UniCredit - Sustainable Transition Finance

Ambitions to mitigate climate change, as outlined in the 2015 Paris Agreement, require decarbonisation of whole societies and economies globally by year 2050. The agreed objectives are to keep the global temperature rise well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C.

The EU Action Plan on Financing Sustainable Growth considers finance a critical enabler of transformative improvements. However, while green finance has experienced tremendous growth since its outset in 2007, it has been focusing on harvesting the low hanging fruits, i.e. activities which are already green such as wind farms and photovoltaic parks. If the aspiring climate change mitigation targets are to be reached, the industry will have to broaden its perspective and seriously attend to financing activities which are hard-to-abate. High-carbon sectors such as steel, aluminium, cement and natural gas, but also shipping and aviation will have to change dramatically in order to switch to the Paris trajectory. The OECD estimates that EUR 6.35 tr/year are required to meet mitigation goals by 2030 alone and public sector resources will not be adequate to meet this challenge.

To help facilitate the flow of investment to the climate transition process, the International Capital Markets Association (ICMA) published the first guidance for issuers called “Climate Transition Finance Handbook” in December 2020. The handbook does not provide definitions of transition projects, but it clarifies the issuer-level disclosures which are recommended to credibly position the issuance to finance the transition. In other words, no new sustainable finance instrument is created, but each of the existing sustainable finance instruments can be used and structured in a way which supports transition. Additional credibility can be sought by issuers and borrowers by obtaining a climate “transition label” by referencing the guidance.

A framework published by the Climate Bonds Initiative provides an additional view of identifying credible Paris-aligned transitions. The so-called “White paper” defines five principles which in our opinion have the potential to be the goalposts of transition finance going forward: all goals and pathways need to be aligned with the 1.5°C trajectory and established by science, offsets don’t count, technological viability trumps economic competitiveness and it is action that is required, not pledges. The transition concept is applicable for both whole entities and all of their activities. While general corporate purpose sustainable finance instruments are the means to finance entities, use-of-proceeds instruments are used to finance activities. With the exception of activities which already are at or near net-zero emissions, like wind power generation, all other activities, including those which are not yet on a pathway to zero or even stranded, can in principle and selectively be financed under a transition label.

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