ICMA Issues KPI Registry for Sustainability-Linked Bonds

ICMA has also updated its guidance and introduced clarifications to support growth of the sustainable bond market.  

The International Capital Market Association (ICMA) has published a new registry of 300 KPIs for sustainability-linked bonds (SLBs) as part of a raft of new and updated publications and resources launched at its 2022 Annual Conference of the Principles.

The registry is a response to the rapid take-up of SLBs by issuers looking to use them as part of their efforts to reduce their CO2 emissions and align with net zero goals. The market has taken off since the ICMA issued its Sustainability-Linked Bond Principles in June 2020.

SLBs are the fastest growing part of the bond market and amassed US$118.8 billion last year, with a YoY growth of 941%, according to a recent report by the NGO Climate Bonds Initiative. Climate Bonds’ 2022 Q1 market update also noted that SLB-themed volumes represented 11.9% (US$24 billion) of total sustainable debt issuance that quarter.

Unlike green or social bonds, SLBs can be used to fund whole-entity transition to more sustainable business models, according to specific targets and KPIs, rather than proceeds being ringfenced for specific social and environmental-themed projects. KPIs selected by an SLB issuer should be relevant, measurable, externally verifiable, and able to be benchmarked, the ICMA’s SLB working group said.

The working group identified sector-specific KPIs and labelled them as either core (material and able to be applied in isolation) or secondary (more limited in scope and best used in addition to core KPIs). The ICMA has encouraged issuers to select at least one core KPI for an SLB. However, in the event a core KPI is “not feasible” or applicable on a given sustainability theme, related secondary KPIs can be used, so long as they “effectively add up to the equivalent of a core KPI”.

“We’re not a regulator and we’re not trying to be too prescriptive, but rather represent the voice of the market,” said Orith Azoulay, Global Head of the CIB Green and Sustainable Hub at Natixis, speaking at a media briefing this week.

The KPIs have been further divided into sustainability themes, which have been updated from 2021 guidance to be more explicit. The carbon emissions theme is now part of the climate change (GHG emissions and energy) theme, and labour practices is now part of working conditions (employee engagement, labour practices and labour rights).

A suggested core KPI for auto manufacturers of auto parts is ensuring a percentage of produced or sold vehicle components are zero emissions. Secondary KPIs include outlining the degree of recyclability of sold vehicle components.

The ICMA has also published an accompanying SLB Q&A document providing further clarifications, such as outlining what could be considered a credible materiality assessment of SLB KPIs.

“This registry isn’t covering all the relevant KPI options for issuers, as it’s a work in progress,” said Azoulay.

“There’s further room for innovation. It will continue to evolve as we continue to learn from the market – especially as we further develop social-focused KPIs, because, at present, this particular facet is not as developed as it could be.”

ICMA serves as Secretariat of the green, social and sustainability-linked (GSS) bond Principles, producing market guidance on best practice for global sustainable fixed income markets.

Last year, total GSS-themed debt issuance increased by 57% compared to 2021, reaching almost US£1.1 trillion, the Climate Bonds report said.

Guide rails in a time of growth 

The rapid emergence of SLBs has had a number of impacts on the wider sustainable bond market.

French asset manager Mirova has warned that investors should closely scrutinise the growth of SLBs to better understand broader ‘greenium’ levels, with sectors experiencing strong SLB issuance seeing higher price differentials.

The ICMA’s registry follows separate guidance for institutional investors published by the World Bank, outlining how to assess the contribution of SLBs issued by sovereigns to tackling climate change and biodiversity loss.

As well as the registry, the ICMA has published other new publications and resources. These include new definitions for green securitisation, a climate transition finance methodologies registry, new metrics for impact reporting, updated high-level mapping to the United Nations Sustainable Development Goals (SDGs), and pre-issuance checklists for green bonds.

Nicholas Pfaff, ICMA’s Deputy CEO and Head of Sustainable Finance, said: “Sustainability now permeates all areas of the capital markets. The [Bond] Principles provide market participants and stakeholders with an essential reference for product standards, agreed terminology and technical consistency, as well as a resource to benchmark ambition.”

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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