How are transition bonds different?
Transition bonds are like a combination of the more widely accepted green and sustainability-linked bonds but with both similarities and differences. Their similarity to green bonds lies in that the finance they both provide can be for or are directed at a specific sustainable project.
Transition bonds are a nascent financing tool, in which proceeds are used to reduce an issuer’s environmental impact through decarbonising fossil fuel and hard-to-abate sectors that would not qualify for green bonds such as steel, cement and petrochemicals. Companies issuing transition bonds are also required to have a transition strategy and transition bond framework.
However, transition bonds has been slow to gain traction. To put things into perspective, among the four main bond categories for sustainable finance (green, social, sustainability and sustainability-linked, otherwise known as GSSSL bonds), the smallest category of bonds, sustainability-linked bonds, had about US$66 billion in issuances in 2023, making up only 7% of GSSSL bond issuances. On the other hand, transition bonds only had around US$3 billion in issuances. This speaks to how relatively small and unknown transition bonds are compared to existing GSSSL bonds, albeit they were only introduced around 2021.
