Green or climate bonds are a relatively new type of financial instrument intended to fund projects with climate or environmental added value. Interest in such bonds has soared recently, with the market now worth more than $500 billion, as companies and investors become increasingly engaged in building diverse portfolios with positive environmental impacts.
However, supporting carbon intensive players that are actively decarbonizing but have not yet reached the “greenness” that makes these efforts eligible to green bonds requires new instruments. This is why AXA developed the concept of “transition bonds” in 2019.
“One aspect of the energy transition is financing green projects, which AXA is doing right now through several green infrastructure, real estate or bonds investments” explains Thibaud Escalon, AXA’s Chief of Staff to Group Chief Investment Officer. “However, at the same time as financing the green, we also need to ensure that there is a transition away from heavily carbonized development models towards less carbon intensive alternatives.”
Keen for green, but transition is within the ambition
Even if the world adopts a steep low-carbon trajectory, it will not be enough to meet the global energy demand in the short to medium term. This is where AXA’s transition bonds come in. Green bonds have strict eligibility criteria to determine what can be classified as a “green project”. Transition bonds will fill the gap between “already green” projects that are eligible for green bond funding, and those that are not, but would nevertheless make huge strides towards lowering carbon footprint.
During its “Climate Impact Day”, AXA announced the launch of a first of its kind “transition bond” in partnership with Crédit Agricole CIB. AXA will entirely finance a EUR 100 million bond in a private placement where the proceeds will be used to refinance existing commercial loans made by Crédit Agricole CIB. The main difference with conventional bonds is that the use of proceeds will be directed to industrial companies with the aim to decarbonise or to projects contributing to decarbonisation.
What will transition bonds finance?
In this transaction, the use of proceeds from the bond will be used in the following ways:
- Electricity production: Loans made to an electric utility company in an Asian emerging market country which is currently dependent on coal for power generation. These loans are for the development of gas fired power stations. By allowing a switch from carbon-intensive fuels in emerging countries with an oil and coal dependant electric grid and a constant growth in the energetically demand, gas is expected to play a prominent role in the transition towards a low-carbon economy. Current Combined Cycle Gas Turbine technologies have an average carbon intensity of 350 tCO2/kWh, 60% lower than the average coal production unit.
- Marine transport: Loans made to shipping companies. Switching from heavy marine diesel oil to liquid natural gas propulsion is the most efficient improvement currently available to reduce emissions for large scale commercial shipping. Shipping is currently one of the few activities where transition technologies can be implemented on a large-scale. By enabling a 25% reduction in GHG emission from freight and passenger vessels, LNG is important for the transition of marine shipping sector before the development of low carbon solutions such as wind, electric or hydrogen powered vessels.
- Industrial resource efficiency: Loans made to a South American industrial company implementing resource efficient measures such as energy efficiency and waste-water treatment. Industry sector must aim to produce twice as much value per unit of energy use in 2040, compared to current levels. Overall manufacturing energy intensity could improve by 44% between now and 2040 with 70% of the energy savings potential in less energy-intensive manufacturing sectors.
Transparency is key to ensuring environmental outcomes
One of the principles of green bonds is that issuers must provide a means of mapping the invested funds to be able to clearly demonstrate that they are used for green projects (use of proceeds). Transition bonds can function in exactly the same way. Transparency is critical in this regard: investors must be regularly informed of how money is being used and what environmental outcomes are being achieved.
AXA will require transition bond issuers to regularly publish a number of key details, such as the projects to which proceeds have been allocated. The issuers are to use indicators, like those developed in the Green Bond Principles, either to demonstrate the environmental impact of transition bond-funded projects for the use-of-proceeds transition bonds, or the strategic shift to low carbon model of the company for climate key performance indicator (KPI)-linked bonds.
Transitioning into AXA’s overall climate strategy
As a responsible investor, AXA has committed to a number of bold and ambitious climate objectives. But the Group is also a major investor and cannot only invest in 100% green assets. It must also finance the transition to green.
“Transition bonds will be a very relevant tool in AXA’s overall contribution to the fight against climate change. Through transition bonds and many other means of engagement, it is AXA’s intention to accompany companies that want to embark on the journey towards more sustainable and less-carbon intensive development models,” concluded Thibaud Escalon.
AXA’s new Climate strategy is not only the launch of transition bonds, it also:
- A commitment to align its investments with the Paris Agreement by achieving a 1.5°C “investment portfolio temperature” by 2050 ;
- A strengthening of our coal policy combined with a complete exit strategy;
- A doubling of its green investment target from €12bn in 2020 to €24bn in 2023.