Legal Updates

 Banking and Capital MarketsJuly 16, 2020

Sustainability - Linked Bond Principles

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On 9 June, 2020, the International Capital Market Association (ICMA) published the Sustainability-Linked Bond Principles (the Principles) (available here), setting out a voluntary framework for issuers and their advisors in structuring, disclosing, and reporting on Sustainability-Linked Bonds (SLBs). The Principles are applicable to all types of issuers and financial capital market instruments and are intended to promote the development of the SLB market by providing guidance on the issuing of an SLB whilst ensuring that investors are provided with adequate information. In this article, we summarise the fundamental initiatives introduced by the Principles as well as the main components of SLBs.

What are SLBs

SLBs are defined as “any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined sustainability / environmental, social or governance (ESG) objectives”. SLBs are intended to aid in the development of the role the debt markets play in funding and encouraging companies that contribute to such sustainability. Consequently, issuers are committed to making improvements around sustainability and related outcomes over a period prescribed by the issuer. These objectives are measured by way of predefined Key Performance Indicators (KPIs) and then assessed against predefined Sustainability Performance Targets (SPTs). As the proceeds of SLBs do not need to finance a specific project, and can be used for general corporate purposes, SLBs can provide a flexible and attractive sustainable financing option for issuers.

The Principles

The Principles clarify the approach to be taken in issuing creditable SLBs and sets out a framework of five core components required for SLBs, including (i) selection of KPIs, (ii) calibration of SPTs, (iii) impact on bond financial or structural characteristics, (iv) reporting, and (v) verification of performance.

Selection of KPIs

The Principles note that the credibility of SLBs will depend on the credibility of the KPIs selected to measure an issuer’s sustainability performance. It is important that issuers select KPIs that are relevant to the core sustainability and business strategy of the issuer and that they address environmental, social and governance challenges that relate to the industry. Investors should be clearly informed as to why the specific KPIs have been chosen and how they relate to their sustainability strategy. Additionally, the KPIs selected should have a clear definition including the relevant scope, parameters and method of calculation.

Where possible, the issuers should also aim to select KPIs which have been used previously in their annual reports so as to enable investors to evaluate their historical performance. If this is not possible, issuers should try where possible to provide historical KPIs values that are externally verified over the previous three years.

Overall, the KPIs should be:

  • relevant, core and material to the overall business of the issuer and have high strategic significance in relation to any current and future operations;
  • measurable or quantifiable on a consistent methodological basis;
  • verifiable externally; and
  • be capable of being benchmarked using external references and definitions.

Calibration of SPTs

SPTs are measurable improvements in KPIs, which an issuer commits to over a predefined timeline. The Principles provide that SPTs should be set in good faith and the issuer should disclose strategic information that may decisively impact the achievement of the SPTs.

The SPTs should be ambitious and represent a material improvement in the relevant KPIs, beyond a “business as usual” trajectory. SPTs should also be compared to a benchmark or an external reference (where possible), be consistent with an issuer’s overall strategic sustainability / ESG strategy and be determined on a predefined timeline (which is set either before or concurrently with the issue of the bond). In addition, SPTs should be set based on a combination of benchmarking approaches, including the issuer’s performance over a three-year period, in comparison to peers (where available) and industry standards, or with reference to scientifically based criteria or official national, regional, or international targets, (such as the Paris Agreement on Climate Change) or similar proxies.

Disclosure of target setting should make clear the issuer’s timelines for target achievement, including verified baseline cases and key factors within and beyond the issuer’s control in reaching their reported SPTs. Issuers are encouraged to appoint external review providers to confirm that the SLBs are in compliance with the five components of the Principles (referred to above) which can be done by way of a Second Party Opinion. Prior to the issue of the SLB, the external reviewer can assess the relevance, robustness and reliability of the KPIs, SPTs, benchmarks and strategy taken to ensure their performance. If there are any changes post-issue, these can be assessed by the relevant reviewers to ensure they do not have any adverse effects. Where there is no Second Party Opinion, issuers should demonstrate the internal expertise to verifying their methods which should be documented in detail and communicated to investors. The Green Bond Principles (available here) have developed guidelines to promote best practice in respect of external reviews which can be used as a reference.

Bond Characteristics

The main element of a SLB is that its structural and financial characteristics can change depending on whether the KPIs reach the predefined SPTs. It will therefore be impacted by certain triggering events, with the most common example being a potential variation of the coupon, with a coupon varying as SPTs are consistently met or missed; however, other variations are possible.

The Principles provide that the structural characteristics of SLBs should be “commensurate and meaningful” relative to the financial characteristics of the SLBs. Bond documentation should include an explanation of the financial or structural impact of any fallback mechanisms in circumstances where SPTs cannot be observed or calculated. Issuers are encouraged to consider including a description of any exceptional events (such as material M&A activities) or extreme events (such as drastic regulatory changes) that could substantially affect the relevant calculation of the KPIs, restating the SPTs and baseline adjustments.


Issuers of SLB should publish information regularly (at least on an annual basis) and on any date that the SPTs performance is to be assessed which could lead to adjustments in the bond’s structure or financial characteristics. The Principles set out specific information that should be accessible and that issuers should publish, as follows:

  • current information around the performance of the relevant KPIs including the baseline;
  • a verification assurance report on the performance of the SPTs comparing it to other SPTs and any impact or timing relevant to the financial and structural characteristics of the bond; and
  • information around the SPTs ambitions made available to the investors to include any updates in the sustainability strategy or other information around the performance of the KPIs and SPTs.


A qualified external reviewer with the relevant expertise as outlined in the Green Bond Principles Guidelines (such as an auditor or environmental consultant) should examine and verify the performance level of the issuers against each SPTs for each of the KPIs. This should be done annually and at least on any relevant date for assessing the performance of the STP which could lead to potential adjustments in the bond’s structure or financial characteristics until the final trigger event has been reached. Unlike the pre-issue external review (which is only a recommendation), the post-issue external verification is mandatory under the Principles and should be made publicly available.


Whilst SLBs are still an emerging market, it is anticipated that they will develop into a mainstream product (similar to the development of the sustainability-linked loan market). The aim of the Principles is to increase issuer interest and investor confidence in SLBs. By providing a detailed framework and guidance on the issuance of SLBs, it is hoped that issuers will become more comfortable issuing SLBs whereas from an investor perspective, the disclosure requirements will enable sustainability investments to be assessed with greater ease.

Dillon Eustace
July 2020

DISCLAIMER: This document is for information purposes only and does not purport to represent legal advice. If you have any queries or would like further information relating to any of the above matters, please refer to the contacts above or your usual contact in Dillon Eustace.

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