Mobilising capital across financial institutions and governments will be a critical lever in the transition towards net zero. Asia is rapidly becoming a key market for issuers, governments, and investors to accelerate the low carbon economy transition through new sustainable capital market innovations.
Even though no dedicated set of Principles have been formalised yet at international level, the transition bond, in which use of proceeds are ringfenced to decarbonise hard-to-abate sectors accompanied by a robust transition strategy, has become a valuable tool for governments and banks across Asia to rapidly engage investment and implement decarbonisation at scale. BNP Paribas’ experts from the region and globally from the institutional universe, share their perspectives on market drivers and outlook ahead.
Japan’s trillion-dollar transition ambition
October saw over one thousand experts gather to discuss the latest developments shaping the sustainable finance markets at the PRI in Person in Tokyo, Japan, one of the world’s largest gatherings of investors and financial institutions committed to ESG investment.
The event began with an address by Prime Minister Kishida focused on Japan’s Green Transformation (GX) framework, a policy package detailing how Japan expects to turn sustainability into an economic growth opportunity. The GX strategy aims to channel households’ savings into green investments and attract international institutional investment to drive economic development through emissions mitigation. Overall Japan expects to raise over JPY150 trillion, or USD1 trillion, of public and private financing over the next 10 years, to achieve net zero in 2050.
Transition strategies are a key part of the GX plan, and Japan plans to issue the new “Climate Transition Bonds” within the current fiscal year. Japan intents to follow the recommendation from the ICMA Climate Transition Finance Handbook.
Prime Minister Kishida noted, “We have been strongly promoting transition finance, and the introduction of ‘Climate Transition Bonds’ will pave the way for further promotion. Transition finance, which leads the whole-of-economy transition, is crucial for transforming the world.”
Marie Gwenhaelle-Geffroy, Global Head of ESG, Sustainability and Private Capital practice, Financial Institutions Coverage at BNP Paribas attended PRI in Person, and reflected upon the broader implications of transition finance led by governments in the region – “When it comes to government action on transition finance, each market will ultimately develop their own pathways towards a net zero aligned trajectory. The engagement we have seen from Japan in terms of public and private sector leaders and investors mobilizing to develop new financial innovations across capital markets is a strong example of how sustainable finance can support the transition throughout the APAC region.”
Decarbonising China’s steel sector with transition bonds
Across China, transition finance is ramping up as a catalyst to drive the decarbonisation of carbon intensive sectors. BNP Paribas recently supported Bank of China Luxembourg branch to issue the world’s first steel sector specific green transition bond issued by a financial institution. The €300 million transition bond will drive investment into the development of the steel sector’s decarbonisation in the Hebei Province, China’s top steel province. Project use of proceeds for the new Bank of China transition bond include:
- Reduction of carbon emissions or energy consumption during steel processing,
- Collection and recycling of scrap iron and steel, and utilisation of scrap iron and steel for steel reproduction.
Following recommendations of the ICMA Transition Finance Handbook (2023), and the Green Bond Principles (2021), eligible projects within the transition bond will adhere to the industry economic activity classifications, and technical indicators for climate transition, from the IPSF Common Ground Taxonomy, the EU Taxonomy or the Climate Bonds Initiative Sector Criteria. BNP Paribas acted as joint transition bond structuring advisor and joint lead manager on the bond.
This transaction follows the 2021 inaugural transition bond from Bank of China, and illustrates the issuers commitment to sustainable finance and the greening of the steel industry across the country.
There is a strong climate and economic imperative to support green investments in the steel industry across China. The steel industry accounts for circa 5% of Chinese GDP, and currently represents around 15% of China’s total carbon emissions. The Climate Bonds Initiative estimates that China’s steel industry will need investments of around RMB20 trillion, equivalent of USD3.14 trillion, to achieve carbon neutrality.
Chaoni Huang, BNP Paribas Head of Sustainable Capital Markets APAC explained: “BNP Paribas is proud to have supported Bank of China in structuring this transition bond, in alignment with robust international standards and recommendations. This successful transaction marks a step forward in scaling up transition finance for carbon-intensive sectors in Asia.”