AXA Investment Managers says that the green bond market needs a new transition bond to allow carbon intensive companies to finance their gradual shift away from fossil fuels.
Although green bonds have become an established option for fixed income investors, the asset class is at a crossroads with the bonds' potential likely to be undermined by a desire for further issuance which the sector cannot provide now, AXA IM says.
The firm'sESG research and engagement team is calling for a new type of bond that is required to help companies which are not yet green to instead issue debt which is tied to them becoming greener businesses.
AXA IM has therefore developed guidelines to support would-be issuers of transition bonds, covering considerations such as reporting, management of proceeds, and issuers' sustainability strategies, to create a rigorous market for them.
The bonds, which could be used to finance projects such as carbon capture storage, co-generation plants and gas, or transport infrastructure, would help investors to overcome the major challenge of providing capital not just to companies which are already green, but to those which have ambitions to become so.
The asset class would be used by companies solely to finance transition projects, with a high level of transparency around the bonds and their use to give investors' confidence about how their capital is being deployed.
Yo Takatsuki, AXA IM head of ESG Research and Engagement, says: "We believe the establishment of a new asset class called Transition Bonds is vital for those issuers which do not have the capacity or capabilities to launch green bonds. Aimed at companies operating in greenhouse gas intensive industries such as materials or chemicals, alongside other companies which lack sufficiently green assets to issue a green bond, transition bonds would provide an alternative source of finance specifically aimed at helping the journey to become greener.
"Transition bonds would allow the quality of the green bond market to avoid being diluted by issuances where the environmental benefit of projects being financed is less clear. The concept of the Green Bond has been proven; it works, and it is here to stay, but that market is now at a crossroads.
"We believe green bonds must remain a market which prioritises ambition, quality and integrity. It cannot be undermined by secondary concerns. The creation of transition bonds will help maintain the level of quality of the green bond market while offering a source of financing for the other activities necessary for the technological and energy change that will perpetuate the advent of and a low carbon world and economy".