Sustainable Finance 101: Sustainability Bond Guidelines (SBG)
The background of SBG
According to ICMA, “Sustainability Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance a combination of both Green and Social Projects.”
Both SBG was published in 2017 by International Capital Market Association (ICMA). Please note that the Asia Pacific Loan Market Association (APLMA), Loan Market Association (LMA) and Loan Syndications and Trading Association (LSTA) did not publish any guidance related to Sustainability Loan.
The four core components
The SBG mostly follow the same set of components as set out in GBP and SBP:
Use of Proceeds
The SBG did not provide any examples of eligible projects with both environmental and social benefits.
Within the framework, the issuer can list out green project and social project categories separately, or might list out projects with a mix of both environmental and social aspects (e.g. upgrading a building to be more energy efficient for underprivileged population).
Process for Project Evaluation and Selection
The issuer should communicate the following to the investors:
- The environmental and social objectives
- The process to identify eligible social projects and their target populations
- The potential social and environmental risk and how to mitigate
Management of Proceeds
The proceeds should be managed under a dedicated account for proper track record so the allocated and unallocated amount are clear.
Reporting
Reporting can be divided into allocation reporting and impact reporting.
For allocation reporting, the issuer should include a list of projects that the proceeds have been allocated to. The list should include the project description and the respective amount and its social benefits.
For impact reporting, the issuer should report the qualitative and quantitative performance indicators which have been set out in the Framework. The metrics might include number of beneficiaries from the target group, GHG emissions avoided.
To conclude, it is the market practice to provide the above details in a Framework document which are readily accessible to the investors. The issuers are also recommended to conduct external reviews which includes consultant review, verification, certification and rating to make sure the projects have sustainability benefits and align with international standards.
Reference
Sustainability Bond Guidelines Sustainability Bond Guidelines (SBG) » ICMA — International Capital Market Association (icmagroup.org)
