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SSAs could lead the way in transition bonds

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By Frank Jackman
26 Nov 2019

Economies like Canada and Australia that rely upon carbon dioxide-heavy industries are well placed for establishing transition bonds in the SSA market. Having already blazed the trail for green bonds and new risk-free rate linked paper, it is time for SSA issuers to establish transition bonds as a public sector instrument.

For high carbon sovereigns, transition bonds offer a chance to move towards a more sustainable future without making the jump to green bonds that are typically accessible only to borrowers with respectable environmental, social and governance (ESG) scores and a large pipeline of green projects.

Green capital, arguably, can do the most good not when it is channelled into clean companies, but when it is financing the reduction of pollution.

Instead of directing funds only towards borrowers with high ESG scores, socially responsible investors should also look towards those with lower scores but a positive trajectory to a sustainable economy.

Transition bonds would have the most impact in fossil fuel-focused emerging markets but developed countries, like Canada or Australia, would benefit from some of this capital while also giving the market a rates product reference point.

Earlier this year, French insurance company Axa drew up a set of guidelines for transition bonds to “start a dialogue between issuers, investment banks, investors, policy makers and wider stakeholders”, but there is not yet an established set of internationally recognised principles.

Introducing transition bonds would signal to the market that public sector borrowers in Canada, whose government approved the controversial Trans Mountain Pipeline the day after declaring a climate emergency, are committed to reducing their climate impact while setting an example to other commodity-orientated economies.

Earlier this month, Sweden’s Riksbank announced it had sold its holdings of Alberta, Queensland and Western Australia government debt due to their “large climate footprint”, said Riksbank deputy governor Martin Flodén.

According to an Environment Canada study, in 2017 top polluter Alberta belched out 40% of the nation’s greenhouse gas emissions, while only accounting for 12% of Canada’s population.

For a province like Alberta, home to the stunning yet shrinking Athabasca Glacier, and well established in the SSA market as a borrower, introducing transition bonds would allow the local government to work towards a more sustainable future.

By Frank Jackman
26 Nov 2019