Transition bond

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An emerging form of activity-based sustainable finance involving issuers seeking financing to transition their business to a greener, more sustainable model. For example, an energy company might issue a Transition Bond to finance the transition from coal to gas- fired generation. Transition bonds are a relatively new class of ‘use-of-proceeds’ debt instruments, aimed at helping companies in ‘brown industries’ (industries with high GHG emissions) to raise capital to invest in shifting to greener business activities. Transition bonds are different to ‘green bonds’, which are designed for “green industries” such as renewable energy. ‘Brown industries’ include mining, heavy industry (e.g. cement, steel and chemicals), utilities and transport. Whilst brown industries may struggle to become completely ‘green’, some aspects may be essential to achieving the green transition; for example, the mining of minerals that are critical for a low-carbon economy, such as lithium and cobalt used in electric vehicle batteries. Examples of transition bonds issued so far include: Hong Kong-based Castle Peak Company Limited’s US$500m “energy transition bond”, for building a new combined cycle gas turbine unit (2017); Brazilian beef producer Marfrig Global Foods’ US$500m 10-year “sustainable transition bond”, funding the purchase of cattle from Amazon ranchers compliant with non-deforestation and other sustainability criteria (2019); The UK’s Cadent Gas’ EUR500m 12-year bond to facilitate the future supply of hydrogen and other low-carbon gases, and reduce methane leakage (2020).

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London Stock Exchange Transition Bond Segment