On November 6, the International Capital Market Association ( ICMA ) released its Climate Transition Bond Guidelines ( CTBG ), providing clearer standards for the issuance of climate transition bonds.

The CTBG introduces the use of the climate transition bond as a standalone label for use-of-proceeds bonds, complementing the existing green, social, sustainability, and sustainability-linked ( GSSS ) bonds, to enable financing of climate transition strategies and projects, particularly for high-emitting sectors.

As with other labelled bonds, an ICMA-labelled climate transition bond needs to disclose its conformity to ICMA’s four core components: use of proceeds, process of project evaluation and selection, management of proceeds, and reporting.

ICMA recognizes that while GSSS bonds have been extensively used to finance renewable energy, clean transportation, and green buildings, they are not contributing sufficiently to finance the transition of fossil-fuel and hard-to-abate sectors.

A report from the World Economic Forum estimates a US$30 trillion funding gap for high-emission sectors to decarbonize by 2050, highlighting the importance of transition finance across these sectors, with a rising demand from issuers and investors for increased clarity in transition bond issuance.

The CTBG provides a non-exhaustive list of recognized climate transition projects, including, but not limited to:

• Carbon capture, utilization, and storage, and carbon removal technologies;
• Early retirement and decommissioning of high-emission assets;
• Fossil fuel switch ( e.g., coal to gas );
• Lower-carbon fuels; and
• Methane and flaring abatement in oil and gas infrastructure.

In the Asia-Pacific region, Japan is a pioneer in transition finance. The Japanese government announced its Climate Transition Bond Framework in 2023 and issued the world’s first government-labelled transition bond in 2024. In China, regulators are using various policy tools to promote the growth of transition finance in its hard-to-abate sectors. Regionally, the G20 Transition Finance Framework serves as a cross-country effort to promote the practice of transition finance.

Today, transition bonds remain a niche part of the sustainable bond family. With the new CTBG in place, the growth of transition bonds is likely to accelerate, as issuers in high-emission sectors will have greater clarity and operability in transition finance activities.