ICMA publishes thought-leadership paper on transition finance in debt capital market

On 14 February 2024, the International Capital Market Association (ICMA) published a paper on transition finance in the debt capital markets. The thought-leadership piece explores the overlapping definitions of transition finance in most use today; recent progress in market and official guidance around transition finance; and analyses the extent to which the sustainable bond market is financing the transition. ICMA concludes that voluntary adoption of transition plans may be the missing piece to driving much needed investment in transition finance, particularly for those in the fossil fuel and hard to abate sectors. 

ICMA’s market research demonstrates the important contribution the sustainable bond market has made to transition finance (in particular climate transition finance). Yet their findings also reveal the challenges facing issuers in the fossil fuel and hard-to-abate sectors to raise transition finance. Issuance from these sectors is estimated at only 3.6 per cent of all outstanding green, sustainability and sustainability-linked bonds, which ICMA attributes to a lack of consensus around credible technologies and industry trajectories coupled with greenwashing concerns.

ICMA sees the market and official sector guidance for issuers (including taxonomies that integrate approaches  to transition and roadmaps/trajectories for the fossil fuel and hard to abate sectors) as helpful progress which may assuage greenwashing concerns by providing clarity around what can be financed. The paper also explores the formalisation of corporate sustainability reporting and standards, which ICMA sees as presenting an opportunity for mainstreaming transition plans.

The paper concludes by homing in on transition plans, which ICMA sees as key to driving much needed financing for the transition. In order to encourage voluntary adoption, particularly by issuers in the fossil fuel and hard-to-abate sectors, ICMA’s paper includes a structure for integrated transition plans to enable an issuer to align with the common elements of the International Sustainability Standards Board’s IFRS S2, European Sustainability Reporting Standards E1, UK Transition Plan Taskforce’s recommendations and ICMA’s Climate Transition Handbook. 

The four common elements of these frameworks are: (i) transition strategy, materiality and governance; (ii) science-based targets and metrics; (iii) implementation transparency; and (iv) verification and reporting. ICMA’s paper includes key actions and disclosures for issuers seeking to prepare a transition plan aligned with these common elements.