Climate Transition Bonds: What Leaders Need to Know

The global initiative to achieve net zero emissions is complicated, bringing both relatively straightforward results while being slowed in the face of perennial problems.

When it comes to finance, for example, green bonds have directed capital toward established low-carbon solutions such as wind energy and electric vehicles. But, despite this, hard-to-abate sectors continue to face challenges.

Industries including steel, cement, chemicals and heavy transport represent approximately 40% of global greenhouse gas emissions. 

Historically, these sectors have encountered difficulties accessing the sustainable bond market at scale.

To address this, and help leaders steer the course to a more sustainable transition, the International Capital Market Association (ICMA) has released the Climate Transition Bond Guidelines (CTBG). 

These voluntary guidelines establish a standalone Climate Transition Bond (CTB) label, creating a framework for financing industrial transformation while maintaining environmental integrity.

What are Climate Transition Bonds?

Unlike traditional green bonds, which typically finance assets that are already low-carbon, CTBs focus on the decarbonisation process. They are use-of-proceeds instruments designed for high-emission issuers requiring capital to refinance projects essential for meeting Paris Agreement targets.

Eligible Climate Transition Projects include assets and activities delivering quantifiable emissions reductions. Examples include:

Carbon Capture and Storage (CCS): The application of removal technologies to industrial processes.

Managed phase-outs: the early retirement and decommissioning of high-emission assets, such as coal-fired power plants.

Fuel switching: transitioning from coal to gas, contingent on infrastructure capability for future integration of zero-carbon alternatives like green hydrogen.

Operational efficiency: the implementation of high-efficiency production technologies and methane abatement within existing infrastructure.

Strategic implications of the guidelines

For business leaders, the CTBG provides a structure to convert high-level climate commitments into science-aligned investments. The guidelines emphasise transparency and accountability through core safeguards that issuers must meet or explain.

Safeguards include the utilisation of an issuer-level sustainability or climate transition strategy, demonstration that low-carbon alternatives are unfeasible, or evidence that a project aligns with recognised taxonomies and 1.5°C decarbonisation pathways.

According to ICMA, investments must generate emissions reductions exceeding business-as-usual scenarios, while adhering to sector standards. 

ICMA states that the CTBG aims to raise standards for heavy industry rather than lower them.

Projects involving fossil fuel infrastructure face additional requirements, including annual independent verification of forward-looking metrics and commitments to transition to low-carbon fuels within specified timeframes. 

The guidelines recommend issuers appoint external reviewers to assess frameworks prior to issuance and utilise third-party auditors to track fund allocation subsequently.

Safeguarding economic competitiveness

The introduction of these guidelines coincides with developments in emerging markets such as Mexico and Latin America. 

As these regions advance beyond the initial phase of sustainable finance, the CTB label offers a mechanism to modernise industrial assets while safeguarding economic competitiveness.

Arturo Palacios, Deputy Director, Mexico and Head of Sustainable Finance, Latin America at The Carbon Trust, notes that technical capacity remains a primary barrier to decarbonisation. 

This includes the ability to produce entity-level transition plans, adopt sectoral pathways, and implement robust measurement, reporting, and verification systems.

“Regulation is only one part of the equation,” Arturo says. “What determines outcomes is how the transition is designed and delivered.

“In Mexico, Climate Transition Bonds can align with national priorities, such as industrial development, energy security and social inclusion, by framing transition finance as modernisation that protects jobs and competitiveness.”

For organisations in these regions, the forward path involves developing entity-level transition plans with interim targets, leveraging national taxonomies to identify eligible activities, and committing to annual impact reporting.

“The bottom line is straightforward,” Palacios writes. “The potential mainstreaming of Climate Transition Bonds may be arriving late in the global debate, but if it happens, it may be on time for Mexico and Latin America.

“At a series of Climate Transition Bonds training sessions delivered recently by Carbon Trust Mexico, we saw that there is interest from companies to explore this type of issuance.

“They do not replace green bonds or sustainability-linked bonds; however, they complete the toolkit by ordering the financing of industrial transition under guardrails investors can trust.”