Finance hard-to-abate sectors with a transition bond

Submitted through the COP31 Sustainable Transformation Awards · SKD Türkiye (WBCSD Global Network Partner)

The company is a bank operating across Türkiye in the financial services sector, with more than 10,000 employees and a nationwide branch network.

Green finance instruments are built around activities that are already low-carbon. That design excludes the sectors where the largest absolute emissions sit: iron and steel, cement, energy and heavy manufacturing, which are economically critical and technically difficult to decarbonise. A company in one of these sectors that wants to fund a genuine transition often falls outside green bond eligibility precisely because it is starting from a high-carbon position.

The consequence in an emerging economy is that capital withdraws from these sectors rather than transforming them. Exclusion protects a lender's portfolio metrics but leaves the underlying emissions in place and removes the funding that a transition would require.

The company's position is that these sectors have to be financed through the transition rather than excluded from it, and that doing so credibly requires an instrument with science-based eligibility conditions rather than intent statements.

The bond forms part of the company's sustainable financing strategy and its 2050 net zero commitment, and supports Türkiye's 2053 net zero target. The company also published its first public climate transition plan in January 2026, aligned with the Turkish Sustainability Reporting Standards and ISSB standards, covering interim 2030 and long-term 2050 objectives (1).

Location of the initiative: Türkiye, with proceeds directed to carbon-intensive industrial sectors including iron and steel and cement

The instrument is a climate transition bond of USD 100 million with a five-year tenor, issued in December 2025 in collaboration with a multilateral development finance institution, which is also the sole investor. It is structured in line with the climate transition finance guidance issued by the International Capital Market Association.

The eligibility architecture is what distinguishes it from a green bond. Financed projects must rest on concrete decarbonisation levers, and four are defined: energy efficiency delivering at least a 20 per cent improvement per unit of output, use of renewable energy, water efficiency delivering at least a 20 per cent saving, and climate adaptation.

Every sub-project must comply with the environmental and social standards of the development finance institution, and must follow a science-based transition pathway consistent either with Science Based Targets initiative methodology or with the International Energy Agency Net Zero 2050 scenario. Eligibility is therefore tied to an external pathway rather than to a borrower's own trajectory.

Two allocation rules protect the integrity of the instrument. At least half of the issue proceeds are directed to projects delivering measurable emission reductions, and refinancing is capped at 30 per cent and limited to projects committed within the preceding 24 months, which secures additionality by preventing the bond from simply repackaging existing lending.

Impact measurement runs through the development institution's carbon accounting tool for financial institutions. The baseline for each project is its pre-financing performance, and before-and-after comparison is carried out through the tool's independent verification process. The reporting set covers annual CO₂e reduction, with a minimum of 25,000 tCO₂e per year per project, energy intensity improvement and renewable energy capacity.

Impact data is monitored throughout the life of the bond and published, and an independent third-party verification mechanism sits over the measurement and reporting process.

Sustainability Impact

Climate

The bond does not target the company's own Scope 1 or Scope 2 emissions. Its purpose is the financed portfolio, which falls under Scope 3, Category 15: Investments, and within that it funds reductions in the borrowers' own Scope 1 and Scope 2 emissions in carbon-intensive industry.

The eligibility conditions define the intended effect. Each financed project must deliver a minimum of 25,000 tCO2e of annual reduction, must sit on one of four decarbonisation levers, and must follow a transition pathway aligned either with Science Based Targets initiative methodology or with the International Energy Agency Net Zero 2050 scenario. Energy efficiency projects must improve energy use per unit of output by at least 20 per cent.

The baseline for measurement is each project's pre-financing performance, with before-and-after comparison verified independently through the development institution's carbon accounting tool. At least half of proceeds are directed to projects with measurable reductions, and refinancing is capped at 30 per cent with a 24-month look-back so that the funding produces additional activity rather than displacing existing lending.

The bond was issued in December 2025 and the reduction figures above are eligibility thresholds and targets rather than realised results.

Nature

Water efficiency is one of the four eligible decarbonisation levers, and projects financed under it must deliver at least a 20 per cent saving. In heavy industry, where process water use is substantial, this places a resource condition alongside the emissions condition.

Climate adaptation is a further eligible category, which brings resilience investment into scope rather than restricting the instrument to mitigation.

All sub-projects must meet the environmental and social standards of the development finance institution, which apply pollution prevention, resource efficiency and biodiversity requirements to each financed facility independently of the emissions test.

Social

The instrument is designed so that carbon-intensive sectors are transformed rather than excluded. In an economy where iron and steel and cement are significant employers and regional anchors, financing the transition protects the industrial base and the jobs attached to it, where withdrawal of capital would not.

Corporate clients in these sectors receive technical advisory support alongside the funding, so the transaction transfers transition planning capability and not only capital.

The environmental and social standards applied to each sub-project also cover labour, community and health and safety requirements at the financed facilities.

Business Impact

Benefits

The transaction secured USD 100 million of five-year funding from a development finance institution, giving the bank long-tenor capital tied to a defined lending purpose.

It builds a structuring capability the bank did not previously hold. Designing eligibility criteria, transition pathway requirements and reporting standards for a first-of-kind instrument creates methodology that can be reused for further transition finance transactions.

It also deepens client relationships in the industrial sectors that matter most to the balance sheet. Iron and steel and cement clients receive technical advisory support and access to funding for decarbonisation, which strengthens the commercial relationship while reducing the transition risk carried in the portfolio.

More broadly, the instrument strengthens transition planning culture among clients seeking international green finance, and encourages the integration of climate risk into credit assessment across the domestic financial sector. Both effects reduce the bank's own forward-looking credit exposure.

Costs

Structuring cost is significant for a first-of-kind transaction. Extensive negotiation with the development finance institution was required to define eligibility criteria, transition pathway requirements and reporting standards, and that design effort is not recovered from a single issue.

The reporting obligation runs for the life of the bond. Impact data must be measured through the development institution's carbon accounting tool, verified independently and published annually, which is a standing cost in staff time and external fees rather than a one-off issuance expense.

The eligibility rules deliberately restrict the addressable pipeline. A minimum of 25,000 tCO₂e of annual reduction per project, a 20 per cent efficiency threshold and alignment with an external science-based pathway together exclude smaller projects and clients without a credible transition plan.

The additionality rules constrain balance sheet flexibility. Capping refinancing at 30 per cent with a 24-month look-back means most proceeds must fund new commitments, so the bank cannot use the issue to term out existing exposure.

Client-side capability is a further dependency. Borrowers must be able to produce baseline performance data and follow a science-based pathway, which requires advisory support the bank has to provide.

Costs are contained by adopting an external framework rather than building a proprietary one, by using the development institution's existing verification tool instead of a bespoke measurement system, and by reusing the same methodology across subsequent transactions.

Impact Beyond Sustainability And Business

Co-benefits

Because eligibility requires alignment with an external science-based pathway, financed clients have to build transition planning capability that then applies to their whole business, not only to the financed asset.

The transaction contributes practical experience to the development of global transition finance standards, since it is among the first applications of the transition bond guidance in the market.

Within the domestic financial sector, the structure encourages the integration of climate risk into credit assessment processes, which extends the effect beyond the parties to the transaction.

Potential side-effects

Financing carbon-intensive sectors carries the risk that funding sustains high-emission activity rather than transforming it. The instrument manages this through the minimum reduction threshold, the science-based pathway requirement, the refinancing cap and independent verification, but the risk is inherent to the model and depends on those controls being enforced.

The eligibility thresholds create a size bias. Projects below 25,000 tCO₂e of annual reduction do not qualify, so smaller industrial operators are effectively outside the instrument even where their relative improvement would be significant.

Reliance on a single investor concentrates the funding relationship, and replication in other markets depends on finding a comparable development institution counterparty willing to take the first-loss reputational position on a new instrument type.

Typical Business Profile

The model suits commercial banks in emerging economies whose loan books carry significant exposure to carbon-intensive industry, and that have a treasury function able to structure a labelled bond and a sustainability function able to run post-issuance impact reporting.

It is most relevant where green finance alone cannot address the emissions profile, because the largest reductions available sit in iron and steel, cement, energy and heavy manufacturing rather than in already-clean activities.

Delivery engages structured funding, sustainability management, credit risk and corporate banking functions, working with a multilateral development institution that supplies the standards, the verification tool and the investment.

Approach

1. Establish why green finance is insufficient: Analyse where absolute emissions sit in the loan book, and identify the carbon-intensive sectors that conventional green bond eligibility excludes, so that the instrument is designed against a defined portfolio gap.

2. Secure a development institution as partner and anchor investor: Negotiate the transaction with an institution that brings environmental and social standards, an impact verification tool and the credibility that a first-of-kind instrument requires from the market.

3. Structure against a published external framework: Align the bond with the climate transition finance guidance of the International Capital Market Association rather than with internal definitions, so that the label is externally testable.

4. Define concrete decarbonisation levers as the eligibility base: Limit financing to four levers with measurable thresholds, being energy efficiency of at least 20 per cent per unit of output, renewable energy, water efficiency of at least 20 per cent, and climate adaptation.

5. Require a science-based transition pathway from each borrower: Make eligibility conditional on alignment with Science Based Targets initiative methodology or the International Energy Agency Net Zero 2050 scenario, and on compliance with the development institution's environmental and social standards.

6. Set a minimum impact threshold and additionality rules: Require at least 25,000 tCO₂e of annual reduction per project, direct at least half of proceeds to projects with measurable reductions, and cap refinancing at 30 per cent limited to commitments made in the preceding 24 months.

7. Fix the baseline and the verification route before allocation: Use each project's pre-financing performance as the baseline and run before-and-after comparison through the development institution's carbon accounting tool with independent verification, so that the measurement basis is agreed before money moves.

8. Report through the life of the bond and connect it to the transition plan: Publish annual CO₂e reduction, energy intensity improvement and renewable capacity data, subject the process to independent third-party assurance, and align disclosure with the published climate transition plan covering interim 2030 and long-term 2050 objectives.

Stakeholders Involved

• Project leads: The transaction was executed under the leadership of the chief executive and approved and strategically directed by the board of directors, which places the instrument inside corporate governance rather than inside a product function. It is presented as an expression of the company's 2050 net zero commitment, and sustainability holds a standing place on the senior management agenda.

• Company functions: The structured funding and sustainability management team holds the central role in structuring, monitoring and reporting. It works in coordination with credit risk and corporate banking so that environmental, social and governance conditions are embedded in the lending process rather than applied after credit approval, and so that sustainability performance sits inside risk management and credit assessment.

• Main providers: A multilateral development finance institution acted as both strategic partner and sole investor. It contributed its environmental and social standards, its carbon accounting tool for financial institutions and its global expertise, and extensive negotiation with it during design determined the eligibility criteria, the transition pathway requirements and the reporting standards. Independent third-party verification providers sit over the measurement and reporting process.

• Other: Corporate clients, principally companies in the iron and steel and cement sectors, are the beneficiaries and are central to the process; they receive technical advisory support alongside financing to accelerate their decarbonisation. Feedback runs through regular impact reporting via the carbon accounting tool and annual public disclosure.

Key Parameters To Consider

The bond is USD 100 million with a five-year tenor, issued in December 2025, and impact data is monitored and published throughout that term.

Eligibility is governed by hard thresholds: a minimum of 25,000 tCO₂e of annual reduction per project, at least 20 per cent improvement in energy efficiency per unit of output, at least 20 per cent water saving, alignment with a science-based pathway, and compliance with the development institution's environmental and social standards.

Additionality is controlled by two rules: at least half of proceeds to projects with measurable reductions, and refinancing capped at 30 per cent with a 24-month look-back.

Continuity is secured through a sustainable finance and product framework aligned with the International Capital Market Association, independent external assurance arrangements, and the climate transition plan published in January 2026 covering interim 2030 and long-term 2050 objectives, supported by digital environmental, social and governance monitoring tools.

Replication is anticipated through partnerships with multilateral development banks, alignment with international frameworks and integration with local capital markets, with pilot applications in comparable markets expected in the 2026 to 2027 period.

Implementation And Operations Tips

Design the eligibility gate before marketing the instrument. For transition finance the label carries no credibility on its own; the minimum reduction threshold, the efficiency percentages and the science-based pathway requirement are what make it defensible.

Treat additionality as a structural rule, not a statement of intent. A refinancing cap with a defined look-back period is a testable control, whereas a commitment to fund new activity is not.

Agree the baseline and the verification tool with the investor before allocation. Retrofitting a measurement basis after proceeds are deployed is where transition instruments lose credibility.

Expect to build client capability alongside the product. Borrowers in carbon-intensive sectors often cannot produce baseline data or a science-based pathway without support, so advisory capacity is part of the cost of the instrument.

Connect the instrument to a published transition plan. Aligning the bond with interim 2030 and long-term 2050 objectives disclosed under recognised standards is what prevents it from being read as a single transaction rather than as strategy.

External Links

• Integrated annual report and sustainability disclosure

Source List

(1) Integrated annual report and sustainability disclosure