Let's be concrete

New Climate Bonds Cement Criteria to open for public consultation

We are excited to publish the second edition of our transition newsletter. This month we’ll focus on cement. Tomorrow (Tuesday the 22nd) we will be organising the launch webinar (click here to register) of the cement criteria. The webinar will kick-start the 2-month public consultation period. The criteria will pave the way for use-of-proceeds and later entity level certification and are the result of over 30 technical and industry experts output. We are keen to get your feedback.
There will be more about cement in this newsletter as we will be analysing Grupo Cementos De Chihuahua's (GCC) recent SLB, the 8^th SLB issued by the industry.
With this newsletter, we are bringing the strands together by commenting on newly issued transition and sustainability-linked bonds (SLBs). We are focusing on deals financing progress along net-zero pathways in hard-to-abate sectors; bonds from new issuer types; and debut transactions from new countries and jurisdictions. We will also update you on the latest developments in the Climate Bonds Standard & Certification Scheme.
We hope you find the content helpful. Your feedback is most welcome.

Paris Aligned

The company’s environmental objective is to transition to net-zero by 2050 for its Scope 1 emissions (~79% of total emissions) while the intermediary target is to reduce the carbon intensity by 22% by 2030. This means reducing CO₂ emissions per ton of cementitious product from 746kg in 2018 to 576kg in 2030. GCC is committed to reviewing the target later (and possibly making it more ambitious) this year in line with SBTi assessment (currently in process), as well as in five years’ time. These targets are in line with the recent target cement pathway published by the IEA, but don’t consider Scope 2 and 3 emissions in line with best practice from peer companies

See here list of SLB issuing peers

GCC remains the least ambitious amongst its SLB-issuing peers, even when comparing it to fellow EM issuers. While the company’s corporate HQ is located in Mexico, the majority of its operations are in the US, including a coal mine in Colorado supplying five cement plants. Furthermore, Brazilian peer Votoratim Cimentos has set lower reduction targets for 2025, compared to GCC’s 2030 targets.

The company will use different levers to achieve those that target:

• Optimisation of thermal and electrical energy
• Increase production of blended cements to reduce the clinker ratio
• Increase in use of alternative fuels
• Replace the use of coal for natural gas

In its Carbon Roadmap, GCC has highlighted that between 2020-30 it will focus on accelerating use of alternative fuels, increasing the share of renewable energy and natural gas in operations, and increasing production of blended cement by reducing clinker content to 80%. In the long-term, it is also looking to utilise Carbon Capture/Storage to help reduce the impact of limestone calcination.  

GCC is a member of Global Cement and Concrete Association, as well as the Portland Cement Association, both of which have published roadmaps to carbon neutrality and that GCC will commit to. But it has yet to publish a detailed action plan of its own, including any information on CapEx or OpEx plans to finance its transition. However, the company’s 2020 Annual Report does note that CapEx will have to increase in response to changing environmental regulations. It has also detailed the launch of a new cement product using pozzolan which has lower CO₂ production emissions than traditional cements.  

Climate Bonds invites you to join us for a webinar on our new Climate Bonds Standard Criteria for low carbon cement.

The Cement Criteria will form part of the Climate Bonds Standard and provide a succinct set of decision rules for determining when cement projects and assets are compatible with a low carbon, climate resilient economy, and are eligible for certification under the Climate Bonds Standard.
 
Join our expert panel of speakers as we discuss how to finance the transition of the cement industry to a net-zero economy.

Sustainability-Linked Bonds

Welcome back! With USD20.9bn issued until the end of March, it is already a record year for transition-related instruments (SLBs and transition bonds). This compares to USD11.1bn at the same time last year, representing 88.3% YoY growth. Most of the issuance volume has come from Utilities and Industrials sectors, which are also responsible for 40% and 29.4 % of GHG emissions, respectively. This bodes very well for the year overall and reaffirms the appetite of both issuers and investors. However, the key to success in terms of delivering the much-needed emission reductions in the real economy lies with ensuring these deals and their targets are credible, which we’ll highlight in another case study below.

Every month we bring you our analysis of key issuances from the nascent SLB/transition markets, focusing on their climate mitigation credentials through the lens of our Five Hallmarks for Credible Transitions framework.

This month we will be looking at a CAD200m SLB from Tamarack Valley Energy Ltd (Tamarack), a Canadian oil exploration and production (E&P) company operating primarily in the Western Canadian Sedimentary Basin with average production of 45,000 boe per day.

Given that Tamarack’s transition planning and related documentation is relatively limited, we will be comparing it to ENI’s (Italian integrated energy company who issued a SLB in June 2021) transition plans to highlight how Tamarack’s plan could be improved.  

• No recognised Paris-aligned pathway has been selected
• The KPI set (GHG Emissions Intensity, kg CO2_e/boe) is sensitive to volumes
• The KPI does not include Scope 3 emissions
• Limited amount of Capex set aside to implement the plan 

Paris Aligned

The company does not have a Paris-aligned target, or a target linked to a recognised collective emissions target (for example IEA net-zero pathways), making it difficult to evaluate the credibility of the SLB’s Sustainability Performance target itself. Also, it does not include Scope 3 emissions, which are the most material emissions for the sector: According to IHS Markit, Scope 3 emissions accounted for 88% of total Oil & Gas emissions in 2019.
 
Lastly, the measure used is intensity (kgCO₂e/boe) – a relative, not absolute one – that can be distorted by production volumes. Absolute emission reductions are required to demonstrate any real efforts to transition or decarbonise the company’s operations. 
 
Comparison: ENI
In contrast, ENI has a Paris-aligned net-zero target by 2050. Some of its key targetsinclude:

• Net-zero carbon footprint (Scope 1 & 2) upstream by 2030
• Net-zero GHG Lifecycle emissions (Scope 1, 2 and 3) by 2050
• Net-zero carbon intensity (Scope 1, 2 and 3) by 2050

A snapshot of SLB issuing industry peers

**This list has been condensed for brevity and does not include all O&G sector SLBs. 

1. Operational improvements (e.g. reduction of redundant equipment, management of pressure and temperature changes to avoid unnecessary flashing)
2. Implementing an emissions review and sign-off during facility design, and an emission report card for ongoing operations
3. Building new facilities that conserve natural gas or upgrading existing facilities to improve their efficiency

At present, Tamarack has not disclosed any plans to help it transition away from or diversify its oil drilling-centred business model. Instead, the company announced as part of the sale of this bond that proceeds of the SLB will be used for debt refinancing and the CAD185m acquisition of Crestwynd Exploration Ltd, a pure-play oil producer.

Holders of this bond include Blackrock, Toronto Dominion Bank, Sentry Investments, and CI Investments amongst others (Source: Bloomberg).

Comparison: ENI
In order to achieve the targets listed above, ENI will be activating the following levers:

• Use of carbon capture & nature-based solutions to offset some of the residual emissions
• Diversify into renewable energy generation and expand it bio-refining capacity
• Increase its retail base for renewable energy distribution

Limited information is provided as to the financing plan for the operational efforts to decarbonise. Also, it is our understanding that most of the funds from the bond will be used to fund acquisitions of E&P companies.
 
According to the shareholder presentation about USD3.5 million out of a total CAPEX of c. USD250 million will be used to finance fossil gas conservation infrastructure & emissions reductions.
 
Comparison: ENI

• Expected Capex to decarbonise to amount to ~EUR 4.5bn between 2022-2025
• Expected capital allocation into new energy solutions (Renewables, biofuel products and hydrogen) to be 30% in 2025 and increase to 60% in 2030 and 80% in 2040

• Qualitative or  quantitative  explanation  of  the  contribution  of the  main  factors,  including  M&A activities, behind the evolution of the performance/KPI on an annual basis; 
• Illustration of the positive sustainability impacts of the performance improvement; and/or, 
• Any re‐assessments of  KPIs and/or restatement of the  SPT  and/or Pro-forma adjustments of baselines or KPI scope, if relevant.

Cement
Cement is the most used construction material in the world, the second most consumed material on earth after water and its production accounts for almost 8% of global CO2 emissions. The demand for cement is expected to increase by 12-23% by 2050 compared to 2014 as economies around the world continue to grow. 

The Cement Criteria are available for public consultation until 23rd April 2022.  Please submit feedback via the Public Consultation Feedback Form before 23rd April. All forms should be sent to public.consultation@climatebonds.net

Basic Chemicals
Decarbonisation of the chemical industry is a crucial step towards a net-zero future. The chemical sector is one of the biggest industries in the world and the largest industrial user of energy, accounting for 30% of energy consumption. It also represents around 5% of total global GHG emissions.

The Basic Chemicals Criteria are available for public consultation until 5th June 2022.  Please submit feedback via the Public Consultation Feedback Form before 5th June. All forms should be sent to public.consultation@climatebonds.net

Sovereign Sustainability-Linked Bonds

Welcome back and a huge thank you to those who participated in our Partner roundtable on SLBs in late April. While most of SLB issuance is currently driven by corporates, in this edition we have discussed the first such structures from SSA (public sector) issuers. Specifically, we’ve analysed the Chilean sovereign SLB issued last March, and as always, look at it through the lens of whether the instrument is credibly supporting Chile’s transition to net-zero. Don’t hesitate to provide us with any feedback!

With USD34.2bn issued as of May this year, it is already a record year for transition-related instruments (SLBs and transition bonds). This compares to USD22.3bn at the same time last year, representing 53.3% YoY growth. This bodes very well for the year overall and reaffirms the appetite of both issuers and investors. However, the key to success in terms of delivering the much-needed emission reductions in the real economy lies with ensuring these deals and their targets are credible, which we’ll highlight in another case study below.
 

Every month we bring you our analysis of key issuances from the nascent SLB/transition markets, focusing on their climate mitigation credentials through the lens of our Five Hallmarks for Credible Transitions framework.

This month we are looking the USD2bn issuance from the Government of Chile, the first ever sovereign SLB. This comes amidst several other landmark debut public sector issuances in Q1 2022: the City of Helsingborg (local government, Sweden), the Arizona Industrial Development Authority (Muni, USA), and Shiga Prefecture (local government, Japan).
 
Chile’s SLB comes on the heels of the World Bank’s report on KPIs for sovereign sustainability-linked bonds, and has used the KPIs recommended in this report. Including the aforementioned local government issuers, Chile’s debut brings the public sector’s SLB volume to USD2.3bn.. Chile is unlikely to remain the only sovereign SLB issuer for long, with other countries exploring this structure, and public calls mounting for further sovereign SLBs.

This issuance makes Chile the only sovereign to have issued across four out of the five GSS+ themes - Green, Social, Sustainability, and Sustainability-linked, and comes at a crucial time for the country’s environmental agenda. Currently in its 13^thconsecutive year of drought, Chile is acutely vulnerable to rising sea levels and worsening drought conditions, which have the potential to severely impact the country’s agricultural resources.
 

SLBs from Public Sector Peers

*The City of Helsingborg has issued two SLBs with different SPT calibration and deadlines.
 

Paris Aligned

Climate Bonds celebrates the selection of the GHG Emission KPI in the first sovereign SLB, as this is the core metric through which funding can help drive decarbonisation in the current critical decade leading up to 2030. Chile has calibrated this target in line with its NDCs, reducing absolute emissions by 15.4%. However, according to Climate Action Tracker (CAT) and this the Sustainalytics SPO, the pathway Chile has selected will only put the country on track for a ‘Below 2 Degree’ scenario. Sustainalytics quotes CAT in saying “If all countries were to follow Chile’s approach, warming would reach 2°C and up to 3°C”
 
The second KPI, targeting a peak in Chilean emissions before 2030, supports and strengthens the first KPI as cumulative and absolute emissions – the global carbon stock in the atmosphere - will be a key factor in determining the speed of climate change.
 
The third KPI, targeting 60% Installed Capacity of Renewables by 2032 proves more ambitious as it is within a 1.5°C pathway, and significantly material to Chile: 77% of the nation’s emissions come from the energy sector. The KPI is, however, not in line with Chile’s National Energy Policy target of 80% renewables by 2030, highlighting a need to integrate all relevant policy levers. 
 

Limited information is provided as to the financing plan for the operational efforts to decarbonise. Also, it is our understanding that most of the funds from the bond will be used to fund acquisitions of E&P companies.
 
According to the shareholder presentation about USD3.5 million out of a total CAPEX of c. USD250 million will be used to finance fossil gas conservation infrastructure & emissions reductions.
 
Comparison: ENI

• Expected Capex to decarbonise to amount to ~EUR 4.5bn between 2022-2025
• Expected capital allocation into new energy solutions (Renewables, biofuel products and hydrogen) to be 30% in 2025 and increase to 60% in 2030 and 80% in 2040

Hallmarks of Credible Transitions (Paris-alignment and associated plans)
***While the Five Hallmarks we have developed are designed to assess corporate and other entity-level transition plans, we are using this framework to assess the credibility of this sovereign issuance on a best-efforts basis. Climate Bonds will be working on frameworks to assess sovereign and multi-portfolio.
 

Basic Chemicals
Decarbonisation of the chemical industry is a crucial step towards a net-zero future. The chemical sector is one of the biggest industries in the world and the largest industrial user of energy, accounting for 30% of energy consumption. It also represents around 5% of total global GHG emissions.

The Basic Chemicals Criteria are available for public consultation until 6th June 2022.  Please submit feedback via the Public Consultation Feedback Form before 5th June. All forms should be sent to public.consultation@climatebonds.net

JERA Inc Co. Transition Bond

Every month we bring you our analysis of key issuances from the nascent SLB/transition markets, focusing on their climate mitigation credentials against our Five Hallmarks for Credible Transitions framework.

The transition label as applied to bonds and other debt instruments is intended for assets and activities in the hard-to-abate sectors, that meet a Paris-aligned transition pathway. Climate Bonds sector criteria for Steel, Basic Chemicals and Cement will be finalised in 2022.
 

Selection of the issuance
This month we are looking at the recent JPY2bn (USD15.7m) issuance from JERA in two tranches, in five-year and 10-year tenors - the first Japanese electric-utility company transition bond. This comes amidst several other landmark debut transition bond issuances in Q1 2022: from Japan Airlines and Tokyo Gas, and an upcoming Transition-linked bond (both UoP and performance-linked structure) from Eneos.
 
JERA is a joint-venture between Japan’s first and third largest energy companies, and collectively counts as the country’s leading corporate CO₂ emitter, responsible for about 15% (169 ­MtCO₂e) of Japan’s total annual emissions. JERA’s Transition bond comes on the heels of Japan’s Ministry of Economy, Trade and Industry’s (METI) Basic Guidelines on Climate Transition Finance in May 2021, as well as the selection and publishing of JERA’s transition finance programme as a ‘model case’ of transition finance.
 
This issuance also comes after JERA announced its 2050 carbon neutrality pledge in 2020, which includes a commitment to decommission all ‘inefficient’ (below supercritical) coal-fired plants by 2030, and plans to replace them with co-firing plants with ammonia and hydrogen, reaching 20% ammonia in 2030 and 100% by 2040; with no concrete targets for hydrogen co-firing.

Paris Aligned

JERA has set targets to reach zero emissions by 2050, reduce coal emission intensity 20% by 2030, and reduce domestic emissions 60% by 2035, with reference to the Japanese government’s target to reduce emissions 46%  by 2030 (all against a 2013 baseline). This is in part due to METI’s Transition Roadmap for the Electricity Sector’s technological pathway encouraging investment in ammonia-firing and hydrogen-firing thermal power plants.
 
However, JERA’s targets fall short of what is required for a net zero pathway. TPI’s 1.5-degree pathway for electric utilities calls for a 73.9% reduction in emissions intensity by 2030, and an 86.9% reduction by 2035 (against a 2013 baseline). The IEA’s NZE2050 makes clear that 2035 is when emissions from electricity generation will need to reach net zero in advanced economies. Additionally, JERA’s 2035 target does not include emissions from its overseas assets.
 
Contradicting both of the above pathways, as well as its own decarbonisation targets, JERA is continuing to develop and acquire additional coal and gas power stations domestically and overseas. JERA’s LNG assets alone include some 11.6GW of installed capacity (as well as LNG terminals) in countries such as Australia, Bangladesh and Vietnam, much of which is only expected to enter operation in the second half of the 2020s.
 
While the Japanese government’s introduction of sector-specific decarbonisation pathways is undoubtedly a powerful and helpful programme to help provide guidance and catalyse the deep decarbonisation required, Climate Bonds opposes the inclusion of co-firing thermal plants as part of this pathway.