ICMA and ELFA crack down on high-yield SLBs with new recommendations

Guidance looks to maintain ‘robust standards’ in HY, while bankers tell RI that investors are looking for Scope 3 targets and verification.


The International Capital Markets Association (ICMA) and European Leveraged Finance Association (ELFA) have collaborated on practical guidance for sustainability-linked bonds in the high-yield space, warning of a need to “maintain robust standards”.

High-yield issuers accounted for close to 40 percent of the SLB market in 2021, according to figures from the Luxembourg Stock Exchange, but issuance largely fell off a cliff in 2022, which was a difficult year for the wider high-yield market.

The guidance from ICMA and ELFA seeks to address practical problems unique or common in high-yield issuance, but a number of its provisions also apply to investment-grade issuers.

The 10 recommendations are split across disclosures, targets, general characteristics and reporting.

On the disclosures side, issuers in both high-yield and investment grade are encouraged to link their bonds to publicly available sustainability strategies. Issuers should also be reporting on proposed KPIs “well ahead of any SLB issuance”.

For the increasing number of smaller, private or non-European issuers not subject to mandatory ESG reporting standards, the guidance encourages disclosure of broader ESG data to support investor analysis of their sustainability performance targets (SPTs).

Turning to penalties, issuers are encouraged to disclose why they have selected a particular incentive, as well as demonstrating the “commensurate and meaningful nature” of the coupon variation and integration of penalties in call prices to investors.

Investors have repeatedly discussed the utility of the 25 basis points step-up, especially in the high-yield space. While 25bps is a smaller relative incentive for lower-rated issuers who are paying more on their bonds, they are also less likely to have free cash flow and will be more affected by a higher step-up.

The guidance encourages issuers to commit to contractual reporting of performance on their KPIs, with the issuer considered to have failed to hit their targets if they fail to report on the observation dates.

Disclosure of performance “should not be a one-line item deeply embedded in a sustainability report”, it continues, but should be comprehensive, clear and easy to find with detailed methodologies and disclosure of any impact from material changes to the business such as M&A.

Sabrina Fox, ELFA’s CEO, said that “high yield bonds as an asset class contain unique features warranting independent consideration and market guidance”. The guidance, she said, would enhance the impact and effectiveness of high yield SLBs.

Investors step up demands

A number of bankers told Responsible Investor that bond investors are stepping up scrutiny and their own demands of SLB issuers.

Agnes Gourc, head of sustainable capital markets at BNP Paribas, said that investors are looking for more tools to help their assessments of SLBs, which are more complex to assess than use of proceeds bonds. She noted especially the recent launch of the Climate Bonds Initiative’s SLB certification scheme.

Trisha Taneja, global head of ESG capital markets and advisory at Deutsche Bank, said that investors are increasingly scrutinising the type of KPI attached to deals and are increasingly asking about verification of emissions targets from the SBTI or similar schemes, while one banker who did not wish to be named said investors are increasingly demanding Scope 3 KPIs.

In 2022, only one in five SLBs with an emissions target included all three scopes, according to Climate Bonds Initiative Figures.

Taneja said that issuers remain positive towards the label, and that investor scrutiny means that they are more careful about their KPIs instead of detracting from issuance altogether.