The much-anticipated 2021 edition of the Green Bond Principles (“GBP”) has now been released by the International Capital Market Association (“ICMA”). ICMA’s Principles, made up of the GBP, the Social Bond Principles (“SBP”), the Sustainability Bond Guidelines (“SBG”) and the Sustainability-Linked Bond Principles (“SLBP”) are a collection of voluntary frameworks that promote the role which global debt capital markets can play in financing progress towards environmental and social sustainability (collectively, the “Principles”). These Principles also outline best practices when issuing bonds to finance environmental and / or social related projects through guidelines and recommendations that promote transparency and disclosure. See our previous update which discussed the Principles in the context of Ireland’s ESG bond offering.
The GBP seek to support issuers in financing environmentally sound and sustainable projects that foster a net-zero emissions economy and protect the environment. The newest edition of the GBP benefits from (i) the feedback of the 2020 consultation of parties such as, the members and observers of the Principles (including, issuers, underwriters, investors and various other industry stakeholders) and (ii) input from various working groups coordinated by the executive committee of the Principles with the support of ICMA as secretariat.
According to ICMA, an estimated 97% of sustainable bonds issued globally in 2020 referenced the Principles. As a result, the latest GBP will be of interest to issuers, investors and market participants who should familiarise themselves with the changes. Interestingly, the GBP note that green bonds issued under earlier green bond guidance released prior to the 2021 edition of the GBP are deemed consistent with the GBP.
What has stayed the same?
The four core components that an issuer should disclose to align with the GBP remain unchanged: (i) use of proceeds (ie, what eligible green projects will be financed); (ii) process for project evaluation and selection; (iii) management of proceeds; and (iv) reporting.
What has changed?
Key Recommendations – Green Bond Frameworks and External Reviews
The GBP now identify key recommendations regarding green bond frameworks and external reviews for heightened transparency.
Green Bond Frameworks
Issuers seeking to comply with the GBP should now explain the alignment of their green bonds with the four core components in a green bond framework or in their legal documentation in a readily accessible format to investors. The GBP recommend that issuers summarise in their green bond framework relevant information, including, for example, reference to the high level environmental objectives of the GBP within the context of the issuer’s overarching sustainability strategy.
Issuers are also encouraged to disclose any taxonomies, green standards or certifications referenced in the process for project selection. Where issuers are communicating Paris-aligned transition strategies in the context of projects targeting climate change mitigation, issuers are encouraged to use guidance from the Climate Transition Finance Handbook.
To promote increased transparency, the GBP recommend that prior to a green bond issuance, issuers appoint an external review provider to assess the alignment of the green bonds with the four core components. Following the issuance, the GBP recommend that an issuer’s management of proceeds be supplemented by the use of an external auditor or other third party to verify the internal tracking and allocation of funds from the green bond proceeds to eligible green projects.
Whilst acknowledging that there are several ways that issuers can obtain external reviews, the GBP note that issuers should consult the Guidelines for External Reviews for recommendations and explanations on the different types of reviews. Any external reviews should be made publicly available by issuers and, if possible, should use the template for external reviews available on the sustainable finance section of ICMA’s website.
Disclosure of issuer-level sustainability strategies and commitments
The GBP recommend heightened transparency for issuer-level sustainability strategies and commitments. As mentioned above, where issuers wish to finance projects aimed at implementing a net zero emissions strategy aligned with the goals of the Paris Agreement, issuers may seek guidance on issuer level disclosures and climate transition strategies from the Climate Transition Finance Handbook.
The GBP recognise that there are several ongoing developments of taxonomies for determining the environmental sustainability of projects and acknowledge that the diversity of current views and of the ongoing development in the understanding of environmental issues and consequences may require parties to consider such taxonomies when determining the environmental sustainability of projects. The GBP note that such taxonomies may assist issuers as to what may be considered green and eligible by investors. As noted above, issuers are encouraged to provide information, if relevant, on the degree of alignment of projects with taxonomies and related eligibility criteria (including, if applicable, exclusion criteria) and disclose any green standards or certifications referenced in project selection.
Identify and manage social and environmental risks
Issuers should clearly communicate information on the processes by which they identify and manage perceived environmental and social risks associated with the relevant projects as part of project selection. The GBP encourage issuers to have a process in place to identify mitigants to known material risks of negative environmental and / or social impacts from the relevant projects identified as part of project selection. These mitigants may include trade-off analysis and monitoring where the issuer assesses the potential risks to be meaningful.
The GBP also contain links and references to complementary guidance of the Climate Transition Finance Handbook, the Harmonised Framework for Impact Reporting and the Guidelines for External Reviews, which are supplemented by the Guidance Handbook.
The GBP recognise that a number of transactions have been promoted as “blue bonds” or similar terminology with the objective of emphasising the importance of the sustainable use of maritime resources and of the promotion of related sustainable economic activities. Notably, the GBP confirm that such “blue bonds” are also green bonds as long as they align with the four core components of the GBP.
The GBP also recognise that issuers may wish to align their green bonds with both the GBP and the SLBP and note that such approach remains at the discretion of issuers and is neither recommended nor discouraged.
The 2021 editions of the SBP and SBG have been similarly revised. The 2021 edition of the Guidance Handbook has also been updated and reflects such revisions.