How ‘Transition Bonds’ Can Help Polluters Turn Green

It makes sense that green bonds are meant for green companies. But there aren’t that many of them -- not enough to meet the rising demand from investors who want their money to have a positive impact on the environment. So what if some of that money went to finance green activities by less-than-green firms, such as oil companies, coal miners and agricultural businesses? A new concept that’s gaining traction, dubbed for now as transition bonds, could vastly expand the green credit field, and could help cut pollution where it needs to be cut. The risk is that they could provide cover for companies not fully committed to shifting quickly away from their carbon-spewing ways.

A new class of bonds, transition bonds would finance projects aimed at helping the seller switch to a cleaner way of doing business, particularly if they help the climate. For example, an energy company could use them to finance efforts to capture and store its carbon emissions or to move from coal to gas-fired power plants. There’s no consensus yet on what types of commitments companies would need to make, though it’s expected that borrowers would need to sign up to specific targets, as well as broader sustainability goals. Investors would demand transparency, adding further pressure on companies to make public their impact on the environment and detail measurable ways in which they plan to bring their businesses in line with goals set in the Paris Agreement on climate change.