Transitioning from brown to green: the use of transition bonds and green bonds, and sustainability-linked financing in agribusiness

Publication October 2019


Two of the most pressing issues currently facing our planet are rising carbon emissions and increasing global food demand. The agriculture industry is challenged to increase food production while decreasing its carbon footprint.

A fresh concept which may help to put agriculture and commodities companies on the road to a more sustainable future is that of the transition bond.

In July 2019, AXA Investments Managers called for a new class of bonds known as transition bonds which are designed to allow companies which currently could not offer traditional green bonds to issue bonds that are linked to permit their companies to gradually transition to a greener business model. Transition bonds also help to prevent ‘greenwashing’ of the traditional green bonds market as it allows industries and companies which have difficult environmental management records to begin managing sustainability in their supply chains without necessarily using the green tag.

However, transition bonds have recently come under scrutiny and have been criticized on the grounds that brown industries such as cattle and soy farming cannot ever be environmentally sustainable due to the very nature of their business and that a gradual shift to greener practices is insufficient to combat the rate of climate change. Despite this criticism, transition bonds are growing in popularity and alongside traditional green bonds do have the potential to assist in leading to a more sustainable and responsible supply chain in the agriculture industry as well as lowering the carbon footprint of commodities traders.

Another financing avenue for agribusiness is sustainability-linked financing (which may take the form of loan facilities or bonds). Rather than the funding itself being earmarked for a particular sustainable project, as is the position with a transition bond or traditional green bond, it is the pricing of the facility which is linked to certain sustainability targets evidencing the issuer’s commitment to a greener future for its business and helping companies to make a gradual shift away from fossil fuels. For example, if environmental and sustainability targets such as reducing food waste or cutting carbon emissions are met, a decrease in the interest rate on the financing may follow, or if the targets are not met, the interest rate may ratchet up. ENEL has just issued the first sustainability-linked bond in September 2019 at an issuance size of US$1.5 billion, and this may pave the way for further sustainability-linked bonds to be issued in the future. ENEL will be able to use the money for any purposes, including for more than half of its power generating business which is currently not green. There was US$4 billion in demand for the bonds and ENEL said that the deal had saved it 20 basis points compared to a conventional bond. In this case, if ENEL fails to hit its set target of increasing its renewable power generation fleet from 45.9 per cent now to 55 per cent by the end of 2021, it would have to pay 25 basis points of coupon step-up.

Why do investors invest in transition bonds?

Transition bonds can be marketed to investors who are pursuing environmental, social and governance (ESG) integration strategies but also want to diversify their investment portfolios away from the traditional green bond projects such as renewable energy projects. As is it perceived that a wider range of issuers may issue transition bonds, investors are provided with a wider pool of companies to invest in. When making their investment decisions, investors can then decide whether they believe the issuer is moving fast enough in combatting climate change.

Why do lenders provide sustainable finance?

As at July 2019, over US$30.7 trillion of funds was held in green or sustainable investments globally, according to the Global Sustainable Investment Alliance and according to Bloomberg Corporation figures, lending linked to measurable sustainability initiatives such as reducing emissions, increased nearly seven-fold to US$36.4 billion in 2018.

Sustainable financing may help in lowering financing costs for lenders as companies with robust ESG strategies often have good records for debt repayment. Lenders are also being encouraged by regulators to pay more regard to the ESG impact of their financing arrangements.

Why do agriculture and commodities companies issue transition bonds or enter into sustainability-linked financings?

Transition bonds can help to boost supply chain sustainability and help companies to publicly demonstrate a commitment to moving towards a more responsibly sourced supply chain. Transition bonds also have the potential to incorporate broader social and economic benefits as well as environmental ones. Additionally, there is also usually an associated drop in the cost of sustainability-linked facilities such as paying a lower rate of interest if sustainability targets are met. A number of sustainability-linked financing programs have recently been entered into in the farming and agriculture sectors.

Case study: Sustainable beef farming practices

Beef production is associated with deforestation of natural grassland areas in Brazil in order to rear cattle as well as being one of the world’s most carbon-intensive forms of food production. Many suppliers are beginning to acknowledge the need for more sustainability in their supply chain. For example, the world’s largest supplier of ground beef, Cargill has voluntarily pledged to achieve a 30 per cent reduction in the greenhouse gas emissions intensity of its North American supply chain by 2030.

In August 2019, Marfrig, the world’s second largest beef producer, also announced a US$500 million sustainable transition bond with the funds raised used to purchase cattle from farms in the Amazon which meet all of Marfrig’s best practice conditions such as not encroaching onto indigenous lands, not having deforested their land since 2009 and not being censured by government agencies.

Marfrig’s Vice-President of finance and investors relations, Marco Spada stated that the transition bond was intended to “give investors more visibility” on the company’s implementation of sustainability strategies such as the traceability of its cattle.

Case study: Sustainable soy production in Brazil

In July 2019, a sustainable commodities financing program, known as the Responsible Commodities Facility and backed by the UK government and the United Nations Environment Programme (UNEP) was announced on the London Stock Exchange. This financing program is aimed at preventing the clearing of forests and grasslands by pasture farmers, instead encouraging them to use degraded pasture as an alternative. Corn and soya farmers who commit to using degraded pasture will benefit from low-interest credit lines as an incentive to prevent further clearance of Brazilian grasslands.

The target for commodities traders is to allow increased production and protect farmers’ income without clearing the natural forest and grasslands. Over a four-year period US$1 billion of green bonds will be arranged through the facility which hopes to produce 180 million tonnes of sustainably soured soy and corn and reduce carbon dioxide emissions by 250 million tonnes through the restoration of 1.5 million hectares of natural forest and grassland.

China’s largest agriculture company, COFCO International also announced in July 2019 that it had secured a US$2.1 billion loan with the interest rate linked to its sustainability performance such as investigating whether its soyabean supply emanates from deforestation in Brazil. It has also pledged to invest any interest savings which it makes into further improving its environmental and sustainability practices.

Case study: Sustainable energy, water consumption and waste management

Facilities linked to water and electricity consumption have also recently been used by agribusinesses to demonstrate a commitment to increasing environmental awareness and transparency. For example, in May 2019, one of the world’s four largest commodities traders, Louis Dreyfus, announced a revolving credit facility (RCF) linked to four areas of sustainability – water usage, electricity consumption, solid waste and CO2 emissions. Louis Dreyfus will benefit from a reduction in the interest rate on the RCF for every year that it improves on its sustainability record in the 4 areas listed above.

Case study: Sustainability in transporting goods and distribution chain

Agricultural products and commodities need to be distributed to end-consumers which also contributes heavily to global emissions. Commodities traders can also look to use transition bonds and green bonds, or sustainability-linked financing, to improve their delivery practices.

For example, in 2019 Electricite de France SA signed two bilateral sustainable revolving credit facilities, taking the total of its sustainability-linked loans to over €5 billion which were linked to the adoption of electric vehicles in its delivery fleet and CO2 emissions targets. The company also has €4.5 billion in outstanding green bonds used to finance the construction of renewable energy sites including wind and solar projects.


In conclusion, the case studies laid out above demonstrate the potential uses of green and transition bonds, and sustainability-linked financing, to encourage the agricultural sector to move towards more sustainable practices. They provide agribusiness the opportunity to clean up their supply chain and ensure that their products are sustainably sourced as well as publicly demonstrating their commitment to a greener future.

Green and transition bonds, and sustainability-linked financings, can be a useful tool for stimulating debate about how to move brown industries to more sustainable practices given the pressing need to address climate change. Companies involved in carbon-intensive industries may look to these financings to begin to reduce their environmental footprint and use them as a stepping stone in the transition from brown to green.

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