Latest iteration of popular guidelines continue with voluntary, market-driven approach.
The annual update of the Green Bond Principles (now also including the Social Bond Principles, and the Sustainability Bond Guidelines, collectively, the Principles) on June 14, 2018 created few surprises. The Principles, highly influential in the sustainable finance space, are subject to annual revision by an executive committee comprised of a set of underwriters, issuers and investors (with the support of the International Capital Market Association (ICMA) as secretariat). Each year, members and observers of the Principles (including Latham & Watkins) submit proposals for amendments to the Principles, with the final amendments formally announced at an annual conference. This year’s conference was held in Hong Kong, in a move to highlight the importance of Asian markets for sustainable finance and the global reach of the Principles.
As has been the case since the inception of the Principles in 2014, the bedrock idea behind the Principles is that the market decides what counts as a green bond. Third-party assurance or review is “encouraged”, but the emphasis remains on issuer communication to enable informed decision-making by investors. This emphasis takes the form of four core components that an issuer should disclose as part of its offering documents: (i) the use of the bond’s proceeds (i.e., what are the eligible green projects?); (ii) the process for project evaluation and selection; (iii) management of proceeds and (iv) reporting. As they have in prior editions, the Principles continue to discourage the green bond label on green bonds that do not otherwise follow the core components (including “pure play” green bonds).
There is good reason for the Principles to stay the course. In 2017, more than 85% of issuances in the green bond market were estimated to comply with the Principles and the eligibility criteria of several stock exchanges and indices refer back to the Principles. The Principles were also the foundation of the Green Loan Principles, a joint project of the Loan Market Association and the Asia Pacific Loan Market Association in March 2018. (More information can be found in this prior Latham blog post.)
Textual Changes to the Principles
Although the main idea behind the Principles remains unchanged, there were several textual changes of note, which are set out below.
- Defined environmental objectives: Five distinct environmental objectives, which entail separate projects, have been established. The objectives include: (i) climate change mitigation, (ii) climate change adaptation, (iii) natural resource conservation, (iv) biodiversity conservation, and (v) pollution prevention and control.
- Expressed support for green classifications: Both global and domestic initiatives to establish green classifications and taxonomies are now mentioned.
- Refined definition of populations benefiting from social projects: The definition of such populations has been refined, according to the Social Bond Principles.
- Heightened emphasis on investor communications: The need for issuers to update their investors promptly if material changes have occurred is stressed.
The Principles were published along with the following complementary documents, which also provide helpful guidance to market participants.
- Guidelines for External Reviews for Green, Social and Sustainability Bonds: This document aims to demonstrate best practices and provide voluntary guidance on ethical and professional standards for issuers in relation to what their reports should include, as well as to external reviewers.
- A High-Level Mapping to the UN’s Sustainable Development Goals: This document aims to provide issuers, investors, and participants in the bond market with a broad framework for determining whether the financing objectives of a green, social, or sustainability bond or bond programme would meet sustainability development goals.
- The Framework for Impact Reporting of Social Bonds: This document is designed to progress impact reporting for social and sustainability bonds.
Latham will continue to monitor future changes to the Principles.
This post was prepared with the assistance of Olivia Featherstone in the London office of Latham & Watkins.