• World Climate Foundation

'Financing Credible Transitions': defining a pathway to sustainability

A Leadership Article by Marisa Drew, Global Head of Sustainability Strategy, Advisory & Finance (SSAF), Credit Suisse

A critical factor in our ability to limit global greenhouse gas emissions and achieve a carbon neutral future – ‘net zero' - requires high carbon-emitting industries and the companies operating within them, such as steel, oil and gas companies, to transition to net zero business models.

But finding a solution to help these industries that need to transition is one of the most pressing issues in capital markets today and requires trillions of dollars of investment.

Banks and large financial institutions are trying to play their part in addressing this challenge. Transition bonds are a new form of financing that allow higher carbon-emitters to issue securities that support their efforts to move towards lower carbon business models.

In September 2020, Credit Suisse and the Climate Bonds Initiative presented a new framework and set of standards for this emerging transition finance sector.

In our new report ‘Financing Credible Transitions', we define ambitious and credible transition pathways for companies to deliver the goals of the United Nations climate accord, otherwise known as the ‘Paris Agreement’.

We aim to spark the beginning of an industry-wide collaboration: unifying the definition of ‘transition’ to enable the rapid expansion of the new transition bond market to help drive down carbon emissions. Many companies are concerned about accusations of 'greenwashing' – the gap between a company’s words and its actions – and a new set of standards would help protect against this.

We suggest five principles for an ambitious company to transition to net zero. All company goals and pathways need to: 

  • Align with zero carbon by 2050 and nearly halve emissions by 2030. 

  • Be led by scientific experts and not be entity- or country-specific. 

  • Be sure that credible transition goals and pathways don’t count offsets. 

  • Include an assessment of current and expected technologies that can determine a decarbonization pathway. 

  • Be backed by operating metrics rather than a commitment or pledge.

The transition framework for corporate entities and their activities goes beyond the ‘use of proceeds’ models common in the green bond market and applies to a broad range of financial products, including use of proceeds, sustainability-linked debt and other instruments.

It supports the rapid growth of a transition bond market as part of a larger and liquid climate-related market and should give confidence to investors, clarity for bankers and credibility for issuers.

We want to promote an economy-wide transition, capturing economic activities that have different decarbonization pathways. There are 5 broad categories where transition finance can be applied:

  1. Near Zero: Activities already at or near net-zero emissions

  2. Pathway to Zero: Activities needed beyond 205 with a clear 1.5-degree decarbonization pathway

  3. No Pathway to Zero: Activities needed beyond 2050 but no clear 1.5 degree decarbonization pathway to 2050

  4. Interim: Activities needed now but should be phased out by 2050 2

  5. Stranded: Activities cannot be brought into line with global warming targets and have an alternative, low-emissions substitute

For more information on Credit Suisse go to www.cs.com

The 'Financing Credible Transitions' report is available at www.climatebonds.net.

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