Climate Bonds Initiative Offers Firm-level Certification for SLBs

The expansion looks to recognise “appropriate ambition” on transition and bring all sectors “into the fold”. 

The Climate Bonds Initiative (CBI) has expanded its Climate Bonds Standard and Certification Scheme by offering company-level certification, which it said will “act as a signal” to investors that the business is a green entity on a Paris-aligned pathway of 1.5°C.

“Until yesterday we were certifying, only use of proceeds instruments,” said Anna Creed, Director – Thought Leadership at the CBI. “In the new expanded standard we are now able to certify assets, entities and sustainability-linked debt instruments.”

The Climate Bonds Certification framework has been designed to work in parallel with the normal process for issuing bonds, loans or other debt instruments. Certification under this standard confirms that debt instruments, assets, or entities meet criteria published under the Climate Bonds Standard.

Creed said that to create the framework the CBI had looked at a lot of different initiatives and drawn from them. Other initiatives include the Science-based Targets initiative, which validates the science-based targets of companies and financial institutions and the UK Transition Plan Taskforce, which offers a disclosure framework and implementation guidance featuring recommendations for financial institutions and corporates on their climate transition plans.

The certification scheme focuses on key aspects needed to demonstrate a credible transition for debt instruments such as sustainability-linked bonds (SLBs) and reach deeper company-level assessments to provide assurance on climate credentials of the corporate entity, extending certification beyond labelled debt to the wider general-purpose debt and equity investment.

Essential SLBs 

Sean Kidney, CEO at the CBI, said: “SLBs offer investors influence over climate impact at the company level. Corporate entity certification will unleash the force of green finance beyond bond markets towards equities.

“This is a huge win for the climate and huge evolution for financial markets, the future of which is sure to rely on credible knowledge on companies’ climate impact,” he added.

The global SLB market is worth around USD 400 billion. Kidney noted that number is expected to rise by as much as 25% by the end of the year.

He said that SLBs are essentially about companies identifying how they’re going to transition and exposing indicators to the market to demonstrate they’re issuing debt around their climate commitments.

Kidney noted that many companies still lack sufficient ambition in their performance targets and the credibility of their transitions plans to deliver on those targets.

SLBs have been accused linked to greenwashing by companies in the past, with the proceeds of the bonds not specifically used for sustainable causes. However, the flexibility this type of bond offers has seen them grow in popularity in some regions, such as Africa where they have surpassed social and sustainable bonds.

“We’ve seen some fantastic work, especially by the International Capital Markets Association and the Green Bond Principles around frameworks for reporting and transparency, and how to tackle SLBs,” Kidney said. “We’re contributing to this by better understanding the level of ambition required to targets, linking them to trajectories sector-by-sector, industry-by-industry.”

Ketish Pothalingam, Executive Vice President and Portfolio Manager at PIMCO, said: “Transition finance is a requirement, and it needs to be put into place. SLBs in our view are a conduit for companies looking to transition which don’t necessarily need to find a specific green project.”

Kidney underlined the importance of an “inclusive approach” for companies on transition pathways, He added that it can be challenging for firms to identify what a transition pathway due to the evolution of what necessary ambition of climate transition is.

Expanded certification 

The expanded CBI Standard and Certification Scheme offers two levels of certification.

Level one is for entities, debt instruments or assets that are already aligned with 1.5°C pathways, including both those already near net zero and those above net zero but within sectoral 1.5°C pathways and transition plans that predict alignment with those pathways going forward.

Level two is for entities or sustainability-linked debt with transition plans that predict they will be aligned with 1.5°C pathways by 2030. Corporates and SLBs from all sectors will be eligible for certification, with those already on 1.5°C pathways eligible, provided the sector has criteria available for certification.

Certification under the Climate Bonds Standard aims to provide “granular simplicity” and bridge the market gap in existing guidance on transition financing, provided the goals, the path and the pace are “suitably ambitious”.

Kidney said the “fundamental difference” with the expanded certification is how it aims to recognise appropriate ambition and even if companies are not currently green that they have plans to be green, or to be climate compatible, in the future.

The CBI said that the certification label is an “endorsement of the green credentials of the assets or entities and debt instruments and the ambition and credibility of corporate transition plans”.

It also flagged key benefits of certification as providing increased visibility for investors by “clearly demonstrating” to the market that the certified instruments meet the “highest standards for climate integrity”, as well as “enhanced reputation benefits” for issuers, companies and asset managers.

Certification is currently fully available for sectors including solar, wind, marine renewables, and cement and steel production. There is also certification for parts of the hydropower, commercial buildings and hydrogen production sectors, with the CBI having certification pending for eight additional sectors in 2023.

There is currently no certification for land use and marine resources, but crop production, livestock production, and commodity supply chains are due for inclusion by the end of the year.

“We just want everybody to be invited into the fold,” Creed said. “We want all sectors to come in, that’s why we’re developing criteria for all sectors and we want to bring in those that maybe have not progressed so far with the transition yet, but they do have ambitious targets and plans and we think they can deliver on them.”

“We’re trying to encourage people here, it’s a big part of the certification,” she added.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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