This year’s annual general meeting included updates to key documents and the addition of frameworks and second-party opinions as recommendations for sustainable bond issuance. Nordea was also proud to be elected to the Executive Committee for Green and Social Bond Principles.
The International Capital Market Association (ICMA) on 10 June hosted its seventh consecutive Annual General Meeting (AGM) of the Green and Social Bond Principles. Digital due to COVID-19, the event included a number of key public announcements, which we’ve summarised below along with our own reflections.
One of the AGM’s main agenda items is the announcement of the election results for the Executive Committee of the Green Bond Principles and the Social Bond Principles. Nordea is proud to join a select group of 24 underwriters, issuers and investors on the Executive Committee, the governing body that decides on any changes to the Green Bond Principles and Social Bond Principles.
Key updates announced at the AGM:
- The different principles have been amended to increase transparency towards the market and enhance the transition process.
- Two new key recommendations (bond framework and external reviews) have been added to the Green Bond Principles alongside the four core components (use of proceeds; process for project evaluation and selection; management of proceeds; and reporting).
- The Social Bond Principles and the Sustainability Bond Guidelines have been aligned with the 2021 edition of the Green Bond Principles.
- A pre-issuance checklist for Social Bonds/Social Bond Programmes has been released.
- Guidelines for Green, Social, Sustainability and Sustainability-Linked Bonds’ Impact Reporting Databases have been released.
- The Handbook for the Harmonised Framework for Impact Reporting includes a new chapter about circularity.
- A helpful visual has been created to illustrate how the different principles relate to each other.
Green Bond Principles (GBPs) 2021
The GBPs have been updated since the 2018 version and now include strong encouragement to have a bond framework and external reviews.
The two new key recommendations do not change the original core pillars: use of proceeds; process for project evaluation and selection; management of proceeds; and reporting.
Issuers are further encouraged to provide information, if relevant, on the degree to which projects align with different international taxonomies. The principles recommend use of the Climate Transition Finance Handbook (released in December 2020) to ensure eligibility on corporates’ transition journeys. This is positive from the a banking perspective since it will limit the risk of green washing and make the issuers assess whether their sustainability strategy is aligned with their core activities.
- Compared to previous versions of the GBP, issuers are now strongly recommended to publish a green bond framework.
- Seeking a second-party opinion has not been mandatory in the previous version, but is now a key recommendation.
- ICMA aims for the principles to remain global and there has not included the different international taxonomies.
- Find the Green Bonds Principles here.
Social Bonds Principles (SBPs) 2021
The Social Bonds Principles were urgently revised in 2020 to accommodate the new demands of the pandemic. The focus has been to further conduct market intelligence to identify the existing process when issuing social bonds. The investigation resulted in the creation of the Pre-issuance checklist for Social Bonds/Social Bond programmes, with the aim to guide issuers on how to create a social bond framework aligned with investors’ expectations and to bypass potential hurdles.
- The SBPs are now harmonised with the Green Bond Principles to promote familiarity.
- The changes improve the infrastructure to better fit the social bond market, adapting to the pandemic landscape.
- The newly released Checklist is a tool designed to overcome hurdles previously identified with the issuance of social bonds.
- Find the Social Bond Principles and Checklist here.
Sustainability-Linked Bond Principles (SLBPs) 2021
Among the different principles, the SLBPs have undergone the most additions and amendments since the previous version. This comes as no surprise, given that the SLBPs are the newest addition to the ICMA catalogue.
The latest version adds a new section, Sustainability-Linked Bond Principles Related Questions, released in February 2021. This section includes fundamentals and definitions of an SLB and the differences between an SLB compared to a green bond. The section also answers questions about bond characteristics, reporting and verification.
An SLB requires measurable KPIs set by the issuer to be achieved at a certain time aligned with the issuer’s transition journey to becoming sustainable compliant. To ease the transition journey, ICMA has come up with KPIs covering the following themes: biodiversity; sustainable agriculture and forestry; climate change mitigation; climate change adaptation; and energy. These KPIs provide global and sector benchmarks and initiatives for the understanding of material issues, definition of calculation methodologies and calibration of targets.
- Illustrative matrix of theme-specific KPIs.
- The KPIs include both minimising negative impact and maximising positive impact.
- Clarification of the differences between an SLB and a green bond.
- Find the Sustainable-Linked Bond Principles and an illustration of KPIs here.
The Harmonised Framework for Impact Reporting
Impact reporting drew significant attention at this year’s AGM. Issuers should now identify both social and environmental risks and what they are planning to do to mitigate them. They are also expected to report on foreseen risks and the impact they might have on green projects.
In addition, the Handbook on the Harmonised Framework for Impact Reporting gained a new chapter focusing on circularity. The chapter provides core indicators for circular economy and eco-efficient projects and a template adapted to fit the issuer’s own needs. The core indicators for circularity are summarised in the image below.
- The framework is reflected in use of proceeds formats and sustainability-linked bonds.
- Well referenced by regulators and stakeholders.
- ICMA has published a Guideline for Green, Social, Sustainability and Sustainability-Linked Bonds’ impact reporting databases. The content consists of minimum information available, security and legal recommendations, input and structuring of data, output of data and advice for issuers and investors.
- Find the Harmonised Framework for Impact Reporting here.
To cover the full sustainable product offering, we would also like to highlight that the European Leverage Finance Association and Loan Market Association (LMA) have created a Best Practise Guide to Sustainability Linked Leverage Loans. The guide seeks to provide practical guidance harmonized with the Sustainability Linked Loan Principles (SLLP) and be aligned with other principles already published in the market.
Johanna Björk, Sustainable Finance Advisory, Nordea
Ebba Ramel, Sustainable Finance Advisory, Nordea
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