Transition Finance Guidance：by the Transition Finance Study Group in Japan(RIEF）
“Transition Finance Guidance” has been set up by Academic Study Group in Japan to contribute for considering global common standard.
The Transition Finance Study Group (TFSG), formed by academic researchers specialized in green & sustainable finance in Japan, organized by the Research Institute for Environmental Finance (Japan), has published “transition finance guidance” as its interim report. Major key points are as follows.
1) Classifying transition project, assets and activities for transformation and transition of high carbon intense or high environmental impact into low intense or low impact ones. We can it as “Transition Taxonomy” or “Brown Taxonomy”.
2) Transition finance is divided into the evaluation of the planning stages before the transition and the evaluation of the implementation stage after the implementation of the transition financing. At the planning stage, pre- evaluations are almost same as existing green bonds principles, but in post-transition procedure it should be needed additional works such as monitoring whole transition process, evaluating the results of transition and whether transitional activities by issuers or borrowers are appropriate and so on.
3) Therefore, roles of external review should be also divided into planning phase and implementation ones to avoid the conflict of interest.
4)In order to ensure the transition promise of the issuers or borrowers, if transition result is not sufficient for planning issuers such as transition bonds should pay additional interest to investors based on introduction of a variable coupon rate. In the case of a loan, by setting of “covenants”, they also pay additional interest to investors as a kind of “penalty”. This is also reason why we should ask to divide transition process between prior and post ones.
5) It should be possible to set phase-in transition process introducing interim targets, due to technical or regional reason. But in that case, issuers should show in final target of the concerned projects, identifying how and when it will reach their through successive phases.
Full paper of the Transition Finance(Interim Report)
<For necessity of transition finance>
・Recently, there are many green bonds and green loans are spreading global financial market including Japan. It is desirable that the number of green projects increases. However, in many countries, fossil fuel-dependent projects, assets and activities make up the majority of the economy. In addition to increasing the number of new or refinancing green projects, we should change existing old-type projects, assets and activities as soon as possible through providing additional finance. That is transition finance.
Based on present green finance approach, we should introduce more intentional approach for transforming existing projects, businesses and societies. That means we need additional procedure and efforts to realize smooth and reliable transition by setting up common but flexible guidance or guideline for various market participants.
We expect to get comments to our guidance from various stakeholders.
If you have comments or questions to the guidance, please send it to as the follows:
In the email, please mentioned your name, title or position, organization, nation and so on.
Considering these opinions, we will make and publish a final proposal again. The consultation deadline is the end of May 2020. The final report will be compiled later this year, including the taxonomy of the “Brown Project” targeted for transition finance. Personal information through gathering consultation period is kept secret.
The Research Institute for Environmental Finance（RIEF）
Non-profit organization to work for prevailing information on green & sustainable finance mainly in Japan. Main member of RIEF are financial institutes, business entities, trade-organization and individuals interested in sustainability and ESG fields.
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