Will New Guidance Open the US$5tn Sustainable Bonds Market?

New guidance has today been issued by the Principles – the influential senior financiers who set the standards for the US$5tn market in sustainability-linked loans.

The Principles hope the guidance, issued at its AGM in Amsterdam, will make it easier for lending banks to engage borrowers in dialogue about their sustainability performance.

As a result, they hope it will lead to more of those borrowers linking the rates of their loans and bonds to their sustainability performance.

What are sustainability-linked loans?

The official definition of SLLs is “any types of loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) for which the economic characteristics can vary depending on whether the borrower achieves ambitious, material and quantifiable predetermined sustainability performance objectives”.

The sustainable bond market represents the largest source of market finance dedicated to sustainability and climate transition, available internationally to corporates and financial institutions, as well as supranationals, agencies and sovereigns.

With so much finance up for grabs, connecting the bonds to  sustainability targets could make the market one of the most significant agents of change globally.

Ground-breaking guidance

Nicholas Pfaff, Deputy Chief Executive and Head of Sustainable Finance, International Capital Market Association, said: “The Principles are releasing ground-breaking guidance for financing green enabling projects while taking into account the underlying sustainability challenges of their supply chains.

“With the publication of the new Sustainability-Linked Loan financing Bonds, we are creating both a new financing opportunity in the debt capital markets while also aiming to support the integrity of sustainability-linked loans.”

An ICMA press release said: “There is an opportunity for lending banks to use this position of influence to engage borrowers in dialogue regarding their sustainability performance.

“The arranging of a sustainability-linked loan instrument may be an attractive way to transfer the bank’s expertise and knowledge with regard to sustainable economic development concepts to the borrower base.

“The core recommendation of these guidelines, as further set out below, is that the existing Sustainability-Linked Loan Principles should be used as the basis for construction of any such portfolio which may be communicated to the market via a bond instrument.”

The key recommendations

The standards and guidance from the Principles are developed with the input of 330 market participants and stakeholders, as well as the participation of many other organisations through technical working groups. They are the de facto standard referenced by 98% of sustainable bond issuance.

The Principles say SLLB issuers must ensure alignment of their SLLB with four core components:

• Use of proceeds
• Process for SLL evaluation and selection
• Management of proceeds
• Reporting.

Such frameworks should be available in a readily accessible format to investors.

They add: “It is recommended that issuers summarise in their SLLB Framework relevant information within the context of the issuer’s overarching sustainability strategy, as well as its efforts in accompanying its customers on their transition.”

Loan and bond issuers should also make external reviews publicly available on their website and/or through “any other accessible communication channel as appropriate”.

Agnes Gourc, Head of Sustainable Capital Markets, DCM Structuring & Solutions, BNP Paribas, and Vice-Chair of the Principles, said: “By incorporating market-wide insights and best practices, the Principles are providing this year again new avenues for the market to facilitate more financing to reach the global environmental and social goals.

“In particular, we hope the Guidance for Green Enabling Projects will help more issuers further up the value chain to access the green bond market.”

The beauty of a thriving ecosystem

Alban de Fay, Head of Fixed Income SRI Processes, Senior Portfolio Manager, AMUNDI, and Vice-Chair of the Principles, said: “Overall, the releases of the Principles and the development of new guidelines illustrates the shared commitment of investors, issuers and underwriters to bring even more credibility to these markets by encouraging greater standardisation while taking into account new developments and innovations in this market.

“It truly showcases the beauty of a thriving ecosystem.”

Isabelle Laurent, Deputy Treasurer, European Bank for Reconstruction & Development and Chair of the Principles, said: “Over the last 10 years since the establishment of the Green Bond Principles, its convening power and the body of work that has been produced under its auspices, including innovative products and guidance, has served to support the role that capital markets can play in advancing the sustainability agenda and mobilising finance towards the goals of the Paris Agreement and the wider Sustainable Development Goals.

“We will drive hard to ensure that the next 10 years sees the work of the Principles continue with equal vigour and success.”

Gemma Lawrence-Pardew, Head of Sustainability at the Loan Market Association, said: “The LMA is proud to have collaborated on the guidelines for Sustainability-Linked Loan financing Bonds.

“These innovative instruments will enhance the robustness of the sustainability-linked loan market and offer issuers a new way to finance sustainable projects.”

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