In the biggest move to codify the sustainability-linked bond market since the SLB Principles’ introduction two years ago, the International Capital Market Association has launched a registry of nearly 300 key performance indicators for the booming but still controversial product.
The initiative includes a “sector materiality matrix” of sustainability themes and a distinction between “core” and “secondary” KPIs to guide market participants – particularly issuers – towards the most appropriate measures to embed in their bonds.
ICMA insists that the registry is “illustrative” and does not dictate exclusive approaches to structuring SLBs – not least as KPIs’ maturity and adoption vary widely. Even so, “we draw attention to the breadth of examples, and we believe this will serve to help arrangers, issuers and investors in their design and assessment of SLBs”, it said.
In a bid to defuse complaints over weak or less relevant KPIs, the association has also published guidance for the product. This 10-page Q&A will be included in a new chapter of its Guidance Handbook, which compiles advice for market participants on interpreting the Green Bond Principles, Social Bond Principles, Sustainability Bond Guidelines, Sustainability-Linked Bond Principles and Climate Transition Finance Handbook.
The Q&A replaces a rather shorter set of SLB questions. Key additions include guidance on the meaning of KPIs being “material” and on the growing issue of issuers’ desire for flexibility over KPIs.
Sales of SLBs soared to US$91bn last year from US$8bn in 2020, according to Refinitiv data. While the product has continued to outperform the corporate bond market this year, declining 8% to US$37bn (excluding Chile’s sovereign issue) compared with an overall 44% slump, investor complaints have grown about its immaturity and lack of ambition.
The new guidance seeks to place the product on a firmer footing. “One of the intentions in the Q&A and KPI register that we've published is to continue to work to improve the integrity of the market, which is one of the key challenges that we had,” said Laurie Chesne, co-head of green & sustainable financing solutions for EMEA at Natixis. “The main questions continue to be around materiality and ambition.”
Ketish Pothalingam, a portfolio manager at Pimco, said: "This is a young product and it has had some degree of pushback in the market and criticism. So I think the integrity of it, its structure, its relevance, and its quality are very important.”
Natixis and Pimco are two of three coordinators of ICMA’s SLB working group alongside JP Morgan.
Besides the trio, the working group has as many as 151 members – from Allen & Overy to Zurich Insurance.
Pothalingam cited contributions to the registry and Q&A from such a large group as support for the product, despite the criticism it has attracted. “It becomes easier to justify its existence now you’ve had that level of buy-in,” he said.
He sees the registry as offering “a holistic view of where this market can go” and underscoring “that it is available across sectors and not just the preserve of utilities or REITs”. The registry offers KPIs for as many as 20 sectors and more than 50 sub-sectors.
Addressing “asymmetry of information” between issuers and investors will be the next challenge for SLBs, Chesne said. “This is really the question in terms of visibility on the means to achieve the targets,” she said.
The KPI registry forms part of a broad raft of new sustainable finance initiatives from ICMA. Besides a new approach to green and social securitisation, this also included the launch of a registry of Climate Transition Finance methodologies.
This second registry, which cites some 30 methodologies and another 30 tools, aims to help market participants validate issuers’ emission reduction trajectories and pathways as science-based.
The association also announced new metrics for social projects’ impact reporting, as well as for green projects’ environmentally sustainable management of living natural resources and land use; recommendations and an information template for green, social and sustainable bond index providers; a pre-issuance checklist for green bonds and green bond programmes; an updated information template for sustainable bonds and sustainable bond programmes; and updated high-level mapping to the UN Sustainable Development Goals.
Working with ELFA
ICMA continues to work with the European Leveraged Finance Association on aligning SLB guidance with high-yield market practice. Bonds potentially callable before the first KPI test have been a source of controversy, while the standardised 25bp step-up for failure to hit targets has been another.
“There are very technical differences and practical differences between the IG and high-yield markets that really required a collaboration with an organisation like ICMA that has been setting and keeping standards and principles high,” said Sabrina Fox, ELFA chief executive, who welcomed increased issuance of high-yield SLBs.
The associations’ joint work on this “really stands to elevate the product and to keep it as credible and as far away from greenwashing as we possibly can”, she said.