ICMA and the Executive Committee of the Principles update the Guidance Handbook

On 29 November 2023, the Executive Committee of the Principles with the support of ICMA has published an updated edition of the Principles Guidance Handbook (the "Handbook") which provides guidance on the application of the Green Bond Principles, the Social Bonds Principles, the Sustainability Bond Guidelines and the Sustainability-Linked Bond Principles (together, the "ICMA Principles"). 

The November 2023 reviewed edition (A) integrates the Q&As that were initially published on a stand-alone basis relating to (i) Secured Green, Social and Sustainable (GSS) Bonds (securitization) (new Chapter 3), (ii) Sustainability-Linked Bonds ("SLBs") (new Chapter 4) and (iii) GSS bonds related to pandemic or to support fragile and conflict states (new Chapter 8) and (B) includes further guidance on topics such as relabeling, net asset value, pure play companies, impact reporting and Social Bonds.

For the purposes of this post, we will provide a high-level summary of the guidance provided in relation to GSS Securitization Bond transactions and SLBs.

Securitization and structured finance

Securitizations and covered bonds can be structured as GSS Bonds as long as they meet the requirements of the applicable ICMA Principles. Appendix 1 to each of the Green Bond Principles and the Social Bond Principles define various types of green and social bonds respectively. Paragraph 4 defines Secured Green/Social Bonds as either:

• A Secured GSS Standard Bond where the Issuer's green/social projects ("Eligible Projects") do not necessarily secure the specific bond (i.e., the "Standard Approach"); or
• A Secured GSS Collateral Bond where the Eligible Projects are securing the specific bond only (i.e., the "Collateral Approach").

The Sustainability Bond Guidelines indicate that the same principles applicable to Secured Green/Social Bonds will apply to Sustainable Secured Bonds where the Eligible Projects are composed of a mix of green and social projects.

The Handbook provides useful guidance by addressing questions on how to structure a secured GSS Bond. The main focus relates to the use of proceeds and the composition of the collateral asset pool, in particular the importance of avoiding double-counting. By way of example: 

• Relation of proceeds to the bonds: The Handbook clarifies that the key distinction between the Standard Approach and the Collateral Approach is that with the Collateral Approach all the underlying assets must consist of Eligible Projects, while with the Standard Approach, as long as the proceeds are used to finance or refinance Eligible Projects in line with the relevant ICMA Principles, there is no need for the collateral to be constituted by Eligible Projects.
• Sustainability criteria applicable to the collateral: While, in structuring a Secured GSS Standard Bond, there is no requirement for the underlying assets to be Eligible Projects, investors will want to verify whether the collateral complies with their investment mandates and issuers, originators and/or sponsors are therefore expected to disclose enough information to potential investors on the nature of the collateral for investors to do so.
• No double-counting rule: One of the core principles included in the Handbook is the avoidance of double-counting. The issuer is given a great degree of flexibility in structuring the Secured GSS Bond, as long as the same Eligible Projects are not counted more than once in the various financing structures.
• Super-senior ranking creditors: The framework for Secured GSS Bonds allows for customary super-senior creditors in the securitisation structure, such as trustees, servicers and administrative counterparties.
• Eligibility term: The default rule is that the allocation term under the collateral approach should at least match the term of the Secured GSS Bond, while under the standard approach, some adjustments may be applicable depending on the amortization profile and the revolving nature of the transaction.
• Reporting requirements: Given the existing regulatory and market practice approach, there is flexibility on the responsible party: the issuer, the originator, or the sponsor can fulfil the reporting obligations.
• Synthetic securitisations: Although on-balance sheet transactions are not excluded from the Secured GSS Bond framework, several considerations are important given the special nature of these transactions, including: (i) a proper assessment of the proceeds amount, taking into account not only the note issuance, but also the full impact in terms of risk weighted assets (RWA) benefit, and (ii) compliance with the no double-counting rule.

Sustainability-Linked Bonds (SLBs)

SLBs are available to all issuers, regardless of sector, geography or level of sustainability provided the structural characteristics of the bond vary depending on whether the issuer achieves predefined ambitious sustainability performance targets ("SPTs") and the selected key performance indicators ("KPIs") reflect issues which are core, material, and relevant.


The Handbook establishes useful regulatory guidance focusing on KPIs and SPTs. By way of example:

• ESG journey of the Issuer: The SLBP do not prescribe a minimal level of ESG performance of the issuer nor exclude any particular business activities or practices. However, investors expect the SLB to fit an overall ESG strategy and will consider the overall ESG profile of the Issuer. In particular, the Climate Transition Finance Handbook, provides relevant guidance and pre-requisites in relation to KPI materiality, climate strategy and expected disclosures.
• Selection of KPIs: The Handbook provides that KPIs ought to be relevant, core and material to the overall business and sustainability strategy of the Issuer/Group and reflect their most significant ESG challenges and impacts. The document also suggests various sources of reference and benchmarks for identifying material KPIs, such as regulatory standards, taxonomies, materiality assessments, external reporting frameworks and initiatives, and the Illustrative KPIs Registry available on ICMA's website. Multiple KPIs may be relevant, even for a single tranche, especially where a basket of KPIs is needed to capture a holistic sustainability theme or all the materiality dimensions of the issuer. The Handbook also discusses some specific cases of KPI selection, such as using third-party ESG ratings, green CapEx, project-level KPIs and group-level KPIs. 
• Calibration of the SPTs: The issuer should select SPTs that are ambitious, meaningful, and credible, and that reflect a material improvement in the chosen KPIs over a predefined timeline. SPTs should be compared to a benchmark or an external reference, such as historical performance, peer performance, industry or sector standards, best available technologies, or science-based scenarios. It is understood that sustainability priorities are likely to vary depending on the economic, environmental, social and political context of different geographies in which issuers are domiciled or where they have the largest proportion of their activities situated.

Additionally, the Handbook offers valuable guidance regarding SLBs structuring features:


• Adjustments and changes to financial characteristics: A key objective underlying SLBs is the reinforcement of the accountability of issuers with regards to their sustainability targets, through the introduction of a tangible incentive for achieving targets or, conversely, a penalty for missed targets in addition to any associated reputational/credibility concerns. While coupon step-ups are the most used characteristic in the current market, other changes to financial characteristics, such as coupon step-downs, changes to the redemption amount, call-options, one-time payments and non-financial penalties, may be considered in light of their respective ability to align with the Sustainability-Linked Bond Principles.
• Change of KPIs or SPTs: The Handbook acknowledges that in some circumstances, issuers may need to amend how they calculate a KPI or change an SPT prior to the maturity of the Bond, for example due to changes in methodology, data sources, perimeter, force majeure events, or market practice. It is recommended that issuers clearly communicate the rationale for recalculation and/or restatement optionality or set out a recalculation policy as part of their framework and/or legal documentation, and to seek external review of any changes to ensure that they are consistent with the original level of ambition and alignment with the Sustainability-Linked Bond Principles. It is also suggested that issuers consider whether it is possible to include a mechanism in the terms and conditions to update their outstanding SLBs if they issue subsequent SLBs with the same KPIs but more ambitious SPTs, or to explain the potential impact on the secondary market if they do not. 
• Reporting: The timing of the reporting relative to an SLBP issuance or programme is not prescribed, but the issuer would need to disclose it ahead of issuance and on a regular basis ideally once a year and provide information on the strategic planning and levers deployed to achieve the SPTs, the interim milestones and progress, the potential remediation actions, and the evidence and data used to support their performance. Since KPIs are likely to be part of the issuer’s annual reporting exercise, the coincidence of timelines with the issuer´s regular financial reporting is therefore more likely and expected to be welcomed by investors. Issuers should report in a user-friendly format information on all the outstanding SLBs to allow an overview of the SLB program. In the case of lack of reporting at the observation date and/or breach of reporting compared with information that was committed to within the documentation at pre-issuance, the SPT should be deemed not achieved and respective, predefined trigger events should occur. 
• Verification: Issuers are to seek independent and external verification of their performance against the SPTs by a qualified external reviewer with relevant expertise at least once a year and for any date/period relevant for assessing the SPT performance leading to a potential adjustment of the bond characteristics. The Handbook also discusses how the external verification may affect the drafting of the legal documentation of the SLB, such as by including references to the roles of the parties in confirming the SPT achievement, and by including an undertaking from the issuer to make the external verification reports publicly available.