Transition Bonds Back in Focus

Overview:

• The transition bond market has only experienced a tepid response, with focus primarily in Europe, then in Asia.
• The newly elected government in Canada may establish itself as a leader in sustainable industry, making transition bonds part of that plan and raising awareness in North America.
• Nations newly embracing transition bonds will likely be led by the public sector.

Sustainable bond issuance was up 11% in April year-over-year, as global issuers defied headlines surrounding a broader sustainability downturn. In perhaps the most contentious issuing market for sustainability, USD issuance was up ~US$5 billion, led primarily by Sovereigns, Supranationals and Agencies (SSAs).

A New Era

While the outcome of Canadian Federal election at the end of April signals a broad policy continuation, it is expected that the Liberal government will place further focus cementing Canada's status as a leader in sustainable industry. The new government has already outlined initiatives it will undergo to achieve this; highlighting a key source of sustainable financing will be transition bonds. The government plans to finalize and implement the Made-in-Canada Sustainable Investment Guidelines for every priority sector by fall 2026 and issue Canada's first-ever transition bonds by 2027, looking to issue at least CA$10 billion per year through new bonds.

Bringing Back Transition Bonds

The transition bond market has seen a tepid response since the first was issued in 2017 with only ~US$50 billion pricing to date. Initially adopted by a handful of European borrowers, notably natural gas businesses, early transition bond issuers eventually shifted instead towards green bonds or sustainability-linked products. Despite decreased issuance in Europe, Asia-based issuers continue to access the market in force, with all 48 transition bonds issued since the start of 2024 being from those domiciled in Japan or China.

In February 2024, the Japanese government issued the world's first sovereign transition bonds. Since then, the Government of Japan has issued US$17 billion with plans to issue JPY20 trillion (~US$144 billion) over 10 years. The program also spurred an uptick in the corporate Japanese transition bond market, with US$2.7 billion of corporate transition bond issuance in 2024, a 62% increase in issuance value and a 57% increase in deal count over 2023 issuance.

Global Transition Bond Issuance

While North American issuers have shied away from the transition bond market to date, the Canadian agenda will bring the instrument back to the western hemisphere likely attracting the attention of Canada's transition-minded corporates.

The Public Sector Leads the Way

While transition bond issuance has jumped following the Japanese government's Green Transformation (GX) Transition Bond program, the market remains miniscule compared to the green bond market and remains centred around the Japanese archipelago. As more nations embrace transition bonds as a financing strategy, we expect the instrument will continue to be public-sector led with sovereign issuers taking the lead. However, as in the case of Japan, the private sector will take notice – with opportunities emerging for issuers willing to test investor appetite.