Fund Solutions

Update to Green Bond Principles Prioritises Transparency, Impact

New guidance seeks to boost investor confidence with focus on increased information flows and external verification.

A greater emphasis on transparency and impact are the main changes for issuers and investors in green bonds, following the first update to the Green Bond Principles (GBP) in three years, released today by International Capital Markets Association (ICMA).

The update increases coordination between the GBP’s voluntary guidelines for issuing green bonds and related guidance on transition finance, impact reporting and external review processes, to provide greater clarity and consistency for market participants.

According to the ICMA, 97% of all sustainable bonds issued globally in 2020 by sovereigns, banks and corporates referenced one or other of the Green, Social and Sustainability Bond Principles. Mandatory requirements for green bond issuance are being considered in a number of jurisdictions, with the European Commission expected to outline proposals shortly.

The 2021 update makes new recommendations on use of green bond frameworks and external reviews, which complement the four existing components of guidance for GBP alignment of bond issuance: use of proceeds; process for project evaluation and selection; management of proceeds; and reporting.

It suggests issuers should explain GBP alignment in a green bond framework or legal documentation, referencing the issuer’s sustainability strategy as well as the GBP’s five high-level environmental objectives: climate change mitigation; climate change adaptation; natural resource conservation; biodiversity conservation; and pollution prevention and control. Issuers are also “encouraged” to specify use of taxonomies, green standards or certifications referenced in project selection.

The GBP update also recommends that issuers appoint an external provider in advance to assess alignment with the four core components of GBP alignment, and also use an external auditor or other third party to verify internal tracking of and allocation of funds to ensure and validate correct management of proceeds. Further advice on best practice in use of external review is provided.

On reporting, the 2021 GBP emphasises the importance of communicating project impact, recommending use of both qualitative and quantitative performance indicators where feasible, as well as disclosure of “the key underlying methodology and/or assumptions used in the quantitative determination”. It also noted the availability of further guidance and impact reporting templates.

Johanna Köb, Head of Responsible Investment, Zurich Insurance and Vice-Chair of the Executive Committee of the GBP SBP, said investors are increasingly using “an impact lens” when approaching the sustainable bond markets.

“Impact reporting is now strongly recommended for all use-of-proceeds bonds. The impact reporting handbook has been expanded with guidance on the circular economy and eco-efficient products category, and there is new guidance for database providers seeking to support market participants with the collection and aggregation of impact data,” she said.

As outlined in the updated 2021 guidance, green bonds are any type of bond instrument where the proceeds are exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects.

The GBP is a voluntary code outlining best practice for green bond issuers through guidelines and recommendations on how to communicate information on bond characteristics and issuer plans and strategies to investors and market participants.

The 2021 editions of the Social Bond Principles (SBP) and Sustainability Bond Guidelines (SBG) have been similarly revised. All are published under the governance of the Principles, a collection of voluntary frameworks with the stated mission and vision of promoting the role that global debt capital markets can play in financing progress toward environmental and social sustainability. The ICMA provides the secretariat for all Principles.

 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2021 ESG Investor Ltd. Company No. 12893343

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