Environmental Finance Data's research analyst Nimrod Iritz provides an update on transition bond issuance over the past year.
There has been a tremendous buzz around transition bonds since they first came to the sustainable bond market in July 2017 with Hong Kong power company Castle Peak's pioneering $500 million issuance. After the first issuance, however, no further transition bonds were issued for two years until August 2019 when Brazilian food processing company Marfig issued its controversial inaugural transition bond. This controversy has dogged the transition label since its inception with critics arguing that the activities of these companies were unethical to sustainable goals and that some issuers of transition bonds were engaging in textbook examples of greenwashing.
Proponents, meanwhile, argued that the transition away from traditionally 'dirty' industries was essential for achieving a sustainable future with transition bonds a vital tool for these industries.
As a result, the transition bond market continued to grow in value between 2019 and 2021 by over 300% from $1 billion to just under $4.3 billion. However, the number of bonds issued remained in the single digits during this period, occupying a small niche of the wider $4.6 trillion bond market.
After the initial "boom" in the market, transition bond issuance remained subdued with just $3 billion issued in 2022 and 2023, less than 1% of the annual sustainable bond issuance.
Nevertheless, there have been signs of change in the transition bond market, as the value of transition bonds skyrocketed to over $17 billion in year-to-date 2024, fuelled by surge in appetite in Japan.
Japanese regulation
Up until 2021, Japanese issuers had not issued a single transition bond. However, in May 2021, Japan's Ministry for Economy, Trade and Industry (METI) announced guidelines on climate transition finance and shortly after, in July 2021, shipping and logistics company NYK Line issued a pair of transition bond tranches worth JPY20 billion ($182 million).
In the following year, Japanese issuers launched a slew of transition bonds, raising just under $3.2 billion from 19 transition bonds, with Japanese issuers accounting for 91% of transition bonds by value in 2022. Italian energy infrastructure company Snam was the only other transition bond issuer in 2022 with €300 million ($312 million) transaction. The response from Japanese issuers to METI's guidelines seemingly demonstrated the need for clear guidance in the market for an instrument that has otherwise courted controversy and confusion about its definition but fills a much-needed role in a sustainable transition.
Japan's rule over the transition market
In 2024 so far, the market has only seen issuances from Japan. Whether it was the Japanese government or corporates, no other issuance came from any other country. This fact poses a number of questions: "Is the market here to stay?" "Will other countries follow suit?" "Is it specific to Japan?"
While the answers to these questions are uncertain, they could serve as a good basis for discussion on the future of the transition bond market. In 2024, Japan became the first sovereign to enter the transition bond market, issuing not one, but four transition bonds in the space of just six months. Their total volume came in at a whopping $15.1 billion which accounts for almost half of the total transition bond market of $32.5 billion. Interestingly, long-time Italian issuer Snam opted for a green bond and a sustainability-linked bond (SLB) in 2024 instead of a transition bond.
Like last year's report, the three most popular use of proceeds were 'Renewable energy', 'Energy efficiency' and 'Clean transportation, with 24%, 18% and 16% respectively. However, it seems that an eerily familiar instrument to sustainability-linked bonds, transition-linked bonds (TLBs) have accounted for roughly 11% of the total all-time transition bond market. Transition-linked bonds, similarly to SLBs tie their interest rates to sustainability targets such as a reduction in carbon emissions.
Finally, the market has seen a new instrument in play like sustainability-linked loan bonds (SLLB) that raise funds to then loan out to sustainability-linked loans. In August, the Development Bank of Japan issued a JPY10 billion transition-linked loan bond (TLLB) that raised funds to allocate for transition and transition-linked loans.
