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ICMA Principles: Climate Transition Finance Handbook gets its first update

On June 22nd, International Capital Markets Association (ICMA) Principles released an updated version of the Climate Transition Finance Handbook (CTFH) – it’s first update since the document was launched in December 2020 (available here).

Natixis was Co-Chair of the Climate Transition Finance Working Group within The ICMA Principles and led the CTFH redraft alongside JP Morgan.

The working group comprises over 132 different institutions, and they had collectively expressed the desire for the update and need for additional clarity.

The core updates provide clarity on the concept of Climate Transition, the level of ambition required, and the supporting evidence and disclosures to support an issuer’s claims regarding the credibility of their plans. The hope is that this additional guidance will increase the confidence of issuers from “hard-to-abate” sectors to credibly issue Green, Sustainability, or Sustainability-Linked (GSS) bonds.

Climate Transition is identified as a focus on Greenhouse Gas (GHG) emissions reduction strategy, commitments, and practices. The handbook makes it clear that the financing of this transition needs to be aligned with the goals of the Paris Agreement on Climate Change to limit temperature increase ideally to 1.5°C, or at the very least to well below 2°C above pre-industrial temperatures. It also clarifies that the handbook applies to the issuance of either Principles-aligned Green or Sustainability Bonds where the use-of-proceeds and intended to make a “meaningful contribution” to the GHG reduction strategy; or Principles-aligned Sustainability-Linked Bonds where one or more of the KPIs are monitoring GHG emission reduction metrics. In the same way the Green Bond Principles do not specifically list out a taxonomy of eligible projects, the CTFH does not provide a prescriptive list of what projects would be eligible. Rather it provides guidance to issuers on what additional information they should provide to the market to evidence that the projects they have selected are making a meaningful contribution to a Paris-aligned “science-based” GHG reduction strategy.

The four individual elements in the handbook remain, however greater guidance is provided on the level of transparency required of issuers. Notable key updates include:

Element 1 – Issuer’s climate transition strategy and governance:

  • Disclosure on an issuer's transition plan or climate transition strategy. This should include specific itemization of the main levers towards GHG emissions reduction, such as a detailed capital expenditure plan and relevant technological implications.
  • Evidence of a broader sustainability strategy to mitigate relevant environmental and social externalities, including ‘just transition’ considerations where appropriate, and contributions to the UN Sustainable Development Goals.

Element 2 – Business modal environmental materiality:

  • Address the materiality of climate-related eligible projects and/or KPI(s) on the overall emissions profile of an issuer.
  • Where Scope 3 emissions are expected to be material but are not yet identified or measured, a timeline for reporting should be disclosed.

Element 3 – Climate transition strategy to be science-based:

  • Stressing the need for “science-based-targets”, defined as targets that are in line with the scale of reductions required to keep the average global temperature increase to ideally 1.5°C, or at the very least to well below 2°C above pre-industrial temperatures.
  • In circumstances where the main indicator is an intensity based GHG metric, the need to also disclose absolute emissions and provide guidance on the forward projection of absolute emissions.
  • Greater guidance and disclosure on the issuers’ use of carbon credits (to the extent they form part of the transition plan)

Element 4 – Implementation transparency:

  • A much more comprehensive set of indicators on the underlying transition strategy, including the percentage of green capex as a percentage of total capex, assumptions on the internal cost of carbon, and an assessment on the locked-in emissions from an issuers’ key assets

There are also new annexes added to the CTFH which provide a summary table of the recommended disclosures to be made depending on the nature of the underlying format, and a list of market and official sector guidance for climate transition-themed bonds. The Handbook also contains several external references in the footnotes for those looking to dig deeper into some of the concepts and topics raised.

Time will prove the general market acceptance of these additional voluntary guidelines, and we look forward to seeing more GSS issuances that explicitly reference the CTFH.