Sustainability bonds and guidelines

Definition of a sustainable bond

Sustainability bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance a combination of both green and social projects. The rationale behind sustainable bonds is to allow for a broader perspective from borrowers seeking to change their environmental behaviour.

These bonds can be issued by companies, governments and municipalities, as well as for assets and projects and should follow the Sustainability Bond Guidelines from ICMA, which are aligned with both the Green Bond Principles (GBP) and Social Bond Principles (SBP). They can be unsecured, backed by the creditworthiness of the corporate or government issuer, or secured with collateral on a specific asset.

Certain social projects may have environmental co-benefits, and certain green projects may have social co-benefits. The classification of a use of proceeds bond as a Green Bond, Social Bond, or Sustainability Bond should be determined by the issuer based on its primary objectives for the underlying projects. It is important to note that Sustainability Bonds should not be considered fungible with bonds that are not aligned with the four core components of the Principles.

According to the ICMA, it is recognised that there is a market of bonds with sustainable themes, including those linked to the Sustainable Development Goals (SDGs). In some cases, these bonds may be issued by organisations that are mainly or entirely involved in sustainable activities, but whose bonds may not align to the four core components of the Principles. These issuing entities are encouraged to adopt the relevant best practice of the green and social bond principles (e.g. for reporting) for such existing sustainability, SDG or otherwise themed bonds, and to align future issues with the Principles. A mapping of the GBP and SBP to the SDGs is now available and aims to provide a broad frame of reference by which issuers, investors and market participants can evaluate the financing objectives of a given Green, Social or Sustainability Bond/Bond programme against the SDGs.

More details can be found in the sustainable finance section of ICMA’s website.

Sustainable Bond Guidelines

Similar to the green and social bond frameworks, the guidelines have the following four core components.

1. Use of Proceeds

All designated eligible projects should provide clear benefits. In the event that all or a proportion of the proceeds are or may be used for refinancing, it is recommended that issuers provide an estimate of the share of new financing vs. re-financing, and where appropriate, also clarify which investments or project portfolios may be refinanced, and, to the extent relevant, the expected look-back period for refinanced projects.

2. Process for Project Evaluation and Selection

The issuer of a Sustainable Bond should clearly communicate to investors:

• the objectives of the projects

• the process by which the issuer determines how the projects fit within the various eligible project categories

• complementary information on processes by which the issuer identifies and manages perceived risks associated with the relevant project(s).

3. Management of Proceeds

Proceeds should be identifiable and auditable.

4. Reporting

Annual reporting should include a list of the projects to which the bond proceeds have been allocated, as well as a brief description of the projects, the amounts allocated, and their expected impact.