Transition bonds are a form of blended finance/ debt instruments used for transiting high carbon-emitting sectors like cement, iron and steel, construction, metals and mining, aviation, shipping, etc. to adopt a greener approach. These industries are posing an imminent threat to the environment and governments all over the world are now taking notice of the same. These sectors currently emit over 30% of the global GHG emissions. Thus, their decarbonization and transition to a low-carbon future is very critical. The requirement for funding is huge in the Indian context. Also, read These 10 Largest Companies in the World Are Betting Big on Solar

Need for Transition Bonds

The transition of high carbon-emitting sectors will entail high cost and technological advancement which would require extensive funding.  For instance, the Indian government has made it compulsory for thermal power plants to comply with stricter emission standards. Transition bonds are a good way for raising finance for companies that are otherwise not qualified to issue green bonds. Unlike green bonds, transition bonds enable entities who want to reduce their GHG emissions.

The transition bond issuance by such industries/ firms is expected to bridge the gap towards a greener future in line with the objectives of the Paris Agreement.  These bonds are expected to provide the necessary capital for directing these industries into a low-carbon roadway. The different sources from which India could fund its transition bonds are public finance, bank/NBFC loans, private funding, etc.

India requires average annual spending of $28 billion to achieve its net-zero target by 2070. Since 2014, the Indian private sector issued green bonds worth $15.6 billion in international bond markets to finance green projects in renewable energy, transportation, climate adaptation, etc. Transition bonds are gaining traction in European Union, Japan, and Canada. There are several independent organizations like Climate Bonds Initiative and International Capital Market Association that offer guidance on transition bond issuance. Transition bonds provide a good bridge between “Green and Brown”. Please note globally, green bonds worth $ 700 billion were issued in 2020 which doubled from 2019 levels.

In order to enhance investors’ confidence in these bonds, there is a need for full disclosure of objectives and proof of alignment with Paris Agreement goals. This will definitely help mobilize capital for transition in carbon-intensive industries.