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ICMA handbook to aid climate transition in debt capital markets

The International Capital Markets Association (ICMA) has launched a Climate Transition Finance Handbook, designed to support those raising funds on the debt capital markets for climate transition-related purposes.

The handbook has been published (8 page / 1.1MB PDF) in the wake of the 2015 Paris Agreement on Climate Change, which set global goals to reduce greenhouse gas emissions. ICMA said meeting these goals required significant financing, and debt capital markets would have a critical role to play in enabling the climate transition by ensuring the efficient flow of financing from investors to issuers wishing to address climate change risk issues.

Smith Sharon

Sharon E. Smith

Head of Learning & Knowledge (Climate & Sustainability)

The Climate Transition Finance Handbook provides guidance to issuers ... on the disclosures they need to make to access debt capital markets finance to make the transition to greener business activities

Finance law expert Sharon E Smith of Pinsent Masons, the law firm behind Out-Law, said:

“Facilitating climate transition finance is an important step towards meeting Paris Agreement goals of net zero carbon emissions and keeping global warming to +1.5 degrees Celsius.

“Article 2.1(c) of the Paris Agreement talks about ‘making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’. The Climate Transition Finance Handbook provides guidance to issuers, particularly those in higher greenhouse gas emission industries, on the disclosures they need to make to access debt capital markets finance to make the transition to greener business activities,” Smith said.

The handbook covers both use of proceeds instruments aligned to the Green and Social Bond Principles or Sustainability Bond Guidelines, as well as general corporate purpose instruments aligned to the Sustainability-Linked Bond Principles.

ICMA noted that issuers were at different stages of the transition to meet Paris Agreement goals. Therefore the handbook does not provide definitions of transition projects, and instead aims to clarify the issuer-level disclosures which are recommended to credibly position the issue of instruments to finance the transition, particularly of ‘hard-to-abate’ sectors such as transport, shipping, chemicals, and building materials.

The recommendations cover four key elements:

1. Issuer's climate transition strategy and governance

The financing purpose should be for enabling an issuer’s climate change strategy. Any ‘transition’ label applied to a debt financing instrument should communicate the implementation of the issuer’s corporate strategy to transform its business model in a way which effectively addresses climate-related risks. Disclosures regarding corporate strategies may be aligned with recognised reporting frameworks such as the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) or similar frameworks.  Provision of an independent technical review of an issuer's strategy may assist investors in developing a view as to the credibility of an issuer's strategy to address climate change risk issues and meet Paris Agreement goals.

2. Business model environmental materiality

Climate transition financing should be sought by an issuer for the funding needed in the strategic change over time to its core business activities driving both current and future environmental impact. Issuers in industries with high greenhouse gas emissions will have the most need for climate transition finance, ICMA said.

3. Climate transition strategy to be science-based, including targets and pathways

The issuer's planned transition trajectory should be:

  • quantitatively measurable;
  • aligned with, benchmarked or otherwise referenced to recognised science-based trajectories;
  • publicly disclosed, ideally in mainstream financing filings; and,
  • supported by independent assurance or verification.

4. Implementation transparency

Market communications in connection with the offer of an instrument to fund an issuer's climate transition strategy should provide transparency of the underlying investment programme including planned capital and operational expenditure to deliver the proposed transition strategy, and including any research and development-related expenditure.

“The credibility of an issuer’s climate transition strategy to meet Paris Agreement goals is key. Following recommended disclosures, including by reference to science-based targets and supported by independent assurance or verification, will also protect against greenwashing risk,” Pinsent Masons’ Smith said.

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