Mobilising bonds for the just transition: an exploratory assessment methodology of thematic sovereign bonds

This report presents a novel methodology to assess the presence of just transition elements in green, social, sustainability and sustainability-linked (GSS+) bond frameworks. This methodology demonstrates how GSS+ bonds can be leveraged for the just transition, which can inform both issuers’ bond design and investor decision-making. The authors classify certain GSS+ bond framework characteristics – eligible expenditures, performance targets and post-issuance reporting – as just transition-related where activities cover both climate change mitigation and one of the following social themes: education, employment or equality. Where there is a causal link between the mitigation and social activities in question, the expenditure, target or reporting is considered just transition-focused. Using this methodology, they assess nearly all existing sovereign GSS+ bond frameworks, amounting to 68 in total, finding moderate evidence that just transition elements are present.

Main messages

• The majority of sovereign frameworks (72%) have an approach to managing and preventing social harm through exclusions, social safeguards or both.
• A meaningful share (22%) have just transition-focused eligible expenditures through their inclusion of projects that directly address the social harm caused by the low-carbon transition or the opportunities it presents.
• Meanwhile, 26% of frameworks include at least one metric in post-issuance reporting commitments that we categorise as just transition-focused.
• Developing countries appear to be making greater strides forward than high-income countries on integrating just transition into their sovereign bond frameworks. However, developing countries tend to issue more sustainability bonds, which by definition promote the integration of green and social outcomes.
• Although this methodology is a useful starting point, it should be complemented by an analysis of country context and post-issuance impact reporting.

Recommendations for bond issuers

1. Meaningful engagement with affected stakeholders and vulnerable groups is a core element of just transition and should be incorporated into bond frameworks and post-issuance reporting.
2. Bond frameworks should include both robust social safeguards and clear exclusions to prevent harm. These should be developed such that they are additional relative to existing laws.
3. Where relevant, eligible expenditures should include just transition-focused projects that causally link climate change mitigation action with social benefits in terms of education, equality or employment.
4. Post-issuance impact reporting should include metrics on both the benefits and any harm from funded activities. Successful impact depends on effective theories of change and project design.