ICMA issues guidelines on sustainability-linked bonds

Introduction

The International Capital Market Association (ICMA) has released guidance for issuers of Sustainability-Linked Bonds (SLBs), instruments aimed at encouraging participants in the debt capital markets to contribute to sustainability, from an environmental and/or social and/or governance perspective.

Sustainability-Linked Bonds

SLBs are debt instruments whose structural and/or financial components are subject to change depending on whether their issuer satisfies certain specific sustainability-related conditions. Described by ICMA as a "forward-looking, performance based instrument", the SLB requires that an issuer commit, in the bond documentation, to achieve a specific sustainability goal.

SLBs can be differentiated from existing green, social and sustainability bonds by virtue of the fact that the use of proceeds of the issuance of SLBs may be for general purposes rather than for underlying sustainable projects. As the categorisation of a bond as an SLB is not determined by how the issuer applies subscription funds, a broader range of issuer may consider issuing SLBs than would issue green bonds.

One type of SLB allows for the interest rate payable to be adjusted based on compliance with sustainability objectives. The first SLB was issued by Italian multinational energy company Enel in September 2019. Should Enel be unable to demonstrate that 55% of its total power generation comes from renewable power facilities as at a specific date, the debtholders would be contractually entitled to an increased coupon.

The Sustainability-Linked Bond Principles (the Principles) were issued by ICMA on 9 June 2020 and provide guidance and recommendations across various facets of the instrument, including structuring, disclosure and reporting. The Principles apply to all types of issuer and all types of financial capital market instrument.

The Principles set out that an issuer must select and set sustainability performance targets (SPTs) for itself. These are measurable improvements in key performance indicators over a pre-determined timeline. SPTs should be ambitious, material and, where possible, benchmarked and consistent with an issuer's overall sustainability and/or environmental strategy.

The Principles also contain instructions relating to the metrics that will be used to measure performance against the SPTs during the life of the instrument (KPIs).

The KPIs should be:

• relevant, core and material to the issuer's overall business, and of high strategic significance to the issuer's current and/ or future operations;

• measurable or quantifiable on a consistent methodological basis;

• externally verifiable; and

• able to be benchmarked, i.e. as much as possible using an external reference or definitions to facilitate the assessment of the SPT's level of ambition.

What next?

SLBs have the potential to open sustainable finance to a wider base of issuers and to facilitate and encourage companies to raise finance in a responsible and socially-conscious manner. Given the increasing appetite of global investors for green and sustainable debt, there is certainly scope for this instrument to infiltrate the mainstream and to represent an appealing product to investors.

Recent market leading matters

Our international debt capital markets team continue to support on green financing including ESG bonds, summary below:

We acted for Swisscom on a €500 million green bond. This is Swisscom’s debut green bond and was issued through a Dutch subsidiary of Swisscom. The team was led by Debt Capital Markets partner Piers Summerfield, and assisted by Managing Associate Leon Yap, Associates Victoria So and Amelia Cheng and trainees Jie Low and Jessica Howard. Amsterdam partner Marieke Driessen provided Dutch law advice, assisted by Associates Niek Groenendijk and Emrecan Karacaoglu, while tax partner René van Eldonk and Associate Siebrand van der Zee provided Dutch tax advice.

We acted for FTSE 100 educational publisher Pearson plc on a £350 million education-linked social bond. This is Pearson’s debut social bond following the publication of its social bond framework. The team was led by Debt Capital Markets partner Piers Summerfield, and assisted by Managing Associate Leon Yap and Associate Victoria So.

These are two of a number of significant transactions that we have advised on in 2020, and are representative of the increasing focus on ESG transactions being seen in the debt capital markets and with which we have been involved.

If you would like to hear more about SLBs or sustainable/green finance generally, please reach out to Chris Walton, Piers Summerfield, Lee Irvine or John Kearns.