103、 as a taxonomy can borrow from several of these approaches at the same time.Generally,characteristics and innovations relating to transition and avoidance of carbon lock-in in these taxonomies include:recognition of interim performance improvements(e.g.shift from harmful/red levels to amber before r

104、eaching green performance levels);direct incorporation of sunset dates for interim/amber performance levels(to upgrade to green)and/or forward-looking pathways into technical criteria;rejection of“amber”categories where green alternatives feasibly exists;regular reviews and tightening of thresholds

105、and criteria as a matter of taxonomy governance;distinction of eligibility conditions between greenfield and brownfield investments;requiring entity-level transition plans backing up an activity-level transition;outright exclusions of some activities and projects(e.g.solid fossil fuels);6.See the CB

106、I Taxonomy,the MDBs-IDFC Common Principles,and the ISO Taxonomy.7.Overview and Recommendations for Sustainable Finance Taxonomies.15Transition Finance in the Debt Capital Market other targeted technical criteria specifications(e.g.limitations to increase in production capacity or asset lifetime in c

107、ase of a fossil-fuel switch);and,CapEx-related focus in taxonomy implementation measures.The OECDs recently released detailed report“Mechanisms to Prevent Carbon Lock-in in Transition Finance”provides a comprehensive overview of lock-in considerations in transition finance and highlights the role th

108、at taxonomies can play in this respect.The report also cites the IEA finding that over 80%of steel and cement production facilities in the EU and the US are around 20 years old,and soon due for refurbishment for lifetime extension.There is therefore an important window of opportunity for both greenf

109、ield and brownfield decarbonisation investments while avoiding the lock-in risks.Pathways and roadmaps for hard-to-abate industriesSeveral key jurisdictions are developing decarbonisation pathways and roadmaps that can help transition finance navigate the challenge of supporting transition in the ha

110、rd-to-abate industries.In Japan notably,sectoral decarbonisation roadmaps have been developed with a special focus on hard-to-abate sectors.Since October 2021,Japans METI has been releasing roadmaps for GHG-intensive industries8.In essence,these provide expected corporate level actions and potential

111、 technologies together with an implementation timeline toward the 2050 carbon neutrality objective.The METI roadmaps also provide contextual insights and analysis,such as trends,practices,and production processes in each sector,the rationale for roadmap development,the Paris alignment and scientific

112、 basis.Companies are expected to refer to these roadmaps when raising transition finance in line with the countrys Basic Guidelines.Financial institutions can also use those in assessing whether companies strategies and initiatives qualify for transition finance.METIs Roadmap for Transition Finance

113、in Iron and Steel Sector8.Currently,roadmaps in Japan are provided for iron and steel,chemical,power,gas,oil,pulp and paper,cement,and automobile sectors.In other industrial sectors,Japans Ministry of Land,Infrastructure,Transport and Tourism has also been releasing roadmaps for international shippi

114、ng,domestic marine transport,and aviation sector,that show technologies and directions toward decarbonisation that can be used for transition finance.16Transition Finance in the Debt Capital MarketWhile not as explicitly targeted at supporting transition finance as in Japan,other jurisdictions have

115、been developing pathways and roadmaps,which can apply to transition in the hard-to-abate sectors:In China,it is reported that the National Development and Reform Commission(NDRC)and other ministries in charge of sectoral developments have already developed at least a dozen guidelines on technical pa

116、thways for decarbonisation for carbon-intensive industries.In other Asian countries,authorities have been recently releasing national policies and roadmaps focused on the transition in the energy sector9.The ASEAN Transition Finance Guidance,released by ACMF in 2023,also refers to the technology lis

117、ts,such as the Asia-focused guidance developed by the Economic Research Institute for ASEAN and East Asia,for potential use until official sector pathways and roadmaps are developed.In the EU,the European Commission published in January 2023 the transition pathway for the chemical industry which ide

118、ntifies the actions and conditions needed to achieve the green and digital transition and improve resilience in the sector.This is part of a broader provision of transition pathways for European industrial ecosystems.In the UK,the Government published its Industrial Decarbonisation Strategy in March

119、 2021.In the US,the Department of Energy released its Industrial Decarbonization Roadmap in September 2022,acomprehensive report identifying four key pathways to reduce industrial emissions in American manufacturing.Nonetheless,sectoral pathways and roadmaps catering to the diversity of developed an

120、d developing economies are not yet widely available or sufficiently comprehensive in coverage.This has been highlighted as a key challenge in the recent OECD Guidance on Transition Finance(2022)and reports by the Asian Transition Finance Study Group.ICMA has also previously highlighted that there is

121、 a lack of science-based decarbonisation pathways or tools that apply both sectoral and geographical lenses10.Benchmarking ambitionPathways and roadmaps can otherwise be used to demonstrate the level of ambition of targets under their SLBs,or to showcase the relevance of selected technologies projec

122、ted by such pathways and roadmaps for use of proceeds.TheInternational Energy Agencys(IEA)scenarios and methodologies have been particularly influential and authoritative around the globe.They are used as input for official sector policies for pathways and roadmaps,and directly referenced by several

123、 issuers in sustainable bond frameworks to position their transition strategies.The IEAs scenarios also constitute the basis of sectoral guidance,benchmarking or certification schemes for companies,such as those provided by the Transition Pathway Initiative(TPI)and the Science-based Targets Initiati

124、ve(SBTi).New regulations and guidance are addressing the conflict that can develop between aiming for ambitious transition projects or targets and the reputational/market risks of failure.In Japan,METI published a Transition Finance Follow-up Guidance highlighting,among other things,that transition

125、that transition progress may exceed or fall short of initial expectations of strategies and individual projects,and that it is vital for investors to understand the changes in the circumstances and engage in constructive dialogue to discuss future efforts towards desired outcomes.Both ESMA and the U

126、K Financial Conduct Authority(FCA)have been recently discussing protection for disclosure of forward-looking information in prospectuses11.TheEU Green Bond Standard allows issuers to explain the reasons for delays or deviations significantly impacting the delivery of CapEx Plans.9.See Asia Transitio

127、n Finance Study Group Annual Report,September 2023,p.1310.See ICMAs“Overview and recommendations for sustainable finance taxonomies”,2021,p.3011.In its Progress report on greenwashing,ESMA signalled the potential need for“safe harbours”:“Potential liability risks may be driving non-disclosure of cer

128、tain forward-looking information,particularly in prospectuses.The uncertainty around forward-looking information raises the issue of non-execution risk the risk that commitments about future sustainability performance are not achieved.The further away in time such commitments are,the higher the non-

129、execution risk,also due to the possibility that a new managing team will overturn past decisions.To address the potential non-disclosure of forward-looking information relevant to investors within prospectuses,further consideration could be given to the extent to which liability risks make issuers u

130、ncomfortable with including such information and to identify potential ways to address fairly and effectively some of these concerns.”In the UK,the FCA consulted on“protected forward-looking statements”that aim to encourage the inclusion of forward-looking disclosures in prospectuses including for s

131、ustainability.17Transition Finance in the Debt Capital MarketFrom disclosures and reporting to transition plansIn parallel with the evolution of taxonomies and other guidance described above,the increasing availability of sustainability disclosures has been driven by investor demand and has notably

132、been based on voluntary disclosures aligned with the highly influential framework of the Task Force on Climate Related Financial Disclosures(TCFD).During the COP26 in November 2021,the IFRS Foundation established the International Sustainability Standards Board(ISSB)to develop a global baseline for

133、corporate sustainability disclosures.Building on these efforts,market best practice and soon regulation,have called for the mainstreaming of corporate transition plans.Transition plans can act as enabler of transition finance by providing a basis for both issuers and investors to propose and evaluat

134、e transition strategies,actions,and investments.Disclosures as a foundationIn June 2023,the ISSB issued its inaugural standards(IFRS S1 and IFRS S2),which received IOSCOs endorsement swiftly later.IFRS S1 provides a set of reporting requirements designed to enable companies to communicate to investo

135、rs about the sustainability-related risks and opportunities they face over the short,medium,and long term.IFRS S2 sets out specific climate-related disclosures.Several jurisdictions have already taken steps to implement the ISSB standards or expressed their intention to do so.Examples include Austra

136、lia,Brazil,Canada,China,Hong Kong,Malaysia,Singapore,South Korea,Trkiye,and the UK.In parallel in December 2023,the European Sustainability Reporting Standards(ESRS)were released by the European Commission for use by all companies subject to the Corporate Sustainability Reporting Directive(CSRD).The

137、 ESRS cover the full range of environmental,social,and governance issues and integrate a double materiality approach,going beyond the primary financial materiality focus of the ISSB standards.The first CSRD reports are due in 2025(covering FY 2024),and the reporting obligation will gradually expand

138、to around 50 000 companies by 2029,including listed SMEs who will use a simplified reporting standard12.In the UK,the FCA introduced climate-related disclosures aligned with the TCFD on a comply or explain basis in December 2021,with a phased-in application.The FCA is expected to launch a consultati

139、on in H1 2024 on the adoption of the ISSB standards in the UK,and in parallel on the specific transition plan framework building on the recommendation of the UK TPT.In the US,the SEC consulted in March 2022 on its proposed climate-disclosure rule,with the final rule remaining yet to be published.Gen

140、erally,the application of sustainability reporting regimes will take time to mature.Many corporates will be subject to such comprehensive non-financial disclosures for the first time.They will need to invest in data collection systems,human resources,and capacity building as well as gain implementat

141、ion experience.Potential difficulties regarding the initial implementation of these reporting frameworks seem generally acknowledged by policymakers and regulators at the early stage.Also,market and stakeholder feedback13 recommending international consistency and proportionality has translated into

142、 early efforts to avoid fragmentation between the ISSB and ESRS frameworks as well as various measures and reliefs to ease implementation.Allowance has been made for the specific challenges of reporting on Scope 3 data.IFRS S2 provide transitional reliefs and other flexibility(e.g.reliance on estima

143、tions)in acknowledgement of the complexity for value chain reporting.The ESRS allow entities,except those with over 750 employees,to omit Scope 3 emission disclosures in their first year of reporting,even when material.The framework legislation for the ESRS,i.e.the CSRD,adopts a general“comply or ex

144、plain”approach for the first three years of any value chain reporting where data is not available.12.See here for a summary of the CSRDs phased-in application(source:GrantThorton)13.ICMAs responses to the consultations on the ISSB standards,the ESRS,and the UK TPT recommendation can be found here.18

145、Transition Finance in the Debt Capital MarketTransition plans as the next stepTo summarise,transition plans are essentially entity-level,forward-looking disclosures on decarbonisation ambition,targets,actions,means,and financial and other resources that are of strategic nature and supported by effec

146、tive climate governance.We summarise in the table below definitions of transition plans in the leading international disclosure frameworks14:FrameworkDeveloped/adopted byTransition plan definitionsIFRS S2(Climate-related Disclosures)ISSB“An aspect of an entitys overall strategy that lays out the ent

147、itys targets,actions or resources for its transition towards a lower-carbon economy,including actions such as reducing its greenhouse gas emissions.”UK TPT Disclosure FrameworkUK Transition Plan Taskforce(UK TPT)“A climate-related transition plan is an aspect of an entitys overall strategy that lays

148、 out the entitys targets,actions or resources for its transition towards a lower-carbon economy,including actions such as reducing its greenhouse gas emissions.(Source:IFRS S2 AppendixA)”.ESRS E1(climate change)EC(as advised by EFRAG)“An aspect of an undertakings overall strategy that lays out the u

149、ndertakings targets,actions and resources for its transition towards a lower-carbon economy,including actions such as reducing its GHG emissions with regard to the objective of limiting global warming to 1.5C andclimate neutrality.”The Glasgow Financial Alliance for Net Zero(GFANZ)provides guidance

150、both on financial sector and corporate transition plans.It has published15 extensively on corporate transition plans which it characterises as articulating“a companys overall approach to the net-zero transition,including information regarding its climate objectives,targets,actions,progress,and accou

151、ntability mechanisms,and helps define that companys overall role and level of ambition in the transition”.GFANZ has identified five themes(Foundations,Implementation Strategy,Engagement Strategy,Metrics&Targets,Governance)comprising ten components that provide relevant information for financial inst

152、itutions when evaluating a companys transition plan.The OECD Guidance on Transition Finance released in October 2023 defines ten elements for credible corporate transition plans.These are:(i)setting temperature goals,net-zero,and interim targets in line with the goals of the Paris Agreement;(ii)usin

153、g sectoral pathways,technology roadmaps,and taxonomies;(iii)measuring performance and progress through metrics and KPIs;(iv)providing clarity on use of carbon credits and offsets;(v)setting out a strategy,actions,and implementation steps,including on preventing carbon-intensive lock-in;(vi)addressin

154、g adverse impacts through DNSH and RBC due diligence;(vii)supporting a just transition;(viii)integration with financial plans and internal coherence;(ix)ensuring sound governance and accountability;and(x)transparency and verification,labelling,certification.A Transition Plan Taskforce(TPT)was launch

155、ed by HM Treasury in April 2022.The TPT issued its final recommendation for a dedicated transition plan framework in October 2023 and launched in November 2023 a consultation on sector-specific guidance for preparers to interpret the framework for their sectors.The UK TPTs recommendation stands out

156、as the most the most focused,structured,and detailed framework for transition plans so far.It builds on and is closely aligned with the TCFD,the ISSBs standard IFRS S2,as well as the work of GFANZ.The UK TPT recommends such plans be standalone publications sitting alongside financial reports,which h

157、as also been designated as best practice by ICMAs CTFH.14.As mentioned above,the Principles also provide relevant guidance for transition plans in the CTFH.CBI have also developed high-level requirements for transitions plan with five“Hallmarks”presented in the paper“Transition finance for transform

158、ing companies”in September 2022.15.Expectations for Real-economy Transition Plans,September 2022.19Transition Finance in the Debt Capital MarketOverview of the UK TPT recommendation Source:TPT Disclosure Framework October 202320Transition Finance in the Debt Capital MarketFrom voluntary adoption to

159、mandatory requirementIt is important to note that while current sustainability and climate performance including GHG emissions are mandatory to disclose,where material,under the ISSB standards and the ESRS,entities are not obliged to have transition plans,science-based targets,or even,any targets at

160、 all.The applicability of transition plan and related disclosures is therefore contingent on entities voluntarily having them in the first place.ESRS E1 therefore states that in the case an undertaking does not have a transition plan in place,it shall indicate whether and,if so,when it will adopt a

161、transition plan.Such voluntary and disclosure nature of forward-looking commitments may however change going forward.Already,theCSDD Directive in the EU obliges certain large companies to“adopt”a transition plan compatible with the Paris Agreements 1.5 C objective,including EU entities with over 100

162、0 employees and net global turnover over EUR450 million and non-EU entities with over EUR450 million turnover generated in the EU,in a phased manner until 2029.For the real economy companies,this essentially implies adapting business models to address to climate risks,and where relevant,set apart th

163、e CapEx and OpEx required to invest for decarbonisation.The adoption of transition plans by the financial sector would also create a pressure for real economy decarbonisations as the focus is on banks and investors“financed emissions”.It is reported that the CSDD Directives requirement for transitio

164、n plans would also apply to the financial sector while similar requirements can be introduced for banks under prudential regulation.Additionally,a number of market initiatives have so far promoted the voluntary adoption of transition plans by the financial sector and developed guidance to this end.A

165、ccording to GFANZs Progress Report of December 2023,several major financial institutions have published their first plans in 2023 using the GFANZs Net Zero Transition Plan Framework,with at least 250 more expected in 2024.Influenced by exiting market sources,a number of official sector guidance has

166、been released recently for the financial sector transition planning,such as the Hong Kong Monetary Authoritys Planning for net-zero transition(August 2023)and the US Treasurys Principles for Net Zero Financing and Investment(September 2023).ICMA also recommended in its response to the recent compreh

167、ensive consultation on the EUs Sustainable Finance Disclosure Regulation(SFDR)to consider a uniform disclosure to understand all funds exposure to investees who are implementing credible transition plans(i.e.aligned with ESRS,ISSB,and/or ICMA CTFH)where climate risks are material.This would apply re

168、gardless of presence of sustainability claims in fund products and may prove an easy-to-understand metric especially for retail investors and create a pressure on investees to adopt transition plans where this is not already required by law beyond just disclosure.As such,it may help reorienting capi

169、tal flows towards credibly transitioning investees.Where the law does not directly require the adoption of transition plans,all this together may turn transition plans into a“de-facto”requirement for most corporates issuing in the international debt markets.It would therefore be optimal for the mark

170、et to anticipate or accompany regulation while meeting increasing investor demand,by promoting the voluntary provision of transition plans by issuers,especially in the hard-to-abate sectors.Increasing the market impact of transition plans through convergence The widespread adoption of transition pla

171、ns integrating international reporting standards such as the IFRS S2 and ESRS E1 would support the development of transition finance and of specifically transition-themed sustainable bond issuances in several ways by:Providing strategic context to evaluate the consistency of climate transition theme

172、d sustainable bonds with issuer level transition and sustainability commitments16.This would also help reduce greenwashing risks,as we explained in our publication“Market integrity and greenwashing risks in sustainable finance.”Helping issuers avoid controversy related to potential carbon lock-in ri

173、sk in their individual projects as transition plans promote transparency and supply context on an organisations overall decarbonisation efforts.16.We note that the 2023 update to the CTFH includes an appendix of illustrative example of issuance disclosures that aim to reinforce the link between sust

174、ainable bond issuances and broader transition strategies and targets.Similarly,in the UK,the FCA discussed some additional prospectus disclosures on the link between SLBs and broader sustainability and transition strategies.21Transition Finance in the Debt Capital Market Enhancing SLB target setting

175、 and KPI selection with standardised sustainability reporting metrics,disclosures,and materiality guidance while potentially providing context for the evaluation of failed SPTs and circumstances beyond an entitys control.The international standardisation of transition plans will underpin their usabi

176、lity and maximise their relevance in the market.Looking at the IFRS S2,ESRS E1,and UK TPT,there is currently variation in the level of specificity,prescriptiveness,detail,and structure of transition plans and related elements,even if these frameworks converge on the need for them to be strategic and

177、 material to the future business model and supported by effective corporate governance.For example,although the EUs ESRS E1 lists transition plans as the very first disclosure under the strategy pillar and provides high level guidance on the expected content,the structure of transition plans is not

178、yet clearly established.IFRS S2 developed by the ISSB merely refers to the disclosure of transition plan,if the entity has one,under the strategy pillar of the broader climate reporting and without much specific and direct content guidance.To illustrate further,both the CTFH and the ESRS E1 allow th

179、e use of carbon credits only to abate residual emissions while the IFRS S2 does not provide any limitation.The ESRS E1 is otherwise quite prescriptive in some target setting practices.For instance,it requires target values at least for 2030,and 5-yearly updates to the baseline disclosures and target

180、s from that date.The CTFH also has more direct and explicit reference to mitigation strategies regarding just transition and other sustainability trade-offs in the climate transition context compared with other frameworks.Nonetheless,it is possible to achieve convergence through market practice betw

181、een the CTFH and the IFRS S2,ESRS E1,and UK TPT.As mentioned,ensuring the strategic nature of climate transition to the entitys future and effective climate governance is common to all these frameworks.It should also be possible for an entity to align with the key common elements of these frameworks

182、 by publishing an integrated standalone transition plan,sitting alongside financialreporting.Proposed structure for integrated transition plan(under CTFH,IFRS S2,ESRS E1,and UK TPT)As a contribution to this effort,building on the framework of the CTFH,we are proposing a structure for such an integra

183、ted transition plan with four elements as illustrated above.We have also attached in appendix:Key actions&disclosures for an integrated transition plan(Appendix A).Summary comparison of key transition-related elements under CTFH,IFRS S2,ESRS E1,&UK TPT(Appendix B).Transition strategy,materiality&gov

184、ernanceScience-based targets&metricsImplementation transparencyVerification&Reporting22Transition Finance in the Debt Capital MarketBroader policies to support transitionIt is important to underline that the success and development of transition finance is both a factor and contingent on the wider e

185、conomic transition necessary to align with the goals of the Paris Agreement.GFANZ,which brings together a global coalition of eight independent net-zero financial Alliances17 with now over 675 financial firms in more than 50 countries,emphasises that action by financial institutions,while critical,c

186、annot substitute for,or succeed,without the necessary action by government.In October 2021,it issued a Call to Action on G20 governments with specific policy requests and recommendations which includes economy-wide net-zero targets aligned to 1.5 C;reform of financial regulations to support the net

187、zero transition;phase-out of fossil fuel subsidies;pricing carbon emissions;mandatory net zero transition plans and climate reporting for public and private enterprises by 2024.GFANZs subsequent work on Net Zero Public Policy can be found here.Also,in October 2022,the G20 Sustainable Finance Working

188、 Group released its report which introduces a Transition Finance Framework with five pillars:(i)identification of transitional activities and investments;(ii)reporting on transition activities and investments;(iii)transition-related finance instruments;(iv)designing policy measures;and,(v)assessing

189、and mitigating negative social and economic impacts.The pillar focused on designing policy measures states that policy action is needed to send correct market signals to incentivise and accelerate the mobilisation of private capital flows to enhance the sustainability or support the orderly transiti

190、on of high-emitting and/or hard-to-abate sectors and to mitigate the risks of creating stranded assets.The G20 Transition Framework separates policy measures into two categories:(i)the use of public financing,de-risk,or support/incentives to improve the availability and affordability of climate tran

191、sition finance;or(ii)price and non-price-based policy tools(such as certain incentives,regulatory measures,sectoral standards,etc.)designed to reduce emissions and accelerate the climate transitions by internalising the costs of firms and projects to inform the financial decision-making of market pa

192、rticipants.Examples of policy measures provided by the G20 Transition Finance Framework De-risking facilities,such as government,MDBs provided loan guarantees or first-loss provisions;Concessional financing towards transition firms and/or projects,such as interest subsidies(either directly or on-len

193、ding via commercial banks);Subsidies for third party verification of transition finance instruments(e.g.,used in Hong Kong SAR of the PRC,Japan,and Singapore);Central bank instruments(e.g.,used by the Peoples Bank of China,Bank Indonesia,and Bank of Japan)where mandates allow;Emission trading scheme

194、s(ETS),carbon taxes,or other emissions pricing mechanisms that put a price on covered emissions,where revenues could also be used for a variety of purposes,including for example for supporting climate-aligned investments,and dividend/rebate programs for impacted communities;Investment by government

195、sponsored“transition funds”;Public procurement,as a driver for innovation and for providing industry with incentives to develop environmentally friendly works,products and services,government spending for green research and development of technologies that support the climate transition activities;P

196、referential tax treatment or incentives for companies engaged with transition activities,e.g.,via accelerated depreciation of fixed assets or other tax credits(in order to internalise external benefits);17.The eight sector-specific alliances that are part of GFANZ are Net-Zero Asset Owner Alliance,N

197、et-Zero Asset Managers initiative,Paris Aligned Asset Owners,Net-Zero Banking Alliance,Net-Zero Insurance Alliance,Net Zero Financial Service Providers Alliance,Net Zero Investment Consultants Initiative,the Venture Climate Alliance.23Transition Finance in the Debt Capital Market Sectoral regulation

198、s that can boost demand or market shares for transition activities,e.g.,setting minimum energy efficiency standards for power,building and manufacturing sectors or environment friendly labelling certifications for products,and environment management standards like ISO 14000 series etc.(e.g.,Bank Ind

199、onesias LTV on green property loans and 0%down payment for electric vehicle purchase);and,Introduction of regulatory or voluntary best practice key performance indicators(KPIs)that help market participants to assess a financial products transition strategy and encourage the use of transition finance

200、 instruments.In September 2023,the International Monetary Fund published“Activating Alignment:Applying the G-20 Principles for Sustainable Finance Alignment with a Focus on Climate Change Mitigation.”The comprehensive report provides,among other things,a global framework and technical solutions to e

201、nsure greater credibility,comparability,and interoperability of climate data and presents tools to improve the credibility and uptake of transition planning,encompassing carbon-intensive activities and projects that need to undergo significant decarbonisation or phase-out.It also aims to contribute

202、to the design of a transition finance framework in a constructive way for Emerging Market and Developing Economies(EMDEs),finding the right balance between interoperability and the local context and purpose,and solutions for alignment in EMDE-based supply chains.24Transition Finance in the Debt Capi

203、tal MarketConclusionsTransition finance is available but not yet where it may be most neededWe identify three different overlapping definitions in general use currently for transition finance.These can be differentiated from the wide to the narrow lens of what transition finance is understood to be

204、achieving and include economy-wide transition,climate transition and hard-to-abate transition.The success of the sustainable bond market in contributing to transition finance highly depends on what definition is being referred to.The Principles have promoted transition as a theme applicable to both

205、use-of-proceeds bonds and SLBs.Considering climate transition holistically,the green and sustainability bond market to date has been largely dedicated to the financing of decarbonisation of energy,buildings,and transport sectors.Similarly,the new SLB market is squarely focused on climate transition

206、with 69%of SLBs having GHG reduction and/or renewable energy increase targets.The greatest challenge of transition finance resides,however,with the fossil fuel and the hard-to-abate industries as illustrated by the modest amounts raised to date by issuers from these sectors in the sustainable bond m

207、arket(3%of the combined outstanding of green,sustainability and sustainability-linked bonds).Issuers can aim to overcome reputational concerns with official and market guidance It remains indeed difficult for companies in the fossil fuel and the hard-to-abate industries sectors to raise transition f

208、inance because of a lack of consensus on acceptable and credible technologies and trajectories,and“greenwashing”fears for issuers and investors alike.This paper illustrates various efforts to address these concerns with both official and market taxonomies integrating new approaches to incorporate tr

209、ansition and provide increasingly granular guidance to issuers.Several jurisdictions are also specifically publishing trajectories and roadmaps for the fossil fuel sector and hard-to-abate industries to provide an official reference for market participants on what can legitimately be financed.This a

210、dditional guidance can provide significant comfort to issuers from these sectors wishing to mitigate their reputational risks.The voluntary adoption of standardised transition plans could unlock the marketTransition plans can unlock the wider availability of transition finance by(i)providing strateg

211、ic context to evaluate the consistency of issuer-level transition and sustainability commitments;(ii)helping issuers avoid controversy related to potential carbon lock-in risk in their individual projects and investments;and(iii)enhancing sustainability-linked bond target setting and KPI selection w

212、hile providing context for the evaluation of failed targets and circumstances beyond an entitys control.There is important work under way from regulatory sponsored working groups to define and promote the availability of transition plans.The CTFH published by ICMA also provides a framework to struct

213、ure them.The progress on developing and adopting an international standard for corporate sustainability reporting though ISSB with parallel developments in Europe does not signal the widespread and immediate availability of standardised corporate transition plans.This may change through regulation,s

214、uch as the CSDD Directive in the EU.It would be preferable however to reach this goal earlier and internationally through voluntary provision of corporate transition plans especially in the fossil fuels and hard-to-abate sectors.As a contribution to this goal,we are publishing a structure for such a

215、n integrated transition plan with two documents in appendix which are:(i)Key actions&disclosures for an integrated transition plan(Appendix A)and(ii)Summary comparison of key transition-related disclosures&actions under CTFH,IFRS S2,ESRS E1,&UK TPT recommendation(Appendix B).25Transition Finance in

216、the Debt Capital MarketAppendix A Key actions&disclosures for an integrated transition plan under CTFH,IFRS S2,ESRS E1,&UK TPTElementsKey actions&disclosuresTransition strategy,materiality&governance Adopt a Paris-aligned(ideally its 1.5C objective)and quantitatively measurable climate transition st

217、rategy and targets using science-based pathways provided by recognised third-party sources,where they exist,and disclose methodologies and scenarios used,as well as any third-party certification.Ensure that climate transition strategy is relevant to the environmentally material parts of the business

218、 model.Ensure effective climate governance arrangements including senior management approval of the plan and accountability,remuneration/incentive schemes linked to the transition strategy,and necessary skills and training across the organisation.Where relevant,consider“just transition”and disclose

219、broader sustainability policies addressing negative sustainability impacts and trade-offs.Position transition plan as a standalone document sitting alongside financial reporting.Science-based targets&metrics Disclose GHG emissions covering all material Scopes as formulated in absolute(gross tCO2e),e

220、conomic output(per net revenue),and industry-based metrics.Adopt and disclose absolute gross(tCO2e),and where relevant,intensity-based targets for all material GHG Scopes.When only intensity targets set,disclose also the associated absolute values.Adopt short(ideally 3 years max.),medium,and long-te

221、rm targets,and in any case for 2030,from which date baselines and targets should be updated every 5 years.There should not be any reliance on offsets except for residual(approx.5-10%)emissions in net zero targets,in which case they should be disclosed separately and include credibility proof.Impleme

222、ntation transparency Disclose all the relevant information on(i)planned changes to the business model,operations,products,as well as relevant policies and processes supporting those;(ii)actions for short(ideally 3-years max.),medium,and long term;(iii)planned investments,financial resources,and othe

223、r financial metrics;(iv)internal carbon pricing;(v)engagement strategy and actions for value chains,with industry,public sector,and civil society.Provide a credible link between the various levers and the transition strategy and quantify the contribution from different levers to climate objectives a

224、t least on an estimated basis.Where relevant,disclose potential adverse sustainability impacts and mitigating actions and expenses(e.g.for“just transition”).Verification&reporting Obtain an external review assessing the credibility of the entitys strategy,its alignment to the referenced science-base

225、d trajectories,and its climate governance alongside any potential jurisdictional requirement required for sustainability reporting(e.g.,limited or reasonable assurance).Report annually quantitative and qualitative information on the progress against the transition plan,targets,and metrics.Regularly

226、update the transition plan(ideally every 3 years),and when there are significant changes.26Transition Finance in the Debt Capital MarketAppendix B Summary comparison of key transition-related actions&disclosures under CTFH,IFRS S2,ESRS E1,&the UK TPTElementsCTFH(ICMA)IFRS S2(ISSB)ESRS E1(EC)UK TPT r

227、ecommendationTransition strategy,materiality&governanceRequirementAlignment with the CTFH is a recommended voluntary best-practice which implies some behavioural and disclosure requirements.Disclosure of transition plan and targets is contingent on reporting entities voluntarily having them in the f

228、irst place.Disclosure of transition plan and targets is contingent on reporting entities voluntarily having them in the first place.However,the CSDD Directive in the EU makes the adoption of 1.5 C compatible transition plans mandatory for certain large EU and non-EU entities(including in the financi

229、al sector).Subject to the FCAs upcoming consultation on transition plans(expected in H1 2024),it is expected that disclosure of transition plan and targets will be contingent on reporting entities voluntarily having them in the first place.MaterialityClimate transition strategy should be relevant to

230、 the environmentally material parts of an issuers business model.Subject to reporting entitys own materiality assessment.Subject to reporting entitys own materiality assessment.However,if the entity concludes climate change is not material,it shall publish a detailed explanation.Subject to reporting

231、 entitys own materiality assessment.27Transition Finance in the Debt Capital MarketElementsCTFH(ICMA)IFRS S2(ISSB)ESRS E1(EC)UK TPT recommendationTransition strategy,materiality&governanceAmbitionClimate transition strategy should be aligned with,benchmarked against,or otherwise reference recognised

232、 third-party,science-based trajectories,where they exist.When third-party trajectories are not available,issuers should consider industry peer comparison and/or internal methodologies/historical performance.Aligning the business plans with a 1.5C trajectory will be perceived as most credible;at a mi

233、nimum,issuers should align to a well below 2C trajectory.Disclosure of how the latest international agreement on climate change,including jurisdictional commitments,informed the targets;whether the targets and relevant methodology are validated by a third party,and whether the targets are derived fr

234、om a sectoral decarbonisation approach.Disclosure of whether and how targets set by the entity are science-based,compatible with 1.5C objective,assured by a third-party,and which framework or methodology they are based on(including sectoral decarbonisation pathways and underlying policy scenarios).H

235、owever,the CSDD Directive in the EU makes the adoption of 1.5 C compatible transition plans mandatory for certain large EU and non-EU entities(including in the financial sector),imposing a mandatory ambition level through“best efforts”.Disclosure of how the latest international agreement on climate

236、change,including jurisdictional commitments,informed the targets;disclosure of the consideration of and alignment with any external requirements,commitments,science-based targets,pathways,roadmaps or scenarios(e.g.national or international commitments of governments,targets required by law or regula

237、tion,sectoral pathways,roadmaps or other scenarios,voluntary commitments);disclosure of whether targets and methodology have been validated by a third-party.GovernanceDisclosure of clear oversight and governance of an issuers climate transition strategy,including management/board level accountabilit

238、y.Disclosure of who oversees the setting of targets and progress including whether and how remuneration policies are correlated with these as well as the role of the management in governance processes,controls,and procedures.The other core content of Governance section of the IFRS S2 is also relevan

239、t.Disclosure of whether and how climate-related considerations are factored into the remuneration of members of the administrative,management and supervisory bodies,including in relation to GHG reduction targets,and whether transition plans are approved by such bodies.More general governance related

240、 disclosures are provided under ESRS 2 on General Disclosures.Disclosure on the governance bodies/individuals responsible for the oversight of the plan;managements role in the processes,controls,and procedures and how these are embedded within the wider control,review and accountability mechanisms;a

241、lignment of the culture and of incentives/remuneration policies with the companys strategic transition ambition;and how necessary skills,competencies,and training across the organisation are being ensured.28Transition Finance in the Debt Capital MarketElementsCTFH(ICMA)IFRS S2(ISSB)ESRS E1(EC)UK TPT

242、 recommendationTransition strategy,materiality&governanceJust Transition/DNSHEvidence of a broader sustainability strategy to mitigate relevant environmental and social externalities,including just transition considerations,where appropriate,and contribution to the UN SDGs are listed as recommended

243、disclosures under the Strategy and Governance pillar.The CTFH also states that the trajectory should consider issuers broader environmental and social impact,and an issuer should seek to mitigate negative externalities.Just transition is not directly included in the climate transition plan-relevant

244、disclosures at this stage18.Just transition and the DNSH aspects are not directly included in the climate transition plan-relevant disclosures at this stage,but rather covered under the ESRS S1 Own Workforce and other topical ESRS as relevant.Disclose whether and how impacts and dependencies of the

245、transition plan on stakeholders,society,the economy,and the natural environment have been identified,assessed,and taken into account.Science-based targets&metricsGHG EmissionsDisclosure of the baseline year and historic emissions(including absolute emissions,where intensity metrics are the main indi

246、cator).Where material,Scope 3 emissions should be disclosed,or the issuer should disclose a timeline for Scope 3 reporting.Mandatory GHG emission disclosures covering all material Scopes using both absolute(gross tCO2e)and industry-based metrics with the latter considering also the ISSBs future indu

247、stry-specific guidance.Transitional relief(s)and other flexibility(e.g.use of estimations)apply for Scope 3 reporting.Mandatory GHG emission disclosures covering all material Scopes in both absolute(gross tCO2e)and economic output intensity(total GHG emissions per net revenue)metrics.Transitional re

248、lief(s)and other flexibility(e.g.use of estimations)apply for Scope 3 reporting.Disclosure of absolute gross GHG emissions(tCO2e)for Scope 1,Scope 2,and if appropriate,Scope 3 emissions,generated during the reporting period19.18.Other general ISSB guidance,such as on interdependencies and other sust

249、ainability risks,may however be relevant.ISSB also consulted on its future priorities with a potential focus on biodiversity,human capital,and human rights,and most recently,directed the staff to develop educational material regarding some nature and social aspects of climate-related risks and oppor

250、tunities.19.In the UK,the disclosure of GHG emissions is currently mandated in line with the TCFD reporting and on a comply or explain basis.The TCFD framework will likely be replaced by the UKs adoption of the IFRS S1 and S2.The current TCFD-based GHG disclosure mandate refers to the Scope 3 report

251、ing“if appropriate.”29Transition Finance in the Debt Capital MarketElementsCTFH(ICMA)IFRS S2(ISSB)ESRS E1(EC)UK TPT recommendationScience-based targets&metricsGHG target metricsTargets formulated either in intensity-based or absolute metrics;in the case of former,projections for absolute emission re

252、duction should also be disclosed.Where targets are quantitative,disclosure of whether they are absolute,or intensity based.In determining metrics,the entity should consider both cross-industry and industry-based metrics.If the undertaking has set GHG emission reduction targets,disclosure of targets

253、in absolute(tCO2e or%of emissions of a base year),and where relevant,in intensity value(per physical activity or economic output,as per ESRS sector standards).If the entity has only set an intensity target,it shall nevertheless disclose the associated absolute values.Where targets are quantitative,d

254、isclosure of whether they are absolute,or intensity based.HorizonsCredible interim targets in the short and medium-term on the trajectory towards a long-term,Paris-aligned goal.References to“milestones”and“interim targets”.Disclosure of target values at least for 2030,and if available,for 2050,and u

255、pdate of baselines and targets on a 5-years rolling basis as of 2030.Base year for a new target should not precede the start of the target period date by more than three years.There are other detailed Application Requirements under ESRS E1 on baseline references and calculations.Disclosure of short(

256、recommended as max.3 years),medium,and long-term targets and milestones including definitions for each.30Transition Finance in the Debt Capital MarketElementsCTFH(ICMA)IFRS S2(ISSB)ESRS E1(EC)UK TPT recommendationScience-based targets&metricsCarbon creditsUse of high-quality and integrity carbon cre

257、dits for offsetting is allowed only to abate the residual emissions,and such needs to be justified while issuer carbon credit procurement policy and governance to be disclosed.Disclosure of the planned use of and reliance on carbon credits to achieve the net targets,their type(e.g.,whether nature or

258、 technology-based),third-party verification/certification schemes,and any other credibility and integrity disclosures.GHG removals,carbon credits,or avoided emissions cannot be used to meet targets.However,in the case of a net-zero target,they can be used to neutralise the residual emissions(after r

259、educing 90-95%of emissions),as supported with disclosures including to demonstrate credibility.Disclosure on the use of carbon credits in achieving strategic ambition,alongside justification,third-party verification/certification,standard or methodology used,type of carbon credit,and other credibili

260、ty and integrity factors.The TPT however states that good practice transition plans should prioritise decarbonisation through direct abatement over purchasing carbon credits.31Transition Finance in the Debt Capital MarketElementsCTFH(ICMA)IFRS S2(ISSB)ESRS E1(EC)UK TPT recommendationImplementation t

261、ransparencyRecommended disclosure of CapEx and CapEx roll-out plan(inc.%green CapEx vs.total and its expected evolution)as well as qualitative and quantitative climate outcome and impact these are expected to enable;R&D investments;phase-out plans and divestments;internal carbon cost assumptions;pot

262、ential locked-in emissions from key assets/products;assets/revenues/expenditures/divestments aligned to various levers;any other“beyond BAU”expenses;governance and process changes.A specific itemisation of the main levers towards GHG emissions reductions is also required under the strategy or transi

263、tion plan disclosures.Where relevant,issuers should outline how they have incorporated the“just transition”and disclose on adverse impacts on the workforce,community,and surrounding environment and related mitigation strategies.They may also detail any social expenditures that are considered relevan

264、t.Disclosure of(i)current and anticipated changes to the business model including resource allocation(e.g.,decommissioning,R&D,etc.);(ii)current and anticipated direct efforts(e.g.,changes in production processes or equipment,relocation of facilities,workforce adjustments,changes in product specific

265、ations)and indirect efforts(e.g.,working with customers and supply chains);(iii)planned actions and resources to achieve the targets;(iv)capital deployment(CapEx,financing,or investments);(v)carbon price considerations and cost assumptions.Disclosure of(i)the identified levers and key actions(e.g.,u

266、se of RE,energy or material efficiency,changes to product and service portfolio,adopting new technologies,phase-outs and decommissions,or substitution,etc.)and their overall expected quantitative contributions to targets achievement;(ii)quantitative disclosures of investments and financial resources

267、(including EU Taxonomy-aligned CapEx for those subject to Art.8 of the Taxonomy Regulation);(iii)qualitative assessment of potential locked-in emissions from key assets/products;(iv)internal carbon pricing schemes.Disclosure of(i)short(recommended as maximum 3 years),medium-,and long-term actions re

268、lated to business operations(e.g.,production processes,equipment,workforce adjustments,supply chain and procurement,asset phase outs,etc.);(ii)changes to product and service portfolio(including any underlying tools,methodologies,definitions used to classify products and services);(iii)relevant polic

269、ies and conditions(e.g.,energy use,procurement);(iv)financial planning(e.g.financial resources,and effects of the transition plan implementation on the entitys financial position,cash flow,and performance,taking into account also its investment and disposal plans);(v)engagement strategy and actions

270、for the value chains,with industry and public sector and civil society.Implementation policies may also cover safeguards to address potential adverse human rights and labour impacts and impacts on the natural environment.32Transition Finance in the Debt Capital MarketElementsCTFH(ICMA)IFRS S2(ISSB)E

271、SRS E1(EC)UK TPT recommendationVerification&reportingExternal ReviewSubstantive review required for assessing the credibility of the entitys strategy,its alignment to the referenced science-based trajectories,and its climate governance.Also,the GBP/SBP/SBG recommendations for the external review of

272、frameworks and allocation reports as well as the SLBP requirement for annual verification of KPIs(e.g.,annual limited or reasonable assurance)can be leveraged to demonstrate alignment with the CTFH.Up to the individual jurisdictions adopting the ISSB standards to decide on the type and level of exte

273、rnal verification and assurance.Mandatory limited assurance which would likely be upgraded to a reasonable assurance in future as per the CSRD.Disclose information about which aspects of the transition plan are subject to external assurance or verification,including the nature of the assurance or ve

274、rification.Eventually,the assurance and its required level may be determined by the UK policymakers.ReportingRelevant disclosures can be referenced in issuers,annual reports,sustainability reports,climate transition strategy,statutory filings and/or investor presentations and should be publicly acce

275、ssible to investors.The Appendix of the CTFH provides examples of sustainable bond disclosures to demonstrate CTFH alignment,leveraging also the existing post-issuance reporting requirements of the Principles.Annual quantitative and qualitative disclosure about the progress of the plan.Annual disclo

276、sure of an entitys progress in implementing the transition plan.Entities subject to the CSDD Directive would have to report on the progress and update their transition plans every 12 months.At least annual disclosure on the progress against the targets and the plan.The TPT recommends that the plan s

277、hould be updated every three years,and when there are significant changes.33Transition Finance in the Debt Capital MarketAppendix C The integration of transition in taxonomiesWe summarise below the efforts and progress from both the market and the official sector to incorporate the complexity of tra

278、nsition into taxonomies.Transition as an activity with an outcomeThe EU Taxonomys transition perspective can be defined as twofold.Firstly,the Taxonomy defines green transitional activities as those which(i)have no technological and economically feasible low carbon alternative;(ii)are consistent wit

279、h 1.5C objective by having the best GHG performance in the sector and the industry;(iii)do not hamper the development and thedeployment of low carbon alternatives;and(iv)do not cause carbon lock-in.There are currently 29 transitional activities with technical screening criteria(TSC)listed in the Cli

280、mate Delegated Act out of 95 activities in total.In several cases,the TSC for these activities are outcome-based,i.e.,referring to the end-state environmental/GHG performance of an activity.These thresholds and conditions are expected to tighten every three years to accommodate technological and sci

281、entific development and the need for enhanced ambition over time.The eligibility approaches and metrics differ depending on the activity in question,and may include,among other things,quantitative thresholds,relative improvement against a baseline,and less commonly,thresholds embedding a pathway and

282、 sunset dates which aim to avoid carbon lock-in.Eligibility approachesTransitional activity examplesSubstantial Contribution criteriaQuantitative thresholds with physical intensity metric20 3.7:Manufacturing of cement“grey cement clinker where the specific GHG emissions are lower than 0,722(100)tCO2

283、e per tonne of grey cement clinker”Quantitative thresholds embedding a pathway6.7:Inland passenger water transport“where technologically and economically not feasible to comply with point(a),from 1 January 2026 onwards the yearly average GHG intensity of the energy used on-board does not exceed the

284、following limits:76,4 g CO2e/MJ(01.12.2026 31.12.2029);61,1 g CO2e/MJ(01.01.2030 31.12.2034);15,3 g CO2e/MJ from(01.12.2045 31.12.2049);0 g CO2e/MJ(from 1.12.2050.)”Relative improvement7.2:Renovation of existing buildings“Alternatively,it leads to a reduction of primary energy demand of at least 30%

285、”Sunset date4.29:Electricity generation from fossil gaseous fuels“(b)facilities for which the construction permit is granted by 31 December 2030 comply with all of the following:(v)the facility is designed and constructed to use renewable and/or low-carbon gaseous fuels and the switch to full use of

286、 renewable and/or low-carbon gaseous fuels takes place by 31 December 2035.”20.The quantitative thresholds for many manufacturing activities are based on the average value of the top 10%most efficient installations in GHG performance in Europe according to the EU ETS data.34Transition Finance in the

287、 Debt Capital MarketThe second transition aspect of the EU Taxonomy comes from its implementation.The CapEx metric speaks to the investments of a company and signals its future direction.It is incorporated both as a metric for annual Taxonomy reporting for entities subject to the Corporate Sustainab

288、ility Reporting Directive and as a use-of-proceeds type under the EU Green Bond Standard.Importantly,such a CapEx definition also includes an entitys plans to expand the Taxonomy-aligned activities or render existing ones as Taxonomy-aligned within usually five,and exceptionally ten years(the“CapEx

289、Plan”mechanism).21 These CapEx Plans can be disclosed as Taxonomy-aligned immediately rather than being subject to the completion of the project.This aims to create a regulatory incentive to consider Taxonomy alignment comprehensively in both greenfield and brownfield investments in a forward-lookin

290、g and outcome-based manner.The ISO Taxonomy is generally similar to the EU Taxonomy in its design,classification approach,and high-level eligibility conditions consisting of Substantial Contribution,DNSH,and Minimum Safeguards for social considerations.It is however climate-focused only and prioriti

291、ses international acceptance by recognising regional differences and circumstances including the differing commercial availability of various Best Available Technologies.It provides sector criteria,potential environmental benefits,and environmental performance indicators including high-emitting sect

292、ors(e.g.,cement,aluminium,iron&steel,etc.).The Annex B of the ISO Taxonomy provides exemplary thresholds,criteria,and exclusions also for these transitional sectors/sub-sectors.Nuclear and unabated gas are not included in the ISO Taxonomy.Project and“whitelist”based approachesOn the market side,the

293、MDBs IDFC Common Principles incorporate a project/measure-based approach and provide eligibility principles including for transitional activities,as well as exclusions.The eligibility for transition activities generally refers to high performance country or sector standards,benchmarks,or thresholds

294、that significantly exceed expected performance in a sector or activity.The Common Principles avoid imposing fixed quantitative thresholds to allow flexibility for individual mandates and specific circumstances in the areas of operation of MDBs and the application of other standards or taxonomies.Oth

295、erwise,as a key eligibility approach,it relies on the greenfield and brownfield activity distinction.Greenfield projects must enable substantially higher system-efficiency compared to those normally used in greenfield projects.For brownfield projects,old technologies must be replaced well before the

296、 end of their lifetimes with substantially more efficient technologies.In China,the Green Bond Endorsed Project Catalogue(2021 edition),which is mandatory to use for green bonds,incorporates a“white-list”,measure-based approach including for transitional areas such as industrial energy efficiency re

297、trofit.Besides,the Peoples Bank of China(PBOC)is currently leading the development of a national policy framework for transition finance.The framework will incorporate a broad approach towards transition,including a dedicated transition taxonomy,disclosures for transitioning companies,dedicated inst

298、ruments,incentives for transition,and just transition aspects.While the PBOCs detailed approach on the transition taxonomy is yet to be disclosed,it is expected to focus on the sectors of agriculture,buildings and building materials,coal and thermal power,and steel.Some local authorities in China su

299、ch as the Huzhou City have already developed transition taxonomies.21.The details of the CapEx plan mechanism are set under the Article 8 Delegated Regulation.35Transition Finance in the Debt Capital MarketThe“traffic lights”approachIn Asia,the prominent transition debate is also at the heart of ong

300、oing taxonomy works by the official sector.Given the diversity of development and circumstances of ASEAN Member States,the ASEAN Taxonomy(see Version 2)is being developed with a specific focus on inclusivity.It consists of a multi-tiered approach and two main elements:(i)a principles-based Foundatio

301、n Framework with a qualitative assessment of activities based on a sector agnostic decision tree and(ii)a Plus Standard with detailed technical criteria,metrics,and thresholds.Several aspects of the ASEAN Taxonomy are transition relevant.The focus on the emission intensive energy sector for technica

302、l criteria development is an obvious starting point.The“traffic lights”approach also incorporates different performance levels for classification purposes.Not meeting the DNSH does not lead to immediate disqualification as“remedial measures”,when already commenced or to be implemented within five ye

303、ars,allow activities to qualify for green or amber-level performance categories.As the ASEAN Taxonomy assumes that“amber”tiers will be gradually phased out over time and performance will converge into the green level,sunsetting is adopted in the relevant technical criteria.We note that similar trans

304、ition aspects are also incorporated in individual Asian taxonomies,such as those in Malaysia and Singapore.Structure of the ASEAN TaxonomySource:ASEAN Taxonomy for sustainable finance(Version 2)The EU Platform on Sustainable Finance recommended that the EU Taxonomy introduce an“amber”performance lev

305、el and incentivise“interim transitions”(i.e.,from red to amber or within the amber category itself)on the way towards the green.This recommendation has so far not been acted on,despite the Commission recently endorsing such use on a voluntary basis in its Recommendations on transition finance of Jun

306、e 2023.36Transition Finance in the Debt Capital MarketIntegrated approachesThe traffic-lights Taxonomy of the CBI is particularly relevant for use in green financial instruments.It also constitutes the cornerstone of the CBI certification alongside its more detailed Sector Criteria.The CBI has recen

307、tly started to provide Sector Criteria for carbon-intensive businesses including basic chemicals,cement,shipping,and steel.These Sector Criteria are applicable at different levels to allow the certification of measures/projects,asset,and/or entities,at the choice of the certification seeker.The crit

308、eria for individual sectors also rely on a variety of eligibility approaches.Examples include:(i)measures and projects that are automatically eligible;(ii)measures eligible if leading to a certain outcome in existing facilities(e.g.,X%cut in emission intensity by 2030);(iii)facility-level criteria f

309、or new investments;and(iv)tiered entity-level criteria for certification,requiring quantitative intensity values to be met over a declining emissions pathway,at least by 2030.The Singapore-Asia Taxonomy is essentially based on a traffic-light system where the green category is built on science-based

310、 pathways and the EU Taxonomys TSC,but still reflects local specificities in some cases.The green category includes both near-zero emission activities and those decarbonising in line with a 1.5 C pathway.New activities should generally meet the criteria and thresholds for the green category.On the o

311、ther hand,the amber category is relevant to existing assets and brownfield investments,includes activities currently not on a 1.5 C pathway,but are either moving towards green or facilitating significant emissions reductions in the short term.In any case,amber activities are constrained with sunset

312、dates as transition cannot last forever,usually by 2030,and for some industrial activities,by 2035.Source:Singapore-Asia TaxonomyIn addition to facility-level thresholds-based criteria,the Singapore-Asia Taxonomy also incorporates a measures-based approach for some activities(e.g.basic chemicals,cem

313、ent,hydrogen).Among other things,this is intended to enhance the usability of the Taxonomy for CapEx and labelled use-of-proceeds bonds.For hard-to-abate industries,since such measures-based approach is more flexible compared with attaining a certain quantitative performance level,it needs to be sup

314、ported with 1.5 C aligned transition plans placing such measures at a strategic and continuous decarbonisation context.TimeEmissions37Transition Finance in the Debt Capital MarketIn Australia,under the ASFI Taxonomy project,joint industry-government initiative,a detailed proposal has been made on ho

315、w to integrate transition.For activity-level categorisations,it also proposes to require a credible transition plan,net zero target,and public climate disclosures going beyond the satisfaction of activity-level requirements.Similarly,the green and transition taxonomy project in Canada,initiated and

316、backed by financial institutions and private sector,contemplates that green or transition instrument issuers comply with entity-level transition planning requirements in addition to project level criteria of the Taxonomy.Transition as a managed phase outFor the first time,there have recently been pr

317、oposals to include technical criteria for the managed phase out of coal,in taxonomies,as in the ASEAN and Singapore taxonomies.The managed phase-out of carbon intensive assets broadly refers to strategies to finance or enable the early retirement of such assets.There already exist international init

318、iatives by MDBs,agreements between developed and developing nations22,and market-led guidance by GFANZ and CBI,CPI,and RMI23 on the concept.While being a new development,the focus in Asian taxonomies on the coal phase out is not surprising given the energy mix in the region.The ambition and stringen

319、cy of the criteria is of utmost importance to ensure the credibility of a taxonomy which incorporates such activity.The Singapore-Asia Taxonomy adopts a hybrid approach for managed coal phase out.Itcombines combine facility-,entity-,and energy system-level criteria and include several safeguards,amo

320、ng which a commitment from the coal plant owner for no new coal plant development and having an entity-level,Paris-aligned transition plan in place.The CTFH and other transition plan frameworks already recognise phase outs,decommissioning,and divestments as potential decarbonisation levers.Having a

321、transition plan could indeed offer a broad strategic view on exiting coal and future business transformation(e.g.,shift to renewables).As such,it could also address the risk of moral hazard and unintended consequences,such as a collective backloading by coal operators of their phase-outs towards the

322、 end of 2040 coal exit deadline recommended by the International Energy Agency(IEA)for developing economies.Otherwise,such unwanted situation could arise due to green or amber labelling provided under a taxonomy.22.For example,in 2021,the Asian Development Bank has launched the Energy Transition Mec

323、hanism which aims to use concessional and commercial capital to accelerate the retirement or repurposing of fossil fuel power plants and replace them with clean energy alternatives.The coal-phase out is also the core pillar of Just Energy Transition Partnerships which now cover several developing ec

324、onomy countries.23.In June 2022,GFANZ published its guidance on the managed phaseout of high-emitting assets,and,in December 2023,its APAC-focused guidance.The CBI,CPI,and RMI,also jointly published Guidelines for Financing a Credible Coal Transition in November 2022.38Transition Finance in the Debt

325、 Capital MarketAppendix D-Non-exhaustive list of existing transition financedefinitionsSourcesOrganisation(s)DefinitionsBasic Guidelines on climate transition finance(May 2021)Japans Financial Services Agency and Ministry of Economy,Trade and Industry;and Ministry of the Environment“Transition finan

326、ce refers to a financing means to promote long-term,strategic GHG emissions reduction initiatives that are taken by a company considering to tackle climate change for the achievement of a decarbonised society.In particular,Japan,with the aim to achieve 2050 carbon neutral,defines transition finance

327、as a finance for supporting the fundraiser who have set their target consistent with the Paris Agreement and satisfied the elements set forth in these Guidelines.”G20 Sustainable Finance Report(October 2022)G20 Sustainable Finance Working Group“Transition finance,as discussed in this report,refers t

328、o financial services supporting the whole-of-economy transition,in the context of the Sustainable Development Goals(SDGs),towards lower and net-zero emissions and climate resilience,in a way aligned with the goals of the Paris Agreement.”Guidance on Transition Finance-Ensuring Credibility of Corpora

329、te Climate Transition Plans(October2022)OECD“In the context of this Guidance,transition finance is understood as finance deployed or raised by corporates to implement their net-zero transition,in line with the temperature goal of the Paris Agreement and based on credible corporate climate transition

330、 plans.”Recommendation on facilitating finance for the transition to a sustainable economy(June 2023)European Commission“Although the Unions legal framework does not define the concept of transition finance,transition finance should be understood as the financing of climate-and environmental perform

331、ance improvements to transition towards a sustainable economy,at a pace that is compatible with the climate and environmental objectives of the EU.Transition finance means financing of investments compatible with and contributing to the transition,that avoids lock-ins,including:(a)investments in por

332、tfolios tracking EU climate transition benchmarks and EU Paris-aligned benchmarks;(b)investments in Taxonomy-aligned economic activities,including:i)transitional economic activities as defined by Article 10(2)of Regulation(EU)2020/852 for the climate mitigation objective,ii)Taxonomy-eligible economi

333、c activities becoming Taxonomy-aligned in accordance with Article 1(2)of Commission Delegated Regulation(EU)2021/2178 over a period of maximum 5(exceptionally 10)years;(c)investments in undertakings or economic activities with a credible transition plan at the level of the undertaking or at activity level;(d)investments in undertakings or economic activities with credible science-based targets,whe