ICMA cracks down on SLBs with new guidance on callables, materiality and KPIs

The International Capital Markets Association (ICMA) has cracked down on sustainability-linked bonds with new guidance on callable bonds, KPIs and measurement dates as it releases a series of new documents for its sustainable debt standards.

Among the key documents is an updated and expanded Q&A document for the sustainability-linked bond principles, and a database of 300 illustrative KPIs broken down across sectors and ESG factors.

The expansions to the Q&A document address a number of concerns raised by investors, including issues around callable bonds and when in the life of the bond sustainability targets should be measured.

A study published last year on pricing in the SLB market found that many borrowers were issuing their first ever callable bond in the format, and that two-thirds of the bonds in the study’s sample had a call option.

The new guidance recommends that issuers “should ensure the structure of any SLB requires their performance against at least one SPT [sustainability performance target] be evaluated, prior to the bond becoming callable”. Where this is not practical, ICMA warns that “investors will likely expect the call price to reflect an assumption that the SPT has not been met”.

Steve Liberatore, head of ESG/impact for global fixed income at Nuveen and a prominent critic of the development of the SLB market, said the new guidance “eliminates a major structural flaw” with current callable deals. While agreeing that this is a good first step, however, he added that other structural improvements might be needed including interim targets that align with call dates.

Concerns have also been raised around SLBs where the measurement date comes shortly before maturity, meaning that the issuer only pays a small penalty if it fails to hit its targets. The new ICMA guidance recommends that bonds come with “an intermediate observation date”, suggesting a five-to-seven-year date “at the latest” as an example for a bond with a 10-year maturity. The guidance also contains a more detailed explanation of what is meant by “material” when selecting a KPI for an SLB.

While the new guidance does address a number of controversial areas in the SLB market, ICMA deputy CEO and head of sustainable finance Nicholas Pfaff said that it was not the association’s role to be prescriptive.

“We’re not regulators,” he said. “On the other hand, I think what should be noted here is how specific the guidance now is, and how comprehensive and also how transparent… Investors will take a view and then at some point regulators might take a view and I think the work that we’re trying to do here with the market is very clearly a step forward in terms of supporting the integrity of the SLB market as it develops.”

This was echoed by Denise Odaro, head of investor relations at the IFC and chair of the executive committee of the green and social bond principles, who said that the vision was to provide recommendations and guidelines.

“I don’t foresee use getting to a point where we are policing matters,” she said. “In the end it is investors that vote with their feet or wallet… It’s not lost on us how important this work is and we continue to be proactive in terms of keeping up with the fast-moving market, but it’s never our intention to get to a point where we are policing.”

Liberatore also agreed: “Anything prescriptive reduces the opportunity for the market to continue to diversify and provide the opportunity for innovation which is critical for continued evolution and maturation of the market.

“The principles are in place to provide guidance to both issuers and investors on what is required/expected for a deal to be in alignment with them. Ultimately, it is up to the investor to determine what fits for them”.

Alongside the guidance, ICMA has released an updated database of 300 KPIs developed in consultation with the market. The database covers global and sector-specific KPIs across E, S and G, including biodiversity, diversity, climate change, and data protection and security. While the list is comprehensive, ICMA said it wasn’t exhaustive and was not intended to be prescriptive. The World Bank recently published a set of KPIs for potential sovereign issuers, and Odaro said her understanding was that “further development” was being done in that area.

Among the other documents put out by ICMA is a pre-issuance checklist for green bonds, metrics for impact reporting relating to sustainable management of living natural resources, and guidance on the construction of labelled-debt indexes and data provision.