ICMA calls for better disclosure on M&A activity and SLB targets

Standard setter updates SLB Q&As to give guidance on green CapEx, use of M&A to achieve targets and target recalculations.

The International Capital Markets Association (ICMA) has expanded standards for disclosure on M&A activity by sustainability-linked bond issuers as part of an update to its wider guidance on the label.

ICMA, which curates the widely used Sustainability-linked Bond Principles and acts as global standard setter, issued the update to a supplementary Q&A document on Tuesday.

Among the additions are guidance on the use of M&A to achieve targets and penalties when multiple KPIs are attached to a bond. The guidance also gives the nod to green CapEx targets.

Concerns have been raised that issuers could simply sell off dirty assets to meet SLB targets without causing real economy decarbonisation.

Last year, Indian infrastructure and energy firm Sembcorp attracted criticism when it noted in documents for a sell-off of its energy subsidiary that retention of the unit could lead to it missing targets.

Other ICMA documentation recommends that issuers disclose to investors the potential impact of M&A on KPI calculations and restatement before issuing, and the impact of M&A on the KPI post-issuance.

The updated Q&As also recommend disclosure on how acquisitions and divestments fit in to the wider ESG strategy, how issuers ensure that buyers of divested assets have a credible sustainability strategy and “robust” phase-out commitments, confirmation that there is no remaining interest or control, and contribution of the activity to achieving sustainability performance targets (SPTs).

Green expenditures

Companies’ green expenditures are attracting increasing interest from investors looking to measure decarbonisation trajectories.

The updated Q&A document says the metric can be used as a “means-oriented” target in an SLB. It adds that it may be especially relevant for industries where targeted CapEx is an integral part of transition strategies and suggests that issuers consider using such a target where a Scope 3 KPI is not feasible.

However, ICMA warns that increases in green CapEx do not guarantee actual decarbonisation and there are no globally consistent definitions of what counts as green CapEx. It suggests that issuers use a local framework such as the EU taxonomy, seek an external review for their definitions, or provide the rationale for their disclosure.

SLB pioneer Enel updated its sustainable financing framework earlier this year to introduce targets around taxonomy-aligned CapEx. The Italian energy utility raised €1.5 billion from its first SLB with this target in February.

Other updates to the ICMA document include discussion of alternatives to a coupon step-up, how penalties should work when only one of multiple targets attached to a bond is achieved, and when bondholders should be consulted if KPIs and SPTs are recalculated.