European Central Bank accepts sustainability-linked bonds as collateral

Following the publication of ICMA’s Sustainability-Linked Bond Principles  (SLBP)  in June 2020 (see our July article), a few inaugural issuances of this new product were observed on the market recently with the issuances of Novartis, Suzano or Chanel in September 2020.

While Green, Social and Sustainable bonds are designed on a use of proceeds model for funding dedicated sustainable projects, Sustainability Linked Bonds (SLB) are designed to be for general corporate purposes but embedding in the bond characteristics sustainability performance targets. The SLBP define guidelines for issuance of such instruments, that are well suited to issuers willing to align their funding policies with their sustainability / transition strategies in a holistic and forward-looking fashion. This instrument is attracting the appetite of corporates in priority, who do not see the Use of proceeds approach as fit for their strategy.

European Central Bank announcement

From 1st January 2021, SLBs will become eligible as central bank collateral if they meet the following criteria:

• Coupons must be linked to a sustainability performance target referring to one of the six environmental objective(s) set out under the EU Taxonomy Regulation (EU) 2020/852 (see our “Skydiving kit” report on the EU Taxonomy). As a reminder, the six environmental objectives in the EU Taxonomy (Article 9 of the Regulation (EU) 2020/852 published on 18 June 2020) are: climate change mitigation; climate change adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems.
• Coupons must be linked with one or more of the United Nations Sustainable Development Goals related to climate change or environmental degradation (SGD 13, 14 & 15), without providing any guidance on individual SDG

 “Sustainability performance target” (SPT) means a target set by the issuer in a publicly available issuance document, measuring quantified improvements in the issuer’s sustainability profile over a predefined period. The link between the chosen KPI and the Environmental objectives and/or SDGs will also have to be publicly documented. ECB will require an independent third-party verification of the compliance of the issuer with the relevant sustainability performance target.

Under the Asset Purchase programmes, only CSPP and PSPP will be eligible provided they comply with all other eligibility criteria. Bonds could also be issued under the new Pandemic Emergency Purchase Programme (PEPP). Then, issuers from any sector could see their sustainability-linked bond eligible under Asset Purchase Programmes if they demonstrate a clear contribution to the criteria outlined above. Nevertheless, asset-back securities will be out of scope due to the specific nature of special purpose vehicle issuers.

By this announcement, the ECB is showing its full support to green finance and to innovative instruments. This announcement is very likely to foster the development of this new sustainable debt instrument from an issuer perspective.