ICMA principles to help sustainable bond push

IFR 2337 - 13 Jun 2020 - 19 Jun 2020
5 min read
Tessa Walsh

The International Capital Markets Association has completed two important pieces of work that aim to give impetus to the fledgling sustainability-linked bond market and maintain standards in the social bond market, which has seen rapid growth during the coronavirus crisis.

ICMA’s publication of principles for sustainability-linked bonds (SLBs) is expected to encourage more issuers to link bond pricing to their ability to hit general ESG targets, rather than take the traditional green bond route of earmarking money – via "use of proceeds" structures – for specific projects.

The industry body hopes that more companies will follow Italian utility Enel’s lead into the market for SLBs. Enel is the only issuer so far to use the structure, having sold two deals last year with coupon step-ups linked to its carbon emissions and its transition to renewables.

Lars Eiberholm, head of treasury and sustainability at Nordic Investment Bank and chair of ICMA’s green and social bond executive committees, said the principles are key to developing SLBs and to ensuring market integrity and transparency.

Issuance of SLBs, which tie pricing to companies’ ESG strategies and the UN’s Sustainable Development Goals (SDGs) by monitoring performance against targets – or key performance indicators – is expected to grow and could match or exceed the success of the product in the private loan market. More than US$38bn of sustainability-linked loans have been issued this year, according to Refinitiv LPC data.

SLBs are designed to appeal to companies finding it difficult to identify specific projects or capital expenditure to back traditional bonds.

“We don’t see this as an alternative to green bonds or use-of-proceeds bonds, but more as a complement,” said Orith Azoulay, global head of green and sustainable lending at Natixis.

“It's opening the door to a number of issuers that were not finding it easy to structure use-of-proceeds bonds and still believed that they had some role in environmental and social transactions."


The instrument could also be suitable for helping "brown" companies transition to being more environmentally friendly. Another ICMA working group on climate transition finance has yet to present its final report, but is expected to offer definitions after consulting with the market.

“Can this instrument be used for issuers in transition? I believe so. It might even be a very good instrument for that, but needs to be followed by a thorough strategy explanation and documented KPI targets,” Eiberholm said.

The SLB principles have five core components that cover the selection of KPIs, calibrating sustainability performance targets, bond characteristics, reporting and verification, and offer detail that aims to bring clarity and consistency to the SLB market.

KPIs, for example, must be relevant, material to the issuer’s overall business, measurable and quantifiable, externally verifiable and able to be benchmarked.

However, not everyone is convinced yet, with pressure group ShareAction asking for more transparency.

"We are not seeing a transparent methodology to set the boundaries of financial products or to set companies transition plans in line with Paris goals," said ShareAction’s communications manager Beau O’Sullivan, referring to the 2015 Paris climate agreement designed to keep the rise in global warming to below two degrees.

The fact that issuers set and monitor their own targets on sustainable debt is also controversial.

"If you leave economic actors to self-regulate you will end up protecting insiders and the status quo," said Gianfranco Gianfrate, the sustainable finance lead expert at the EDHEC risk institute in Paris.


Some technical issues around SLBs remain to be resolved, chiefly regarding the coupon step-up mechanism that activates if borrowers fail to hit their targets, which could be difficult for investors to include in conventional portfolios and also make bonds ineligible for the ECB’s bond-buying programme.

Hopes are high, however, that the instrument will deliver after a slow start, and the new principles are expected to give comfort and confidence to issuers.

ICMA chief executive Martin Scheck said that the "highly innovative and versatile debt instrument ... can really expand the sustainable finance market while preserving its integrity”.


ICMA also released a 2020 update of the social bond principles that expands eligible social bond categories and the definition of target populations to a global population, in line with recent guidance for social bonds addressing the coronavirus crisis. It also published a collection of case studies.

The trade association updated its framework for impact reporting to include guidance for biodiversity and a framework for impact reporting for social bonds, as well as guidance on mapping green, social and sustainability bonds to the UN’s SDGs.

“The update of the social bond principles accompanies a pivotal moment for social bonds that have shown their relevance with a surge of issuance addressing the consequences of Covid-19," Scheck said.