ESG/Capital Markets Update – New Resources for Green, Social and Sustainability Bonds

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The need for one set of clear environmental, social and governance (“ESG”) guidelines remains an issue of increasing interest and importance for capital markets participants.

Sustainable bonds are one of the fastest growing segments in the international capital markets (see our conversation piece with the London Stock Exchange), and global issuances of sustainable bonds reached new record levels in 2021. This includes the debut green bonds issued by the UK Government in 2021.

As expected, the principles published by the International Capital Markets Association (“ICMA”) in 2021 have become the leading set of standards for participants in the sustainable markets. In fact, ICMA estimates that 98% of the bonds labelled as “sustainable” issued globally in 2021 referenced the one or more set of ICMA’s published “Principles”, i.e., its Green Bond Principles, Social Bond Principles, Sustainability Bond Guidelines and Sustainability-Linked Bond Principles.

On 28 June 2022, ICMA announced new and updated publications and resources to help stakeholders and capital markets participants navigate the framework of sustainability in the context of raising capital, adding to the growing global taxonomy for ESG guidance. The publication of these documents coincided with the Eighth Conference of the Principles, organised by ICMA and hosted at the London headquarters of the European Bank of Reconstruction and Development (“EBRD”).

The new materials include:

  • New definitions for green securitisation reflecting market practice, contained in an updated appendix to the Green Bond Principles;
  • An updated registry of key performance indicators (KPIs) for sustainability-linked bonds, which are becoming central to the monitoring and continued success of this type of finance;
  • A new registry containing methodologies for climate transition finance;
  • New metrics for reporting of both green and social projects, to assess the impact on the environment and natural resources and the impact on certain social indicators and target population, respectively, and enable improved disclosure regarding such projects;
  • Updated guidelines for external reviews of bonds issued under the Principles, designed to promote best practice and including new provisions to align with the Climate Transition Finance Handbook, which in turn is designed to provide additional guidance for issuers in pursuing their climate transition strategy;
  • Guidance for providers of Green, Social and Sustainability Bond index services, reflecting the growth of the sector and the resulting increase in indices for these types of bonds; and
  • Updated mapping to the United Nations’ Sustainable Development Goals, tying the Principles to global ESG goals.

Denise Odaro, Chair of the Principles, Head of Investor Relations, International Finance Corporation (IFC), said:

“The Principles serve as a model for incorporating sustainability into capital markets, and the updates this year ensure that they remain current with market developments while also recognising emerging related products. Additionally, the updated KPI registry and climate transition methodologies stand to aid issuers to fundamentally and rapidly advance the transition to a low-carbon economy via the bond market and beyond.”

Nicholas Pfaff, Deputy Chief Executive and Head of Sustainable Finance, ICMA, said:

“The 2022 announcements of the Principles represent critical support for market integrity and development. Sustainability now permeates all areas of the capital markets. The Principles provide market participants and stakeholders with an essential reference for product standards, agreed terminology and technical consistency, as well as a resource to benchmark ambition.”

Sustainability is a pervasive issue, and the Principles are designed to support the development and transparency of the bond market and beyond. Although Green, Social or Sustainability Bonds may attract a pricing premium, or what has been termed a “greenium”, issuers should consider this as just one of many reasons for seeking to raise finance in this way, as part of a bigger picture of pursuing broader ESG goals, such as climate and energy transition.

The Principles are available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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