Corporations increasingly use innovative financial instruments for climate mitigation. Over the past decade, green bonds have grown significantly, providing capital for eco-friendly projects and offering investors a way to support environmental initiatives.
According to the Climate Bonds Initiative report, global organizations issued $587.6 billion green bonds in 2023, reaching $2.8 trillion in cumulative total. Non-financial corporates contributed 29% of the 2023 green bond market share ($171.8 billion), with increased participation year over year. The trend is expected to continue in 2024, primarily driven by increasing environmental projects to meet corporate goals and regulatory compliance.
Companies using green bonds for net-zero climate transitions are subject to additional disclosure guidelines from the International Capital Market Association (ICMA). This blog summarizes ICMA recommendations and outlines the process for issuing climate transition-themed green bonds.
Green bonds are a type of bond instrument where proceeds are exclusively used to finance or refinance new or existing eligible green projects, adhering to the Green Bond Principles (GBP).
The five main objectives of green bonds include:
Areas of sustainable projects include renewable energy, energy efficiency, pollution, natural resources, land use, waste, biodiversity, clean transportation, water, climate adaptation, circular economy, and green buildings.
Standards for green bonds vary based on regional or international context, and include the Climate Bonds Standard and Certification Scheme, the EU Green Bond Standard, and ASEAN Green Bond Standards.
Climate transition-themed green bonds are dedicated to a company’s climate mitigation transition strategy, with proceeds specifically allocated to reducing greenhouse gas emissions.
These bonds especially appeal to high-emission companies like those in heavy industry, agriculture, and energy, which need significant investments in technology and infrastructure upgrades.
Regulatory disclosures are also driving the growth of these bonds. Companies must disclose their climate transition plans under the EU’s Corporate Sustainability Reporting Directive (CSRD) and the UK’s mandatory TCFD reporting. Climate transition disclosures required by US SEC and ISSB are expected to influence more jurisdictions.
To meet investor and regulatory expectations for climate transition-themed green bonds, ICMA’s Climate Transition Finance Handbook provides guidance on four common elements for issuers:
To align with the Paris Agreement, the issuer must clearly communicate its climate transition strategy and provide detailed plans for adapting its business model to meet the goals.
The climate transition strategy should address the environmentally material aspects of an issuer’s business model, considering both current and future scenarios. Green bonds should finance GHG emissions reduction in ‘core’ business activities or support diversification into new low-carbon activities.
Material Scope 3 emissions should be disclosed. Companies can reference CDP’s sector-specific scope 3 categories to identify relevant issues.
An issuer’s climate transition strategy should reference recognized science-based targets and pathways, ideally aligning with a 1.5°C trajectory or at least a well below 2°C trajectory. The strategy should be quantitatively measured, publicly disclosed, and independently verified.
ICMA’s Methodologies Registry provides a list of tools to help issuers validate their emission reduction trajectories.
Issuers should transparently disclose planned capital expenditures (CapEx) and operating expenditures (OpEx) for their climate transition strategy, including any internal carbon costs. They should report qualitative and quantitative climate-related outcomes and impacts expected from these expenditures.
The table below summarizes the recommended disclosures and indicators. This information should be publicly available for investors and referenced in various documents, such as the green bond framework, offering documentation, annual reports, sustainability reports, statutory filings, and investor presentations.
ICMA further recommends independent review and verification for the disclosures, which could be included in a Second Party Opinion (SPO) as part of the offering documentation and/or the non-financial disclosures.
| Element | Reporting at issuance | Annual reporting |
| Climate transition strategy | – Climate transition plan or strategy, including main levers towards GHG emissions reduction, such as a detailed capital expenditure (CapEx) plan and relevant technological implications. – Oversight and governance of climate transition strategy, including management/board-level accountability. – Estimated qualitative and/or quantitative contribution of eligible projects toward GHG emission reduction goals. | Progress against climate transition strategy, such as: – Annual GHG emissions reduction. – Progress on committed GHG emission reduction targets. – % of CapEx allocated |
| Environmental materiality | – Materiality of the planned climate transition strategy (e.g., materiality matrix). – How eligible projects are leading to the GHG emissions reduction of “core” activities or new low carbon business activities. | Material Scope 3 emissions, or a timeline for reporting if Scope 3 emissions are expected to be material but are not yet identified or measured. Where applicable, the growth of new low-carbon business activities. |
| Science-based strategy and targets | – Short, medium, and long-term science-based GHG emission reduction benchmarking or validation (e.g., SBTi) – Baseline year and historical emissions – Scenario and methodology applied – GHG emission objectives covering all scopes and most relevant sub-categories – Where applicable, use of carbon capture technology and high-quality and high-integrity carbon credits, and their relative contribution. | Progress on any emissions reduction benchmarking or validation. |
| Implementation transparency | – CapEx roll-out plan consistent with transition strategy and climate science. – Phase-out plan for activities/products incompatible with the climate transition strategy. – Green CapEx as a % of total CapEx. – % of assets/revenues/expenditures/ divestments aligned to the various levers. – Qualitative and/or quantitative assessment of the potential locked-in GHG emissions from key assets and products. – Assumptions on internal cost of carbon. | – Allocation to eligible project categories. – Whether GHG emissions reduction spending took place as anticipated. – Impact on workforce, communities, and other non-environmental benefits. – Updates on the climate transition plan guidance. |
In alignment with the ICMA guidelines, the Climate Bonds Initiative has published a step-by-step guide to issuing corporate climate transition bonds. Here are five steps for green bond issuance:
A robust transition plan establishes credibility with investors. It should outline eligible project categories for using proceeds to achieve decarbonization goals. Transition plans typically cover GHG emissions baseline, ambition, actions, and accountability. Refer to the Transition Plan Taskforce for detailed guidance.
Green bond issuers need to understand relevant taxonomies, standards, and sector criteria to identify low-carbon activities in line with the Paris Agreement. Refer to Climate Bonds standards and ICMA taxonomies for a list of official and market guidance.
Issuers should develop a Green Bond framework that outlines the criteria and principles for the issuance to ensure transparency and accountability. It typically covers:
With a framework established, the lead underwriter guides the issuance process, including legal documentation, marketing to ESG investors, and syndication for risk distribution. Once sufficient interest is secured, the bond is priced and distributed.
Post-issuance reporting, required by bond standards, is crucial for investor confidence. It details bond proceeds usage (allocation reporting), project alignment with taxonomy (eligibility reporting), and progress on emission reductions or other transition goals (impact reporting). Issuers should publish these reports annually and make them easily accessible on the corporate website.
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