Latest iteration of popular guidelines continue with voluntary, market-driven approach.

By Paul A. Davies and Aaron E. Franklin

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).