JPMorgan Makes Case for Polluters as It Pitches Transition Bonds

(Bloomberg) -- A new kind of bond issued by companies that pollute has caught the attention of investors eager to fill their climate-friendly portfolios, according to the head of green bonds at JPMorgan Chase & Co., Paul O’Connor.

Transition bonds are a way for issuers to raise funding by promising to clean up their business. While only a few of these securities have ever been sold, they’re set to play a key role in stretching the universe of assets that will eventually live up to environmental, social and governance goals, said O’Connor, who oversees JPMorgan’s business in Europe, the Middle East and Asia.

“If we don’t engage these sectors, not much is going to change,” he said in a phone interview.

With demand for climate-friendly bonds outstripping supply, banks are advising borrowers to include sustainability in their financial goals and funding programs. So-called brown companies, such as in fossil fuel sectors and other heavily-polluting industries, are also keen to embrace ESG amid concerns that, in time, their funding may become more costly or dry up completely. It’s a scenario that’s already reality for some producers of thermal coal. As a result, there’s been a wave of innovation in debt markets, first with green bonds and more recently sustainability-linked securities.

To avoid labeling as climate friendly products that don’t quite live up to the name (a practice known as greenwashing), the Climate Bond Initiative last month introduced a set of proposals for transition bonds, including a recommendation that issuers commit to aligning their entire operations with the Paris Agreement on climate.

Industries for which transition bonds are relevant tend to produce goods and services that are essential to most economies, such as transport and energy. Earlier this week, Etihad Airways sold $600 million in Islamic transition financing, with the terms of the deal linked to the airline’s emissions. And also this week Total SE’s Chief Executive Officer, Patrick Pouyanne, told a conference that the oil major was planning a “very large” transition bond sale.

Read: Total Eyes ‘Very Large’ Transition Bond as It Curbs Emissions

Getting some ground rules is expected to increase demand for transition bonds.

“There is a sense among the investor community that management teams are trying to maintain the status quo for short-term profitability reasons,” O’Connor said. Some of the ESG plans issuers present on occasion leave investors incredulous. Part of the problem is simply that ESG financing “is still reasonably new,” he said.

Much of the work needed to establish functioning ESG markets needs to be done by the financial industry, O’Connor said. But all stakeholders will need to devote more time to figuring out how to make it work, he said.

“Investors have to do it, banks have to do it, companies have to do it,” he said. “There’s no getting around it.”

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