Sovereigns and transition finance in focus as ICMA issues annual updates

The International Capital Markets Association (ICMA) has released its first update to the Climate Transition Finance Handbook, along with a slew of revisions to its labelled bond principles.

The handbook was first published in 2020 and provides guidance to issuers looking to raise funds for their transition strategy.

This week’s update doubles its length and includes dedicated recommendations for issuers on climate-themed green, sustainability and sustainability-linked bonds, as well as acknowledging the development of transition-labelled bonds in some jurisdictions.

The handbook’s publication came amid calls for a dedicated set of transition bond principles, but ICMA said the working group which developed it felt this was unnecessary.

Asked whether the organisation was discouraging the use of the transition bond label at a press conference to accompany the updates, ICMA deputy CEO and head of sustainable finance Nicholas Pfaff said the debate around transition bonds was “arguably a bit frustrating”.

“We completely accept that there is a transition sub-label, similar to blue bonds and gender bonds,” he said. “The debate around transition bonds or the need for a transition bond label is often misconstrued in terms of saying ‘shouldn’t you have something which is separate?’

“What we’re saying it its absolutely fine to have this sub-label, and it’s essentially a green use-of-proceeds bond which is focused on transition projects. What we’re also saying, and this is why it’s difficult to do transition bond principles, is you can also serve transition very well from a trajectory point of view with an SLB.

“So it makes more sense to say at the level of principles you’ve got SLBs and use of proceeds bond [principles] and here’s the overarching guidance [on transition].”

Pfaff added: “We don’t have a problem when there is a specific jurisdiction, or a specific segment of the market wants to use a transition bond sub label. I think the discussion in the market has been confused and we hope our updated guidance will help clarify the debate.”

SLB suitability

The only change made to the sustainability-linked bond principles was to update language to also include the possibility of sovereign SLB issuers. However, ICMA’s registry of KPIs for SLBs has been given a sizeable expansion to include 43 sovereign-specific metrics, as well as social metrics for corporates.

Many suggested sovereign KPIs cover climate change, including targets relating to absolute emissions or coal generation. However, there are also several biodiversity targets, as well as one on gender and racial diversity in national parliaments. Other social targets include access to drinking water and infant mortality.

Last year’s updates to the SLB principles came amid sustained market criticism of the label over perceived weaknesses in the structures coming to market. In response, ICMA issued new guidance on callable bonds, target measurement dates and materiality as well as releasing a KPI registry.

Asked whether these updates had achieved their intended purpose, Pfaff said ICMA did not have sufficient metrics to objectively measure progress. “But what we’re hearing from investors is they are much more confident with the quality of SLBs and that the work that has been done, particularly on the KPI registry, has been very helpful.”

He added: “The guidance that we’ve given around ambition has also been heard. We’re not saying everything is perfect in the SLB market but clearly feedback from investors is much more positive and we’ve had less evidence of disquiet or reports on problematic SLBs.”

Other updates

As previously reported by Responsible Investor, the Just Transition has been further embedded across the principles. The SLB KPI registry now includes a series of suggested Just Transition targets, while references to the concept now appear in the Climate Transition Finance Handbook and pre-issuance checklists for issuers.

Meanwhile the Social Bond Principles have been updated to clarify that issuers should be identifying target populations for their social projects, and a harmonised framework for social bond impact reporting has been produced.

Additional Q&As on labelled securitisations have been published, while some updates have also been made to impact reporting guidance for green bonds.

Despite being voluntary, the various sets of principles have become the de facto global market standard. According to ICMA, 97 percent of sustainable bonds issued globally referenced them in 2023.