Embracing climate transition beyond green debt: exploring the obstacles and enablers to transition bonds

Master Thesis


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Financial markets have shown that there is a growing interest in funding investments that help address the climate challenge alongside financial returns. As the market has developed, so too has the need to cover a wider sector of the global economy. High carbon emitters, however, are still absent and this presents an opportunity for financial actors to support their sustainable transition towards a greener economy through transition bonds. Transition bonds represent an evident market opportunity to provide financing to companies, whose business is not environmental-friendly today, but who have plans to become sustainable in the future. The study followed an inductive design method to explore the determinants for using transition bonds and the outlook towards the instrument. Moreover, it aimed at identifying the practitioners' approach in valuing transition bonds. The author of this dissertation undertook a qualitative exploration through interviews with investment practitioners to assess what constructs are considered to understand investments in and the issuance of transition bonds. The analysis found that sustainability-linked incentives for engagement with transition bonds are the most cited determinants, signalling the willingness to support the transition plans of brown industries. The establishment of clear standards and disclosure was perceived to be of crucial importance to enhance the credibility of transition bonds. Moreover, practitioners confessed to not yet being equipped with the specific tools and knowledge to measure and report transition objectives. The findings further highlighted that supportive policy and regulation were considered to play an enabling role for the success of transition bonds. The author recommends intensifying the development of transition bond guidelines, enhancing disclosure and implement measurement and reporting procedures. The author also urges public and private institutions to cooperate in the establishment of appropriate institutional arrangements that facilitate the growth of transition bonds. The author suggests expanding the geographical scope of the research and widen the segments of market participants, thus incorporating practitioners residing in other regions and retail investors. Another area of research would be to gain insights into the transition measurement techniques. Future research could also explore the emergence of a pricing premium compared to traditional bond instruments and any pricing discrepancies with green bonds.