Rossana Chu (Managing Partner)
Email: rossana.chu@eylaw.com.hk
The principles on sustainable bonds (ICMA Bond Principles) formulated by the International Capital Market Association (ICMA) are widely applied in Hong Kong listed bonds, as discussed in our previous articles1. External reviews play an important part in green, social and sustainability-lined bonds/loans, and the author will summarize the common types of external reviews here.
Common types of external reviews
The Guidelines for Green, Social, Sustainability and Sustainability-Linked Bonds External Reviews2 of the ICMA group external reviews in four main types, namely, second party opinion, verification, certification and rating/scoring.
The “Green Loan Principles”3, the “Social Loan Principles”4 and the “Sustainability-Linked Loan Principles”5 issued by the Loan Market Association, the Asia-Pacific Loan Market Association and the Loan Syndications and Trading Association (LMA Loan Principles) also highlight the functions of external reviews.
(1) Second party opinion
Alignment of the bond/loan framework with international principles
A second party opinion usually comments on whether the green, social, sustainability and sustainability-linked bond/loan framework is in line with the international principles (such as the ICMA Bond Principles and the LMA Loan Principles). It is given by an independent institution with environmental/ social/ sustainability expertise.
Sustainable Development Goals
Seventeen Sustainable Development Goals (SDGs) were adopted by the United Nations in 20156 as a universal call to end poverty, protect the planet, and achieve peace by 2030. Mindful of the SDGs, all countries should recognize that development must balance social, economic and environmental sustainability.
Second party opinions often include mapping of the proceeds uses to SDGs. ICMA provides a broad frame of reference on SDG mapping, and sets out a table illustrating the relevance of 15 SDGs to the uses of proceeds7. Nevertheless, each project should be reviewed individually as to whether it aligns with any particular SDG.
Contribution of the sustainable finance to the sustainability strategy of the issuer/borrower
A second party opinion may start with the issuer’s/borrower’s sustainability strategy. It then discusses how the sustainable bond/loan and its framework can actualize the strategy and lead to positive environmental and social outcomes. The reviewer may also comment on that quantitative results which may be achieved through the sustainable finance.
References can be made to international benchmarks such as the Science-Based Targets Initiative8.
(2) Verification
It refers to an independent verification on the bond/loan framework or the underlying projects against a designated set of internal sustainability criteria.
In the case of a sustainability-linked bond/loan, it is a must to obtain independent and external verification on measuring performance against the key performance indicators or on the progress of achieving the sustainability performance targets. According to the ICMA Sustainability-Linked Bond Principles9 and the LMA Sustainability-Linked Loan Principles, the verification must be conducted at least once a year, and at the time for assessing whether an adjustment to the bond/loan characteristics is triggered, until after the last trigger event has been reached.
(3) Certification
The issuer/borrower can engage a qualified and independent third party to certify its sustainable bond/loan, the relevant framework, use of proceeds, key performance indicators and sustainability performance targets against recognised external sustainability standards which define specific criteria.
(4) Rating/scoring
A third-party rating agency or specialized research provider may evaluate or assess the sustainable bond/loan framework, use of proceeds, selection of key performance indicators, calibration of the level of ambitiousness of sustainability performance targets SPTs, according to an established scoring/rating methodology.
Key takeaway
Bond issuers and loan borrowers are engaged to make good use of external reviews, because they promote best practice for the issuer’s/borrower’s internal control, allow stakeholders to understand how the bond/loan framework is aligned with international principles, and give comfort to investors on how their monies are channeled to sustainable uses.
1 https://www.eylaw.com.hk/en_hk/publications/our-latest-thinking/2022/may/application
2 https://www.icmagroup.org/sustainable-finance/external-reviews
3 https://www.lsta.org/content/green-loan-principles/
4 https://www.lsta.org/content/social-loan-principles-slp/
5 https://www.lsta.org/content/sustainability-linked-loan-principles-sllp/
6 https://www.undp.org/sustainable-development-goals
7 https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Mapping-SDGs-to-Green-Social-and-Sustainability-Bonds-2020-June-2020-090620.pdf
8 https://www.wri.org/initiatives/science-based-targets
9 https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/sustainability-linked-bond-principles-slbp/
