By Douglas Alencar (Federal University of Pará)
The Climate Transition Finance Handbook, developed by the International Capital Market Association (ICMA) and adapted by DZ BANK with review from SUST4IN, establishes guidelines for issuers of bonds wishing to label financial instruments as climate transition bonds. This handbook provides guidance on practices and expectations for issuers to effectively finance the adaptation to a sustainable business model aligned with the commitments of the Paris Agreement.
Regarding Climate Transition Management and Strategy, the document emphasizes the need for a clear strategy to direct the business model towards more sustainable practices, especially in sectors with high carbon emissions. However, the recommendation for issuers to merely “demonstrate commitment to climate practices” is vague and insufficient. It would be more assertive to restrict financing to sectors that genuinely contribute to a low-carbon economy while also banning sectors that are harmful to the environment, regardless of their profitability.
In terms of the Environmental Materiality of the Business Model, the handbook reinforces that the transition strategy must be significant to the sector and the activities of the issuer, considering their environmental impact. In this context, a more robust approach could include prohibiting access to credit for sectors that have a high environmental impact, aiming for a more selective and strategic economic transition.
Regarding the Science-Based Strategy, decarbonization targets must be scientifically grounded, with measurable indicators and emission reduction trajectories consistent with the Paris Agreement. However, many scientists are already warning in 2024 that the goal of limiting global warming to 1.5°C may no longer be achievable. Transition initiatives to a low-carbon economy have, so far, been limited and largely delayed.
The handbook also recommends that issuers transparently disclose their capital and operational expenditures related to the transition, clarifying how financial resources will be applied to achieve climate goals. Establishing clear and accessible targets is essential, along with having financial institutions committed to these objectives. However, it is worth noting that, despite these guidelines, there is not always full transparency, and financing criteria can be opaque.
Another significant gap is the inadequate addressing of the intersection between climate transition and social justice. The transition to a low-carbon economy should consider the impact on vulnerable communities; however, the focus may be overly centered on financial and market aspects. It is crucial to evaluate the distributive impacts of the transition, as the burden may fall on poorer countries and low-income populations.
Additionally, the handbook does not take into account significant regional differences in transition needs and capacities. The presented guidelines are universal and may not be suitable for specific local contexts, such as the Brazilian Amazon, where solutions must be tailored to distinct economic, social, and demographic realities.
Finally, the manual suggests conducting independent assessments to strengthen investor confidence in the credibility of issuers’ transition strategies. Although this practice is common in the financial market, its rigor and transparency must be continuously improved to ensure a genuine contribution to sustainable financing.
