Sustainability-Linked Bond Principles : a set of guidelines to help this new product thrive in integrity


On June 9, 2020, the International Capital Market Association (ICMA)’s Green & Social Bond Principles published a new set of voluntary process guidelines for the debt capital market related to sustainability-themed borrowing activity: the Sustainability-Linked Bond Principles (SLBPs)This new type of debt instrument is the latest addition to the green & sustainable debt instruments toolbox, which will broaden the scope of eligible issuers, especially less capital intensive corporates and/or issuers struggling to have sufficient green/sustainable “capex” in hard-to-abate sectors (e.g. cement, steel industry, oil & gas).

On the one hand, Green Social and Sustainable Bonds are meant to finance eligible projects defined by the Green, Social and Sustainable Bond Principles with the ability to track the proceeds. Typically, the proceeds raised through the issuance of such instruments are earmarked to specific categories of activities or projects (explaining to “what” the money goes).

On the other hand, Sustainability-Linked Bonds are any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuers achieve predefined Sustainability/ ESG objectives. In that sense issuers are committing to future improvements in sustainability outcome(s) within a predefined timeline: it is a forward-looking performance-based instrument used for general corporate purposes and aim at:

  1. Scrutinizing carefully the issuer’s sustainability strategic ambitions, captured through relevant and material KPI(s), and efforts deployed to implement them
  2. Incentivizing its ability to achieve its strategic objectives accordingly (progress or achievement being captured through specific targets).

Hence the importance to have a sound governing process to frame the issuers’ commitments, as captured and followed by tangible metrics, especially towards transition and sustainable mid to long term objectives. The SLBP set “five core components” as follows:

  1. Selection of sustainability Key Performance Indicators (KPIs) meant to be relevant, core and material to the issuers’ business & sustainability profile, measurable & quantifiable, externally verifiable, able to be benchmarked and compared with the aim to be regularly monitored with regards to their contribution to environment, social and governance (ESG) objectives.
    We see two main categories of KPI around i) “means” as input and effort indicators (resources deployed, capital, human such as investments or R&D efforts) or ii) “results” as output or outcome indicators with tangible impact as carbon intensity reduction or absolute emission reduction (in %). While results indicators are the most convincing, we see means KPI (or basket of KPIs) as relevant proxies where results KPI may not be available.
  2. Calibration of Sustainable Performance Targets’ (SPTs)  whose level of ambition is the cornerstone of the instrument, i.e. representing a material beyond “business as usual” improvement, benchmarkable (against its own performance over time, its peers or using external and/or science based references), consistent with the issuer strategy and set on a predefined timeline. and/or facilitating peers comparison.
  1. Bond characteristics (financial and/or structural) should vary depending on whether the selected KPI(s) would reach (or not) the predefined SPT(s) i.e. the SLB will need to include a financial and/or structural impact involving trigger event(s).
    Potential variation of the coupon is the most common example, but it is also possible to consider other variations, such as other bond financial characteristics, quantified predefined remedial actions / investments. In any cases, these impacts on bond characteristics are expected to be “commensurate and meaningful” relative to the issuers’ original bond characteristics, and to be clearly presented in the bond documentation.
  2. Reporting: should be regularly published (at least annually) capturing up-to-date information on the performance of the KPIs, a verification assurance report pointing to the SPTs performance and its impact on the bond’s characteristics.
    In general, the reporting should also provide any information that will help monitoring the level of ambition of the issuers’ sustainable strategy and the analysis of the KPIs and SPTs, as well as recent announcements or strategic decisions that might impact the achievement of the SPTs.
  3. Verification finally with an external and independent reviewer mandated to verify the performance level against each SPT for each  KPI at least once a year and in any case for any date/period relevant for assessing SPT performance leading to a potential adjustment of SLB financial and/or structural characteristic.


Lastly, the SLBP recommend the recourse to a pre-issuance Second Party Opinion to confirm the alignment with the five core components of the SLBP (such as a SPO), and more specifically : the relevance, robustness and reliability of selected KPIs, the rationale and level of ambition of the proposed SPTs, the relevance and reliability of selected benchmarks and baselines, the credibility of the strategy outlined to achieve them, based on scenario analyses, where relevant.


The implementation of these new guidelines will foster the existing sustainable finance market by allowing new issuers to access it. It should also attract ESG investors interests, especially the wide ESG integration practitioners, which are showing a growing interest for this type of instruments since the first issued SLB by Enel end of last year, seeing the “skin in the game” feature of this new instrument as a value add to their ESG screening tools. But they are clearly voicing out a clear expectation for a robust governance to protect integrity, ambition and clarity in this very emerging market.

In our view SLBPs is a good complement to the green/social/sustainable bond markets and proposes a more forward-looking and holistic view of an issuer profile. It should appeal to issuers targeting benchmark issuances, willing to be repeat issuers, or issuers predominantly operating in brown sectors who have enough eligible green assets for Green Bonds Benchmark issuances but refrain from entering the market by fear of reputational backlash.


Key objectives are to keep maximum integrity through a sound governance which will have to be properly framed to best assess the issuers’ sustainable commitments, its KPIs and SPTs, where the levels of ambition which may prove difficult to caliber and appraise will rely on applicable benchmarks and references as well as third party reviews and assessments. We believe the SLBP lay sound foundations for such a sound governance.

Natixis Green Hub’s Global Head Orith Azoulay, who is a member of the Green Bond Principles and Social Bond Principles executive committee, co-chaired the dedicated working group and actively participated to the redaction of the SLBPs.

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