Trends in the sustainable bond markets: climate transition and financed emissions

At the recent AFME Sustainable Finance Conference in Amsterdam, many of the sessions discussed how investing in the transition of companies can help address sustainability crises, including climate change, biodiversity collapse, and resource depletion. Investors typically make a holistic evaluation of an issuer and increasingly a key factor is the entity’s preparedness to transition to its business model to accommodate climate transition. As due diligence evolves, additional layers are being added to help measure impact and progress for the issuers in the set goals, such as Science based targets (SBIT’s). Key KPI’s to evaluate sustainability transition are often focused around:

1. Climate Transition and Adaptation measures: The global transition to a lower-carbon economy is a critical aspect of transition planning. Companies are increasingly focusing on minimizing their environmental footprint and managing risks associated with climate change.
2. Corporate Governance and Risk Management: Managing the overall risks associated with low carbon transition are essential to the profitability of the business. This includes oversight, strategic direction, and transparent policies.
3. Evaluating the ambition of the targets set: In their ongoing engagement, investors are evaluating how issuers are doing against the targets they have set. Also, reporting against those targets and providing data is becoming increasingly important globally. Many reporting regimes such as TCFD and CSRD are providing new datapoints that investors are using in their evaluation.
    

The Role of Sustainable Bonds in the sustainability transition

Despite still being a small part of the overall bond market, sustainable bonds play a crucial role in driving the sustainability transition for issuers. These bonds are designed to finance projects that have positive environmental and social impacts. Per ICMA guidelines, issuers are obligated to capture and publish the data around these impacts, which then can be utilized by investors to quantify real impact in their portfolios. Issuers often use the bonds to invest in innovative technologies, leading to increased resilience, and long-term profitability.

Is it possible for banks to meet their requirements to report on financed emissions with the data currently available?

Financial institutions are under increasing pressure from regulators, civil society, and clients to enhance transparency about their role in climate change and other sustainability-related issues . By quantifying and disclosing financed emissions, these institutions can demonstrate their commitment to integrating climate change into their core business operations. This not only fosters compliance with mandatory disclosure rules in some jurisdictions but also enhances transparency to investors through voluntary disclosures

Financed emissions refer to the greenhouse gas emissions that are attributed to financial institutions through their lending and investment activities, including sustainable bonds. These emissions are a part of the broader category known as Scope 3 emissions, which includes all indirect emissions that occur in the value chain of the reporting company, excluding purchased goods and services.

Challenges in Measuring Financed Emissions

• Data Availability: Data from counterparties is often incomplete or inconsistent, making it difficult to gather accurate emissions data. Some issuers have started to include it in their sustainability reporting, but this is still very scarce.
• Accounting Standards: The application of accounting standards for financed emissions is still evolving, which adds to the complexity.
• Technological Challenges: Processing and computing financed emissions data requires advanced technological solutions.

From the sustainable bond market perspective, ICMA, which is the advising body in the sustainable market is looking to get further guidance from Partnership for Carbon Accounting Financials (PCAF), PCAF provides detailed methodological guidance to measure and disclose greenhouse gas emissions associated with various asset classes. PCAF put out a public consultation at the end of 2024 on the topic of best practices for financial institutions measuring and reporting Scope 3 category 15 emissions. As the data availability stands today, only a few issuers provide emissions data under this category, making it very difficult for financial institutions to report on financed emissions.

The sustainability transition is a journey that requires commitment, collaboration, and continuous improvement. By continuously innovating and embracing sustainable practices and data available to investors and banks, we can more accurately report on how we are doing against set targets.  As we move forward, it is essential for all parties to continue to stay informed, adapt to changing conditions, and leverage opportunities to drive meaningful change.

To aggregate impact data on your global sustainable bond portfolio, the Nasdaq Sustainable Bond Network offering can help you simplify your reporting.