Green bond market needs a new “transition” bond to allow carbon intensive companies to finance their gradual shift away from fossil fuels, AXA Investment Managers has said.
While green bonds have become established options for fixed income investors, AXA IM believes the asset class is at a crossroads, with the potential for the bonds to be undermined by a desire for further issuance which the sector cannot currently provide.
As such, AXA IM’s ESG research and engagement team is calling for a new type of bond that is required to help companies which are not yet green – and will therefore struggle to justify high quality and eligible for any “green taxonomy” green bonds – to instead issue debt which is tied to them becoming greener businesses.
Considering this, AXA IM has developed guidelines to support would-be issuers of transition bonds, covering considerations such as reporting, management of proceeds, and issuers’ sustainability strategies, to create a rigorous market for them.
The bonds could be used to finance projects such as carbon capture storage, cogeneration plants and gas transport infrastructure, among other areas.
These transition bonds would help investors overcome the major challenge of providing capital not just to companies which are already green, but to those which have ambitions to become so.
Yo Takatsuki, AXA IM Head of ESG Research and Engagement, said: “We believe the establishment of a new asset class called Transition Bonds is vital for those issuers which do not have the capacity or capabilities to launch green bonds. Aimed at companies operating in greenhouse gas intensive industries such as materials, extractives, or chemicals, alongside other companies which lack sufficiently green assets to issue a green bond, transition bonds would provide an alternative source of finance specifically aimed at helping the journey to become greener.”
The bonds would be used by companies solely to finance transition projects, with a high level of transparency around the bonds and their use to give investors’ confidence about how their capital is being deployed.
“Transition bonds would allow the quality of the green bond market to avoid being diluted by issuances where the environmental benefit of projects being financed is less clear. The concept of the Green Bond has been proven; it works, and it is here to stay, but that market is now at a crossroads.”
“We believe green bonds must remain a market which prioritises ambition, quality and integrity. It cannot be undermined by secondary concerns. The creation of transition bonds will help maintain the level of quality of the green bond market while offering a source of financing for the other activities necessary for the technological and energy change that will perpetuate the advent of and a low carbon world and economy.” added Yo Takatsuki.
Hans Stoter, Global Head of Core Investments at AXA IM, added: “At AXA IM, we believe that it is essential for asset managers to take a proactive approach to sustainable financing hence we want to play a leading role in the development of Transition Bonds as these have the potential to significantly impact the market. It is necessary for the intensive users of carbon energy to transition towards lower and more sustainable energy consumption.”
“The work our team have done in calling for this new type of bond and outlining the framework for its operation to make this a reality, is a major step for us as a responsible asset manager.”