A Note on Transition Bonds and Finance

Transition finance will play a critical role in reaching agreed global climate targets. This chapter moves from an overview of the landscape of existing purpose-built bonds, including green bonds, to a detailed discussion of the goals, issues, and guiding principles for a recently created transition finance tool, transition bonds. Analyzing the rationale, goals, and challenges of a transition bond framework, it derives lessons from experience with green bonds and related climate finance instruments that have proliferated in number and scale of funds raised in the past decade. It notes that while competing initiatives to define new transition metrics and pathways are predicated on developing markets around voluntarily-accepted quality standards for transition bonds, persistent concerns with reconciling high-level transition standards with firm-specific flexibility and incentives for carbonwashing still need to be addressed. In conclusion, the chapter argues that states, as market regulators, and the ultimate bearers of sovereign risk in economies exposed to increasing transition impacts will have primary responsibility for orderly transition.