Toxic Bonds Network demands to financial institutions

Asset owners and asset managers must:

• Adopt coal, oil and gas policies that immediately stop all new investments in companies expanding fossil fuel output and infrastructure. These policies must cover passive holdings and third-party assets.
• Divest from bond holdings in fossil fuel companies, unless the company has demonstrated proof of no new fossil fuel output / infrastructure and announces a complete phase-out strategy aligned with principles of equity, a 1.5.˚C timeline that is certified by globally recognised science-based professionals and in alignment with the goals of the Global Biodiversity Framework (GBF).
• Put pressure on the top three credit rating agencies to reflect companies’ impact on the environment and ensure climate, environmental and social risks, including assessment of potential stranded assets, is well-integrated into credit ratings.
• Fully and publicly disclose aggregate corporate bond holdings by industry sector code, including scope 1, 2 and 3 carbon emissions and nature related impacts associated with these holdings.

Banks must:

• Immediately publish ambitious short- and medium-term fossil fuel finance reduction targets, which include on- and off-balance sheet activities, such as lending (project finance and finance for general corporate purposes) and underwriting (bond and share issuance), to bring emissions in line with the IEA’s roadmap by 2030.
• Adopt fossil fuel policies that exclude all financial services – including on-balance sheet activities (e.g. lending) and off-balance sheet activities (e.g facilitating bond and share issuance) – for companies expanding fossil fuel output and infrastructure.
• Only facilitate (including book running and syndication) bond issuance for a fossil fuel company that has demonstrated proof of no new fossil fuel output / infrastructure and announces a complete phase-out strategy aligned with principles of equity, a 1.5.˚C timeline certified by globally recognised science-based professionals and in alignment with the goals of the Global Biodiversity Framework (GBF).
• Disclose aggregate bond issuance facilitation for fossil fuels by industry sector code based on the same methodology used for green bonds.

How bond investors can engage fossil fuel companies on climate:

• For companies expanding fossil fuel output and infrastructure, investors must deny new debt and plan to divest from existing bond holdings.
• For all other fossil fuel companies, bond investors should use their position as capital providers to engage as follows:
  • Start engagement with company management in advance of the bond issuance process to inform investment strategy and decisions and to set clear expectations of companies regarding their alignment to a robust 1.5˚C climate scenario. Engagement activity should be tracked from the initial stage and progress monitored.
  • Set the expectation that fossil fuel companies must cease development of new fossil fuel projects and adopt a complete phase-out strategy aligned with principles of equity, a 1.5.˚C timeline that is certified by globally recognised science-based professionals, and in alignment with the GBF.
  • Use covenants linked to events of default on KPIs as mechanisms to ensure targets are met during the lifetime of the bond.
  • If after a short period of time (1 year) companies are not making progress in transition, bond investors should take action to escalate. Actions can include denying new debt and divesting from existing bond holdings.
  • Prior to escalation activities, bond investors should communicate with the company to explain why the action is being taken and make a public statement upon escalation.
  • If shares are also held, bondholders should leverage equity counterparts to increase influence when engaging with companies. When taking action to escalate, additional sanctions can be taken in combination with equities.
  • Bondholders who have limited or no equity offering should aim to partner with other bond managers to increase their influence when engaging with companies.

Before investing, endorsing or providing services in relation to green bonds issued by fossil fuel companies, financial institutions should fully investigate to ensure, at a minimum the company has ceased development of any new fossil fuel projects and has a company-wide business strategy aligned with globally recognised science-based emissions reduction targets to limit global warming to a 1.5˚C climate scenario and a strategy to align with the goals of the Global Biodiversity Framework. Financing should be subject to conditions and borrower covenants. Compliance with the conditions and covenants should be monitored, enforced and reported against on an ongoing basis.

Financial institutions should ensure:

• A legal covenant is in place to demonstrate the company has ceased development of new fossil fuel projects and publicly announces a complete phase-out strategy aligned with principles of equity and a 1.5˚C timeline that is certified by globally recognised science-based professionals.
• 100% of proceeds are ring-fenced for proven projects that move the company towards a low-carbon transition
• No portion of the proceeds are used for refinancing
• There is a commitment to protect and restore biodiversity, including commits to no deforestation or other land-use conversion and to align its activities with the targets of the GBF
• The company commits to respect the self-determination of Indigenous and tribal peoples who may be impacted by company activities; this includes but is not limited to the right to free, prior, and informed consent (FPIC) which respects the community’s own decision-making processes, or to withhold consent.
  • The company has accessible, effective and culturally appropriate grievance mechanisms for Indigenous and tribal peoples affected by business activities.
• There are clear reporting mechanisms and third-party verification on the use of proceeds, carried out at least annually and made publicly available.

Before investing, endorsing or providing services in relation to sustainability-linked bonds issued by fossil fuel companies, financial institutions should fully investigate to ensure it is not only the sustainability objectives and indicators that are ambitious and meaningful to the issuer’s activities and aligned with a 1.5˚ climate scenario, but at a minimum the company has ceased development of any new fossil fuel projects and has a company-wide business strategy aligned with globally recognised science-based emissions reduction targets to limit global warming to a 1.5˚C climate scenario and with the goals of the GBF.

Financial institutions should ensure:

• The company has ceased development of new fossil fuel projects and publicly announces a complete phase-out strategy aligned with principles of equity and a 1.5˚C timeline that is certified by globally recognised science-based professionals.
• Bond KPIs are core, material, relevant to the company and aligned with globally recognised science-based emissions reduction targets to limit global warming to a 1.5˚C climate scenario.
• There is a targeted reduction of absolute scope 1,2 and 3 emissions with defined timelines
• There is a commitment to protect and restore biodiversity, including commits to no deforestation or other land-use conversion and to align its activities with the targets of the GBF
• The company commits to respect the self-determination of Indigenous and tribal peoples who may be impacted by company activities; this includes but is not limited to the right to free, prior, and informed consent (FPIC) which respects the community’s own decision-making processes, or to withhold consent.
  • The company has accessible, effective and culturally appropriate grievance mechanisms for Indigenous and tribal peoples affected by business activities.
• Significant financial penalties are set to ensure the company meets its KPIs
• There are clear reporting mechanisms and third-party verification on the use of proceeds, carried out at least annually and made publicly available