Jupiter AM: a transition bond label is unnecessary

By Michael Hurley

The 'transition' bond label is an unnecessary departure from the green bond model honed over recent years, attendees of Environmental Finance's ESG in Fixed Income Europe 2020 virtual conference heard.

Rhys Petheram, manager of Jupiter Asset Management's Global Ecology Diversified fixed income fund, told attendees: "We're very supportive of the idea of transition finance, it is critically important. Our problem comes from the [transition bond] labelling exercise. There are two problems with it. The first is the extensive scope for greenwashing. The second is that there's a good market for it already, called the green bond market."

Petheram told the conference that the issue of greenwashing is focused on questions surrounding the additionality of some green bonds – whereby they are regarded as 'additional' if they finance an asset or project that otherwise would not have received financing.

"Green bonds do not finance green projects. They finance companies who make a promise to do green projects, in the future or, more commonly, [refinance] historical projects. If you have an issuer that issues multiple bonds in a day – two of which are conventional bonds and one is labelled green – all the proceeds from these three bonds would go to exactly the same pot. The one bond is arbitrarily called 'green', because an accountant then draws a connection between historical projects, and the amount raised by that particular security."

Such questions "are amplified multiple times by transition bonds" because of the carbon-intensive profile of companies that issue such bonds, Petheram said.

Transition bonds are similar to green bonds, in that proceeds can be used to finance specific, low-carbon projects or assets. But transition bonds also demand some kind of strategy to show how the carbon-intensive issuer will lower its emissions over time.

Instead of buying transition bonds, Jupiter prefers to buy green bonds from issuers which clearly articulate a credible transition strategy, Petheram added.

"The second reason [Jupiter prefers the green label to the transition label] is that we've already got a working market. We expect the issuers of green bonds, from a transition perspective, to be ambitious and robust. If we think they are ambitious enough, they will just issue a green bond. We spent many years pushing the Green Bond Principles (GBPs) to include that. As of two years ago, the principles say GBP-compliant green bonds aim to support companies in transitioning their business model to greater environmental sustainability."

He said that, ultimately, the issuance of transition bonds will fizzle out to zero by 2030, "because if we get to a world whereby the EU's sustainability taxonomy is in play, and we have full transparency, all the reporting and measurements that requires, and that asset owners require in order to understand the positive and negative impacts of corporations, then we won't need any labels."

Yo Takatsuki, head of active ownership and environmental, social and governance (ESG) research at Axa Investment Managers, said that while the "great achievement" of the green bond market is the level of transparency it requires, particularly around earmarking use of proceeds and impact reporting, this often falls short of helping investors understand company transition strategies.

"We've almost become accustomed to this level of transparency that we didn't have before, that green bonds gave us. However, all of this is lacking when you [want to] look at what's happening at the issuing entity level."

Takatsuki has been a leading proponent of transition bonds. He was influential in the publication in June 2019 of Axa's guidelines for issuing 'transition bonds', at the time arguing that the development of this new asset class is necessary to stop the green bond market being undermined because it cannot cater to companies operating in greenhouse gas-intensive industries.

A working group convened by the International Capital Market Association (ICMA), which administers the GBPs, expects to publish 'climate transition finance' guidelines on 9 December, but is not expected to publish a formal set of principles on that date.

"The key thing we want to do is take steps to better define the concept of what it means to be credibly transitioning at the issuer level," Takatsuki added.
Environmental Finance understands the guidance will focus on an issuer's climate 'intentionality', emissions materiality and scientific credibility – i.e. whether it aligns with the trajectory of a goal to restrict the rise in global emissions to 1.5°C above pre-industrial levels – and transparency of capital expenditure.

Isabelle Laurent, deputy treasurer and head of funding at the European Bank for Reconstruction and Development (EBRD), told the panel: "I would be very resistant to see a separate transition bond sector of the market that's not a green bond. We're talking about transition to the Paris Agreement goals, not transition in the abstract."

The EBRD has issued 'green transition' bonds, which the multilateral developmental investment bank considers green bonds, Laurent said. It used the transition terminology to distinguish these instruments, which finance projects in carbon-intensive sectors of the economy that enable the transition to low-carbon operations – as opposed to its earlier green bonds to finance renewable energy or energy efficiency projects, for example.

The panel discussion was moderated by Cristina Lacaci, Head of Sustainability Bonds, EMEA, Morgan Stanley

More information about the event is available here.