Report on Sustainability Linked Bond
The International Capital Market Association (ICMA) has released a Sustainability Linked Bond (SLB) report, providing development recommendations for the SLB market, especially high-yield SLBs.
ICMA has previously released the Sustainability Linked Bond Principles (SLBP) to explain this type of green bond. The new report is published with European Leveraged Finance Association.
What is Sustainability Linked Bond
Sustainable linked bonds are debt instruments based on sustainable performance, aimed at encouraging issuers to achieve sustainable outcomes through fundraising. SLB issuers usually use Key Performance Indicators (KPI) to assess sustainable impact.
SLB investors believe that investing in these bonds can track the issuer’s sustainable commitments and provide appropriate incentives. However, the standardization of SLB and the transparency of information disclosure are still hot topics at present.
The SLBP proposed by ICMA is applicable to sustainability linked bonds, but in actual issuance, there are differences between high yield SLBs and investment grade SLBs, such as Redemption Provisions and Covenant Provisions. Therefore, more attention needs to be paid in practice.
ICMA’s Advice on Sustainability Linked Bond
In order to promote the development of sustainability linked bonds, ICMA has put forward some advice. Some of them are applicable to investment grade SLBs, while others are applicable to high yield SLBs.
In terms of SLB issuance and disclosure, ICMA believes that:
- The issuer should provide past sustainable performance based on SLBP before the issuance of SLB, such as short-term, medium-term, and long-term indicators of the company, and make sure the company’s sustainable performance is consistent with the issuance characteristics of SLB (such as maturity).
- When SLB is issued, the issuer should introduce SLB’s Key Performance Indicators and the plans to investors through multiple channels such as bond memoranda and public documents.
- When issuing high-yield SLBs, the issuer should provide detailed information on the characteristics of the bonds.
- When disclosing ESG information of bonds, issuers can choose internationally recognized ESG information disclosure standards, such as the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR).
In terms of Sustainability Performance Target (SPT), ICMA believes that:
- The issuer should set an observation period for SPT so that the progress can be measured in a timely manner before the maturity of short-term bonds.
- The issuer should seek third-party verification (such as SBTi) to ensure consistency between SPT objectives and industry practices.
In terms of bond characteristics, ICMA believes that:
- The issuer should demonstrate to investors whether the changes in the bond coupon after achieving SPT match the incentive measures and explain the reasons.
- The issuer should demonstrate to investors whether the redemption price and incentive measures match in the redemption terms of high yield SLB.
- After the issuance of SLB, the issuer should timely disclose KPIs in accordance with the bond terms to avoid default.
- The issuer should regularly disclose financial data while publicly and clearly introducing the progress of KPIs and SPT.
Reference:
Practical Recommendations for High Yield Sustainability-Linked Bonds
