Unlock the Potential of Transition Finance

Transition Finance: A Diverse Financial Tool

Transition finance offers borrowers and issuers alternative options when they may not be able to commit to green and sustainability linked principles. In hard to abate and high emitting sectors, this form of finance becomes particularly relevant. It allows for a more flexible approach that meets the needs of different entities while still addressing environmental concerns.

For instance, some borrowers may be hesitant to adopt strict green and sustainability criteria due to various factors such as accusations of "greenwashing" or climate litigation risks. Transition finance provides a middle ground, enabling them to take steps towards reducing emissions and transitioning to a more sustainable business model.

The Climate Transition Finance Handbook: A Guiding Light

The Climate Transition Finance Handbook, published by Climate Transition Finance, plays a vital role in defining transition finance instruments. It outlines that these instruments can consist of "use of proceeds" provisions similar to green bonds or sustainability bonds, or they can stipulate that proceeds are for "general corporate purposes" like sustainability-linked instruments.

This handbook focuses on four key elements. Firstly, an issuer's climate transition strategy and governance must ensure that the proceeds of financing are directed towards reducing greenhouse gas (GHG) emissions in line with the Paris Agreement goals. There is an option for independent review to provide additional assurance.

Green Enabling Projects: Enabling the Green Transition

ICMA's Green Enabling Projects Guidance document clarifies that these projects, although not explicitly considered green on their own, are critical for enabling green projects. The guidance aims to provide assistance to issuers in selecting such projects, which must meet certain criteria.

These criteria include requirements related to the implementation of the green project value chain, being a necessary part of the net zero scenario and medium to long-term transition plan of the issuer, avoiding carbon lock-in effects, providing a clear and quantifiable environmental benefit, and managing identified environmental and social impacts and risks.

The Development of Transition Loan Principles

The LMA is in the process of developing Transition Loan Principles. These principles were initially expected in Q4 2024 but are now anticipated to be launched in H1 2025. This development shows the growing importance and recognition of transition finance in the loan market.

Transition loan principles will provide a framework for lenders and borrowers to navigate the transition to a more sustainable economy. They will help ensure that loans are used to support environmentally friendly initiatives and contribute to the overall goal of reducing emissions.

If you have any queries regarding transition finance or need further assistance, please feel free to contact Niek Groenendijk or Marieke Driessen of our Stibbe Financial Markets team.