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Net Zero Bondholder Stewardship: The Potential for Unlabelled Debt

Net Zero Bondholder Stewardship: The Potential for Unlabelled Debt
23.09.24

This discussion paper highlights the huge capacity available in unlabelled debt for fixed income investors looking to align with the net zero transition, and outlines our best practice recommendations and case studies for how such work can be pursued.

Corporate debt will be critical to transitioning investment portfolios, increasing investment in climate solutions and ultimately financing the net zero transition. 

To support bondholders in stewardship to move companies along the NZIF alignment maturity scale, IIGCC published A Critical Element: Net Zero Bondholder Stewardship Guidance – Engaging with Corporate Debt Issuers in 2023. In 2024, IIGCC published its Net Zero Bondholder Stewardship: Engaging Labelled Debt Guidance, exploring the particularities of engaging on green and sustainability-linked bonds to link financing and net zero commitments.

While labelled debt provides an opportunity to directly link financing to transition outcomes in the real economy, a holistic and multi-pronged approach to net zero debt financing across all bond formats and frameworks is imperative for an economy-wide net zero transition. Instruments like sustainability-linked bonds may begin work on engaging carbon-intensive sectors, but we recognise that the majority of debt issued by those sectors is likely to remain unlabelled.

Unlocking the net zero potential of unlabelled bonds may therefore be a large opportunity for fixed income investors aligning with the net zero transition. It is critical that the financing ecosystem is equipped to integrate net zero actions, accountability mechanisms and stewardship into unlabelled debt as part of the effort to create real economy emissions reductions.

This discussion paper – Net Zero Bondholder Stewardship: The Potential of Unlabelled Debt - summarises the key lessons from the 2023 Net Zero Bondholder Stewardship Guidance and looks to begin discussion on how to unlock the net zero potential of unlabelled debt. This may be achieved through existing opportunities to strengthen bondholder stewardship and by standardising the integration of net zero factors into unlabelled debt.

The development of this paper has been led by Laith Cahill at IIGCC. We are grateful to the IIGCC Bondholder Stewardship working group members, including co-chairs Chandra Gopinathan, Railpen, and Sarah Peasey, Neuberger Berman.