Sustainability Linked Bonds Part 3: Overview of ICMA Guidelines

By Richard Howard

In part 1 of this series we gave an overview of sustainability linked bonds (SLBs), and in part 2 we explored some of the challenges and opportunities linked to SLBs.

Sustainability Linked Bonds are a financial product whereby the characteristics of the bond are linked to measurable sustainable performance targets (SPTs or ‘targets’). If the issuing company meets these targets then the bond proceeds as normal. However, if they miss the targets then the characteristics of the bond change. For example, the interest rate may increase if the company misses the targets, increasing the cost of the bond to the issuing company. (For more information about Sustainability Linked Bonds see part 1).

These types of bonds are very new with only one major bond issue in October 2019 so far [1]. However, many challenges with these bonds have been identified (see part 2). In response to some of these potential road bumps, the International Capital Markets Association (ICMA) has released a document entitled Sustainability-Linked Bond Principles [2]. The objective of these “voluntary process guidelines” is to ensure the environmental integrity of SLPs, by offering a framework by which to structure the bonds and “drive the provision of information needed to increase capital allocation to such financial products”.

Find the ICMA’s full report here.

Five Core Components of the Sustainability Linked Bond Principles

The ICMA has defined five core components which need to be clearly communicated by the bond issuer in order for all parties involved in the bond issue (issuers, investors and underwriters) to be able to clearly assess the SLBs environmental benefits. These are:

  1. Selection of Key Performance Indicators (KPIs)
  2. Calibration of Sustainability Performance Targets (SPTs)
  3. Bond characteristics
  4. Reporting
  5. Verification

Key Performance Indicators (KPIs)

The ICMA suggests that the first step in drafting a SLB should be to decide which Key Performance Indicators (KPIs) will be used. A KPI is a broad umbrella indicator of sustainability that must have a suitable scope. It should be linked with wider internal or external environmental goals of the issuing company. Too narrow and the SLB would be meaningless, too wide and the positive effects of the SLB could be spread too thinly.

They suggest that the KPIs must be:

  • relevant, core and material to the issuer’s overall business, and of high strategic significance to the issuer’s current and/or future operations
  • measurable or quantifiable on a consistent methodological basis
  • externally verifiable
  • able to be eternally benchmarked as much as possible

Examples of KPIs could be: reduction in greenhouse gases, increase use of clean energy, increase biodiversity, reduced use of plastics, reduction in deforestation.

Sustainable Performance Targets (SPTs)

Once one or more KPIs have been identified then the more specific sustainability performance targets (SPTs) must be “calibrated”. Each KPI can have multiple targets.

These targets are where the issuing company’s level of ambition is demonstrated and the ICMA suggests that they should be ambitious with their targets. The SPTs should:

  • Go beyond “Business As Usual”
  • Be consistent with the company’s existing ESG strategy
  • Have a predetermined time scale

ICMA also suggests the SPTs should be drafted with respect to:

  • The issuer’s own performance
  • The issuer’s peers and industry
  • Scientific standards (e.g. Paris Agreement or UN SDGs)

It is advised that the issuing company seeks a “Second Party Opinion” to assess the proposed SPTs.

Bond Characteristics

The bond characteristic is the fundamental tenet of the SLB. This is the feature of the bond which is variable and will be triggered by the reaching or missing the predefined targets.

In the example given in part 1, the bond characteristic which would be triggered by missing the SPTs was an increase in the interest rate by 0.25%.

ICMA state that:

“the variation of the bond financial and/or structural characteristics should be commensurate and meaningful relative to the issuer’s original bond financial characteristics”

That is, the bond characteristics triggered by the SPTs cannot be something external to the bond’s original structure.

Reporting and Verification

The ICMA recommends that the issuer regularly publishes (at least annually) and make easily accessible:

  • Up-to-date information on the KPIs and SPTs
  • Verification report relative to the SPTs
  • Any further information which will enable investors to monitor the issuing company’s level of environmental ambition

Furthermore the ICMA states that external independent auditing of the targets:

“Issuers should seek independent and external verification (for example limited or reasonable assurance) of their performance level against each SPT for each KPI by a qualified external reviewer with relevant expertise […] until after the last SPT trigger event of the bond has been reached.”

This verification assessment should then be made publically available. This unlike the pre-issuance “Second Party Opinion” (i.e. when drafting the KPIs and the targets), the verification “Second Party Opinion” is a necessary part of sustainability-linked bonds.


Sustainability-linked bonds have the potential to spearhead the green transition and create a new asset class for the green investment and sustainable finance industries.

The tricky part, however, is ensuring that these bonds are benefiting the climate and the environment in a meaningful way. If not, their integrity will be undermined and ESG investors will no longer trust their environmental credentials.

As a first step the ICMA has produced a set of voluntary guidelines that will aid issuers and investors to draft and analyse the new world of sustainability linked bonds.

DISCLAIMER: The article above is only a summary of the ICMA report and is not necessarily an accurate representation of the ICMA’s advice. For more information on the ICMA’s Sustainability-Linked Bond Principles please find the document here.


  1. Linklaters, ICMA’s Sustainability-Linked Bond Principles align with ENEL issuance, 2020,
  2. ICMA, Sustainability-Linked Bond Principles, Voluntary Process Guidelines, 2020,


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