The International Capital Market Association (ICMA) has released a series of updated publications and guidance through the Green, Social, Sustainability and Sustainability-Linked Bond Principles (SLBP) (collectively, the Principles). These updates include new Green Enabling Projects Guidance (the Guidance) and guidelines for Sustainability-Linked Loan financing Bonds (the Guidelines), the latter of which are issued jointly with the Loan Market Association. The Principles are the global benchmark for the $5 trillion sustainable bond market that represents the largest source of market finance dedicated to sustainability and climate transition, providing an important framework for corporates, financial institutions, and government bodies globally and referenced by 98% of sustainable bond issuance.
This bulletin briefly summarizes key aspects of the updated Guidance and Guidelines.
Green Enabling Projects Guidance
Overview. The Guidance is intended to provide guidance for “green enabling projects”, which are those projects that are not explicitly considered “green” but are nevertheless critical to eligible green projects (“Green Enabling Projects”). The Guidance provides guidance on: (i) identifying the role Green Enabling Projects play in catalysing and scaling the transition to a low-carbon economy in line with the goals of the Paris Agreement while recognizing the complexities of value chains and challenges of multiple end-uses, (ii) addressing both induced and avoided emissions; and (iii) the management of related environmental and social (E&S) risks.
The Guidance primarily applies to the following sectors when necessary for an enabled green project’s value chain to be developed and/or implemented: (i) mining and metals; (ii) building and construction supplies and equipment; (iii) chemicals and specialty chemicals; (iv) ICT and telecommunication networks; and (v) manufacturing of industrial parts and components.
Specific criteria. Green Enabling Projects must meet the following criteria:
- necessary for an enabled green project’s value chain;
- no carbon lock-in;
- clear, quantifiable, and attributable environmental benefit; and
- mitigated adverse E&S impacts.
Classification and usage of Green Enabling Projects. The Guidance provides that environmental benefits must be demonstrated regardless of the traceability to a specific end-user in an enabled green project. This demonstration can be based on the current use of the Green Enabling Project or its potential to enable green projects over time. Where relevant, an issuer may decide to count the Green Enabling Project in full towards a Green Bond or use a pro-rata approach depending on end-use.
Alignment with the Green Bond Principles (GBP). The Guidance provides that issuers of Green Bonds incorporating Green Enabling Projects should align with the GBP and specifically the recommendation under section 2, Process for Project Evaluation and Selection, to position the information communicated “within the context of the issuer’s overarching objectives, strategy, policy and/or processes relating to environmental sustainability”.
Impact reporting. The Guidance provides that issuers of Green Bonds incorporating Green Enabling Projects should carefully consider the risk of double counting of impact that arises from reporting for Green Enabling Projects. Issuers are encouraged to refer to general guidance on avoiding double counting provided in thePrinciples’ Guidance Handbook.
Sustainability-Linked Loan financing Bonds
Key recommendations for Sustainability-Linked Loan Financing Bonds (SLLBs). The primary recommendation of the Guidelines is to use the existing Sustainability-Linked Loan Principles (SLLP) as the foundation for constructing any sustainability-linked loan (SLL) portfolio communicated to the market via a bond instrument. The Guidelines establish voluntary process guidelines that emphasize transparency and disclosure, promoting integrity in the development of the SLLB market by clarifying the approach for issuing such instruments.
Process for SLL evaluation and selection. The Guidelines provides that issuers of SLLBs should clearly communicate the following to investors:
- the governance structure in place to evaluate and monitor SLL eligibility and performance over time;
- any sectorial exclusion criteria and/or other relevant policies applicable to the lending activities at issuer and/or at the SLLB Framework’s level; and
- the process and criteria for disqualifying or requalifying SLLs that were initially included in the SLL Eligible Portfolio.
Reporting. Issuers should make, and keep, readily available up to date information on the eligible portfolio of SLLs to be renewed annually during the lifetime of the SLLB, and on a timely basis in case of material developments.
Additional recommendations. The Guidelines provide the following additional key recommendations:
- SLLB frameworks: Issuers should detail how their SLLB aligns with the four core components of the Guidelines and summarize in their SLLB Framework relevant information within the context of the issuer’s overarching sustainability strategy, as well as its efforts to accompany its customers on their transition.
- External reviews: External review providers should disclose their credentials and relevant expertise and clearly communicate the scope of the review(s) conducted, while issuers should make external reviews publicly available.
For further information or to discuss the contents of this bulletin, please contact Lisa DeMarco at lisa@resilientllp.com.
*Special thanks to Anuja Purohit for her assistance in preparing this bulletin.
