Eurosif calls for regulatory intervention in SLB market

European sustainable finance industry body Eurosif has called on EU lawmakers to intervene in the sustainability-linked bond market, citing a lack of transparency.

In a letter sent to Alain Deckers, head of the asset management unit at Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), setting out a series of recommendations on the EU’s green bond standard, Eurosif said it “would like to emphasise the need to improve transparency in the market of sustainability-linked bonds”.

As SLBs have different characteristics, and the market is in a different stage to the green bond market, the letter suggests that legislators consider requiring the European Commission to conduct an impact assessment “aimed at investigating potential challenges and regulatory needs of this market”.

The Eurosif letter contains a series of recommendations and supported measures for the EU Green Bond Standard, which is currently in the process of negotiations between various legislative bodies.

The group welcomes proposals from the European Parliament for a mandatory disclosure framework for green debt issuances, which it says are not adequately covered by SFDR or the EU taxonomy. Disclosures, it says, must include clear climate targets underpinned by “robust” transition plans, as well as information on sustainability risks and potential adverse impacts.

The letter calls on co-legislators to adopt a number of amendments tabled by the European Parliament, including on transition plan disclosure, supply chain due diligence and taxonomy-alignment of the use of proceeds.

While these requirements may cause additional effort and cost, Eurosif argues that these will be outweighed by the benefits of minimised greenwashing and that market standardisation will reduce the burden of assessment for investors, as well as increasing clarity for issuers on what projects are eligible.

Concerns have repeatedly been raised around numerous aspects of the SLB market, including the ambition and materiality of targets attached to deals. Concerns were also raised at the start of the year that some SLBs are callable before the penalty for missing targets would kick in, potentially allowing issuers to avoid any negative consequences.

An investigation by the Bureau of Investigative Journalism (TBIJ) in October raised concerns over a number of SLBs structured by HSBC, including one from an issuer which linked its cost of financing to the emissions intensity per barrel of oil it produced. HSBC told TBIJ that all SLBs it structured follow an industry standard and are subject to independent review and validation.

In an attempt to crack down on issues with SLBs, ICMA issued a series of clarifications and guidance in June, as well as a database of 300 KPIs covering global and sector-specific targets.