Transition bonds find a footing in 2021

Transition bonds find a footing as companies eye ESG growth:

The tool provides CFOs with a tool to finance the transfer of their assets to companies that meet environmental, social, and management objectives of Transition bonds.

Transition stocks have become a way for financial managers to grow their businesses.

Now small, with just 11 bonds issued last year, proponents estimate the market could hit $ 1 trillion a year in the future.

The growth it offers is an opportunity for companies to spread their feet, indicating that investors are taking climate change seriously, said Shawn Keegan, a global leader in sustainable credit at AllianceBernstein, an asset manager.

Bonds are particularly suitable for companies in sectors with environmental challenges such as mining, energy, and utilities.

The challenge for these types of issuers is the materiality of the funded change, says Keegan. As an investor, you want money to tackle climate change in a meaningful way, not just a tick.

Six bonds have been issued so far this year. These include the $ 300 million sales from Castle Peak Power to build a gas turbine at a power plant and a $ 280 million mortgage loan to fund a portfolio of green transition projects funded by the European Bank for Reconstruction and development.

transition plan

Any CFO who considers a transition effect should have a detailed and thoughtful transition plan and spending structure.

Investors need such a relationship and they will need it, Keegan said. The successful broadcasters [did the right kind of planning] and that allowed them to be serial broadcasters in the market.

Keegan advises CFOs not to limit themselves to prices.

Where’s the financial benefit of my mortgage if I only save 5 to 10 basis points on interest costs? he says, referring to a general financial issue.

But that’s the wrong way to see things, he says. More and more investors are forcing companies to tackle climate change now and the costs could be higher in the future.

largely defined radii

While bonds work well for issuers in sectors facing green challenges, any company that starts looking at a green transition will find the bonds attractive, says Shrey Kohli, head of debt capital markets at the London Stock Exchange Group (LSEG). . one of the first financial instrument entrepreneurs.

An established and sustainable debt capital market already exists, and these bonds add to the options available, he says.

Due to the growing complexity of the market, Kohli advises financial leaders to contact their bankers to contact market participants; Bankers can help you determine which type of mortgage will work best for your industry and business.

The temporary bond market is expanding the coverage of existing sustainable bond markets said, Kohli.

According to Kohli, the London Stock Exchange has deliberately set a high standard of adequacy to avoid greenwashing in its markets.

Any company wishing to trade its temporary title on the London Stock Exchange must have a zero-zero public commitment – one of the goals of the Paris Agreement – to use the science goals by 2050.

The issuer must also meet the standards set out in the International Capital Markets Association (ICMA) Climate Change Guide by reporting and publishing annual progress according to the Financial Reporting Task Force.

slow start

Despite all his promises, the straps could not be fastened quickly. Some of the early issuers are not considered very reliable by ESG-oriented investors and others have nothing to do with structural problems, said Brian Ellis, portfolio manager of the Calvert Green Bond Fund.

But as the green bond market grows and investors become more selective, issuers’ environmental policies become more important, Ellis says.

It is interesting that energy companies mainly finance projects through the green market, perhaps due to the more established history and structure. But this may change as transition groups become more visible.

In short, as companies urgently need to put carbon-related companies at the top of their agenda, CFOs will find a growing group of investors interested in the effects of the transition, not trends.

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