(Bloomberg) -- Export Development Canada is engaging investors about how a potential transition bond should look as the federal agency works to help companies operating in high pollution industries such as oil & gas reduce their carbon footprint.

“We’d like to be a leader in that space, but before doing that, I think you need to have some discussions with investors,” Sue Love, EDC’s treasurer said in an interview. “What is it that they need to see in reporting? What are the types of things that they deem acceptable, in order to develop this market responsibly.”

The Ottawa-based agency last week released a new framework, a first step in potentially issuing transition bonds to raise cash for projects that curb pollution. The EDC may use proceeds from the bonds to finance the acquisition and operation of carbon capture utilization and storage technologies, as well as the production of some low-carbon intensity fuels like certain types of hydrogen.

“We’re wanting to put the framework out there so that investors can familiarize themselves,” she said. “We’re hoping that other companies will take the lead from that.”

While oil & gas companies aren’t excluded from the use of proceeds of a potential transition bond, “they have to have a credible plan in place and a commitment to transitioning in line with the Paris agreement,” said Love. The framework explicitly excludes the financing of carbon capture technologies that would be used to increase oil exploration via a process known as enhanced oil recovery, which tend to be used more frequently when crude prices are elevated. 

The EDC is still evaluating its position on this technology, a press officer for the agency said by email.

While no Canadian firm has issued bonds under the transition label yet, the use of such bonds is gradually gaining traction in some other countries. In Japan, shipping firms, airlines and power companies have sold or announced plans to sell the bonds after regulators published guidelines for transition finance.

Years of Work

In Canada, a group of experts have been working for over two years to develop a transition finance taxonomy, and the federal government published its 2030 Emission Reduction Plan last week with detailed targets and actions for each sector. The guidance said that the oil & gas industry should reduce its emissions to 31% below its 2005 levels by the end of the decade, which comes to about 42% below 2019 levels. 

The Science Based Target Initiative, or SBTi, which provides companies with defined paths to reduce emissions in line with the Paris Agreement, is developing a framework for the oil and gas sector. Once published, and SBTi starts verifying targets in that industry, “we could see an uptick in transition bonds globally and in Canada from the sector,” said Aaron Young, associate portfolio manager at RP Investment Advisors.

So far, “transition bonds are suffering from a lack of clear definitions,” RPIA’s Young said in an emailed reply to questions. “The other major hurdle is that this type of structure would likely be adopted by the highest emitting sectors/issuers that need to transform their operations. Therefore demand from ESG-focused asset managers and owners may be lower as these participants will be reticent to hold a high emitting name in their portfolio, even if the bond is labeled “transition.” 

EDC’s new ESG bond framework will also include provisions for the agency to issue sustainable and social bonds as well as continue selling green bonds, which it’s been issuing since 2014.

Love doesn’t expect the inaugural sale of transition bonds to come this year. Sales of social or sustainable bonds may take place sooner.

“We felt it was important to take the first step in putting transition into our framework,” Love said. That was the part that, when working with the firm Sustainalytics, which provided a second party opinion, “took the most time to get to a level where they could be comfortable with what we put in it.”

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