Responsible Business

Transition strategies and sustainable debt in the corporate sector

May 5, 2021 - 3 minutes
A group of professionals review documents in a boardroom accented with large plants.
Environmental Finance recently held its virtual "ESG in Fixed Income: Americas" conference, focusing on green, social and sustainability topics for 2021. I had the opportunity to moderate a panel discussing one of the hot topics this year – transition – and how net-zero emissions strategies may impact carbon-intensive industries. Below are a few of the key themes discussed, including my own observations on what's needed to further promote market access for these initiatives.

A harmonized transition framework vs. A regionalized approach

One of the key discussions as the markets navigate the topic of transition is how to define what is "transition." Significant focus has fallen on the creation of principles or frameworks to bring credibility to the definition of transition. Core to this debate is whether these frameworks should vary from country to country, region to region, or even industry to industry. A credible approach is important because despite common goals, industries will have different pathways to reducing their carbon footprint. In this reality, determining how to achieve meaningful emissions reductions is not a straightforward answer and context is often necessary.

Considering regional distinctions, and existing barriers in those regions, lies at the crux of the argument for a regionalized approach. For many companies, transition must be a full value-chain issue, which makes consideration of these nuances essential for success.

At the heart of the push for a harmonized global framework lies the belief that all jurisdictions need to be working towards the common goal of a net-zero world by 2050. Many market participants argue that there needs be justification for different regional approaches as the data to support the net-zero transition should not be regionally specific but based in science.

From our perspective, given the pace of technology and rapid developments in this space, coming up with a universal approach to transition is proving to be a challenge. There is no one-size-fits-all solution and each market may have slight differences in what constitutes transition at this time. If a company's decarbonization approach is science-based and aligned towards achieving a net-zero future by 2050, the market should support those initiatives in all sectors and jurisdictions.

Transition at the issuer level vs. Transition at the project level

As the debate evolves, there are also several differing opinions on how to define transition. Some believe that transition should be determined at the project level and that the issuing company's industry should play a lesser role in the analysis. Others believe that a broader assessment of transitional activities can only be taken through the industry lens, which could vary significantly between industries. There is a concern that while some projects within a company's portfolio may be green, other areas of the business could be increasing emissions simultaneously.

When we look at green or transition financing at TD, we advocate for evaluating and assessing the nature of the project. Can a company in a carbon-intensive sector undertake a green project? Absolutely. While proper consideration of an issuer's overall approach to sustainability is an important factor, the sector an issuer is in should not solely outweigh the use of proceeds and a specific project's impact.

Popularity of transition-linked bonds vs. Sustainability-linked debt

To date, the market has only seen a handful of transition bonds, none of which originate from the U.S. or Canada. Issuers engaged in transitional activities are showing a preference for the sustainability-linked debt format.

Market participants cite the lack of guidance for credible transition bonds and a historically negative connotation around the word "transition" as potential hurdles for issuers considering transition financing. Recent issuers of transition bonds faced debate over how the intended use of proceeds fit into a net-zero pathway. Despite challenges in this market, it is clear that investors are willing to engage in order to understand how transition activities fit into the overall corporate strategy and support this type of financing.

While there is no debate that the financial markets need to support emissions reduction activities from carbon-intensive industries, the sustainable financial markets have largely excluded these industries to date. It is not a surprise then to see companies turning to the sustainability-linked debt market where companies' transition activities are incentivized. It may even be the format to finally bring true growth in transition finance.

Learn more about our Sustainable Finance & Corporate Transitions team and our approach to supporting a net-zero carbon economy.


Headshot of Amy West


Global Head of Sustainable Finance & Corporate Transitions, TD Securities

Headshot of Amy West


Global Head of Sustainable Finance & Corporate Transitions, TD Securities

Headshot of Amy West


Global Head of Sustainable Finance & Corporate Transitions, TD Securities

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