The ICMA has released additional guidance to the Green, Social, Sustainability and Sustainability-Linked Bond Principles with a particular focus on the Sustainability-Linked Bond Principles and related KPIs. The update provides useful illustrative and practical guidance to sovereign issuers to tap the Green, Social and Sustainability market which help direct capital streams towards ambitious ESG targets as we move towards a net zero world.
The International Capital Markets Association (ICMA) has released additional guidance[1] to the Green, Social, Sustainability and Sustainability-Linked Bond Principles (the Principles), with a particular focus on the Sustainability-Linked Bond Principles (SLBPs) and related Key Performance Indicators (KPIs). As the standard bearer for the $3.2 trillion sustainable bond market, and with the Principles being referenced by an estimated 97% of sustainable bonds issued internationally, the update provides improved guidance for sovereign issuers in an evolving marketplace.
Sovereigns are a growing class of issuers electing to use target-based sustainable finance instruments[3]. The guidance released by ICMA aligns the recommendations relating to general (e.g. corporate) issuers with those for sovereigns. The table below summarises the key additions.
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| SLBPs which apply to general issuers | SLBPs which apply to sovereign issuers |
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Key performance indicators (KPIs) should be of high strategic significance to an issuer's current and/or future operations. |
KPIs should be of high strategic significance to the sovereign issuer's sustainable development policies. |
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Issuers should communicate to investors the rationale and process according to which why the KPI has been selected and how the KPI fits into their sustainability strategy. |
Sovereign issuers should communicate to investors the rationale and process according to which why the KPI has been selected and how the KPI fits with their sustainable development policy. |
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Issuers should set sustainability performance targets (SPTs) in good faith, with the clear disclosure of strategic information which may impact the SPT's achievement. |
Sovereign issuers should set SPTs in good faith, with the clear disclosure of strategic national development plans or policies which may impact the SPT's achievement. |
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The target setting of SPTs should be based on the relative positioning of the issuers' peers and industry or sector standards, where available. |
The target setting of SPTs should be based on the relative positioning comparable countries in relation to the sovereign issuer, where available. |
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Disclosures on the target setting of SPTs should make clear reference to how the issuer intends to reach such SPTs, e.g. by describing their ESG strategy, supporting ESG governance and investments and their operating strategy. |
Disclosures on the target setting of SPTs should make clear reference to how the sovereign issuer intends to reach such SPTs, e.g. by describing their sustainable development policies, (tagged) budget/NDC plans. |
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Issuers of SLBs should publish and keep readily available and easily accessible any information enabling investors to monitor the level and ambition of the SPTs, such as any update in the issuer's sustainability strategy or on the related KPI/ESG governance. |
Sovereign issuers of SLBs should publish and keep readily available and easily accessible any information enabling investors to monitor the level and ambition of the SPTs, such as any update in the sovereign issuer's strategic development plans and/or policies. |
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Reporting should be published regularly, at least annually. |
Reporting should be published regularly, at least annually. If quantitative data is not available every year, sovereign issuers are encouraged to publish a report containing an explanation of the main factors behind the evolution of each KPI. |
KPIs act as a useful credibility indicator in the sovereign SLB market, enabling investors to monitor the performance of governments' ESG policies. To assist in the selection of suitable KPIs, ICMA's Illustrative KPI Registry draws up examples of potential KPIs applicable to SLBs. The 2023 update now includes a section for potential KPIs for sovereign issuers, mostly relevant for monitoring at a sovereign level. The examples of KPIs sovereign issuers may select include KPIs on GHG emissions, forest area, renewable electricity output, school enrolment and mortality rate. The KPI examples given are also aligned with the relevant United Nations Sustainable Development Goals and other global benchmarks (e.g. the EU Taxonomy, World Bank, and United Nations Statistics Division).
The ICMA's High-Level Mapping to the United Nations Sustainable Development Goals (the UN SDGs) provides a reference for issuers and investors to evaluate the financing objectives of a bond against the UN SDGs. The updated edition maps the applicable project categories relating to both green bonds and social bonds to the relevantUN SDGs[4], and further provides illustrative impact indicators/targets for each category. This mapping can be applied by corporate and sovereign issuers alike.
The updated ICMA guidance is most welcome and provides useful illustrative and practical guidance to sovereign issuers at a time where annual investments in emerging markets and developing countries need to quadruple by 2030 to combat climate change and global poverty. Uptake by sovereign issuers will need to increase to address this, and the updated guidance would buttress and support the crucial role that the Green Social and Sustainable market plays in directing capital streams towards ambitious ESG targets as we move towards a net zero world.
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