This Practice Note looks at what constitutes a green bond and covers: (1) green use of proceeds bonds, (2) green use of proceeds revenue bonds, (3) green project bonds, (4) green securitised bonds, (5) the components of the Green Bond Principles (use of proceeds, process for evaluation and selection, management of proceeds and reporting), (6) use of external assurance to confirm compliance with principles, (7) methods of verifying green credentials, and (8) how the green bond market is developing.
Sustainability-linked bonds (SLBs) are bonds whereby the proceeds from the issuance are not ring-fenced to green or sustainable purposes (unlike ‘use of proceeds’ green bonds or sustainable bonds) and may be used for general corporate purposes or other purposes. Instead, the SLBs are linked to the performance of certain key performance indicators in achieving pre-defined sustainability performance targets, and depending on whether this is achieved, certain characteristics of the SLBs may vary (eg coupon rachet). Therefore, issuers are committing explicitly to future improvements in sustainability outcomes with a pre-defined timeline. SLBs are a forward-looking performance-based instrument. The Sustainability-linked Bond Principles (SLBPs) have been published by ICMA and constitute recommended best practice in order to promote market integrity and transparency in sustainable finance. This Practice Note sets out what an SLB is, describes the SLBPs and how they work and what the future looks like for SLBs.
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