Financing Transition is an opportunity for bond investors

To operate in a lower carbon economy, most sectors must undergo a major transformation

Major economic sectors vary in how aligned they are with the net zero by 2050 goal of the Paris Agreement. The transformation of the electricity utilities sector is well underway but it is clear that most sectors will have a lot of work to do.

 

Source: TPI state of Transition Report 2021
 

 

Finance will play a pivotal role in funding the required transformation

Where work needs to be done, finance will be needed and will therefore play a key role. 

According to OECD estimates, the investment required to deliver on the Paris Agreement is about USD5-7tn per annum across the highest carbon emitting sectors.

 

The bond market has capacity to fund a significant portion and is currently under- utilised

 

The 3 sectors on the graph above account for 85% of global emissions.  In 2019, 450bn bonds were issued by the energy sector, of which 80Bn was green bonds: a small proportion.  We see this same picture in other sectors. 

Green bonds are a good start for financing green activities, but a way needs to be found for all sectors to be ‘green’.  It’s not possible to be green overnight (or net zero) and to move in that direction will involve a transition period.  The changes required can be financed from the bond market and commitments from industries starting to shift their 

These industries are starting from a low base and are now starting to make commitments to transition; expressing that through the transition bond market. 

 

Transition instruments are growing

The transition bond market is increasing, particularly in SLB’s: they now make up 7% of labelled debt market.  In addition, instruments labelled "transition" are starting to be seen.