Time to issue sustainable bonds?

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Time to issue sustainable bonds?

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Introduction Is my business ready and suitable for issuing sustainable bonds – and what are the potential upsides?

Any business in any industry is suitable for and can issue sustainable bonds – but before you issue your first, there are certain steps and considerations that need to be taken. This guide will help you identify the steps and considerations you need to take before your business is ready to issue sustainable bonds.

Sustainability and how to finance the sustainable transition of your business and society as a whole is something that should be on the financing and sustainability agenda of all businesses. You as a business can participate and promote your own sustainable transition by obtaining sustainable financing in the form of sustainable bonds.

Entering into the sustainable bonds market can also provide reputational gains and branding of your business. It will demonstrate that your business and management

have a focus and clear commitment to engage in the sustainable transition of your business and industry. It will also expose you to an increased and more diversified pool of funding opportunities and investors. The issuance of sustainable bonds will put you in the sustainability spotlight.

Pension funds, life insurance companies and collective investment undertakings (UCITS and AIFs) are increasing their focus on sustainable investments. In October 2021, ATP announced its ambition to reach DKK 200bn in green investments by 2030 and DKK 100bn by 2025. In order to meet this objective, there will be an increased demand for sustainable bonds to invest in. By tapping into this market, issuers may also therefore experience a pricing advantage compared to ordinary financing – referred to as a “greenium”.

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What can I read about in this guide – and where can I find it?

Pages 4 and 5 describe and identify the characteristics of useof-proceeds sustainable bonds and sustainability-­linked bonds (SLBs).

Pages 6 to 11 explore the different types of use-of-proceeds ­sustainable bonds – and also take a deeper look into ICMA’s ­Green Bond Principles.

Pages 12 to 15 turn their focus to sustainability-­linked bonds (SLBs) and ICMA’s Sustainability-Linked Bond ­Principles.

Pages 16 and 17 cover steps and considerations to be taken when proceeding with the issuance of your first sustainable bond.

Finally, pages 18 and 19 touch briefly upon the EU Green Bond ­Standard (EUGBS).

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What’s the difference between use-of-proceeds sustainable bonds and sustainability-linked bonds

Sustainable bonds can broadly be ­categorised as either ­use-of-proceeds sustainable bonds or sustainability-­ linked bonds (SLBs)

Use-of-proceeds sustainable bonds A use-of-proceeds sustainable bond is a debt instrument (bond).

Use-of-proceeds sustainable bonds promote companies to contribute to sustainability by directing the proceeds from the bond directly

towards financing activities with dedicated environmental and/or social benefits.The relevant sustainable assets/projects that can be financed by the sustainable bond are determined by the issuer.

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Sustainability-linked bonds A sustainability-linked bond (SLB) is a debt instrument (bond) where the proceeds of the bond may be used by the business for general corporate purposes. Accordingly, the proceeds do not need to be directed towards or applied to specific sustainable assets/projects.

SLBs promote companies to contribute to sustainability from an environmental, social and/ or governance (ESG) perspective by way of the financial and/or structural characteristics of the SLB, which are linked to whether the issuer meets certain predetermined ESG objectives.

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Green and social bonds The predominant type of use-of-proceeds sustainable bonds are geen bonds. The other type is social bonds. Sustainable bonds allow for the financing of both ­ green and social assets/­projects.

Sustainable bonds Green bonds

Social bonds

• Financing of assets/­projects aimed at, for example, ­renewable energy, energy efficiency, pollution prevention and control and climate change adaptation.

• Financing of projects aimed at, for example, affordable basic infrastructure, access to essential services, affordable housing and socioeconomic advancement and empowerment.

• There has been an increased focus and use of social bonds as a response to the COVID-19 pandemic.

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A deeper dive into ICMA’s Green Bond Principles.

• The International Capital Markets Association (ICMA) has developed a set of Green Bond Principles, which is a set of voluntary process guidelines for issuing green bonds.

• The ICMA Green Bond Principles are market leading when it comes to setting the standard for issuing green bonds and are considered to be the best market practice when it comes to issuance of green bonds.

• The ICMA Green Bond Principles consist of four core components and two key recommendations.

• In order for a bond to claim alignment with the ICMA Green Bond Principles, the bond should align with all four core components. The two key recommendations are voluntary, but considered of high importance in order to secure heightened transparency of the green bond.

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The four core components of ICMA’s Green Bond Principles

Use of proceeds The proceeds of green bonds must be applied to finance eligible green assets/projects.

Eligible green assets/projects ­include renewable energy, energy efficiency, pollution prevention and control, green buildings, clean transportation and climate change adaptation.

Project evaluation and selection The issuer of a green bond should clearly communicate to investors: • the sustainability objectives of the eligible green projects/assets to be financed by the green bond; and • the process by which the issuer determines how the projects/­a ssets fit within the eligible green projects/assets categories.

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Management of proceeds Money is fungible. Therefore, an amount equal to the net proceeds of the green bonds must be tracked by the issuer in order to be ­properly allocated towards the eligible green assets/projects.

The issue documentation relating to the green bonds should specify the intended placement of proceeds of the green bond that are temporarily unallocated for eligible green assets/projects.

Reporting Allocation reporting (mandatory): Annual reporting until full allocation, with the report including a list of the eligible green assets/projects to which the green bond proceeds have been allocated. ICMA Green Bond Principles encourage auditor or other third party verification.

Impact reporting (encouraged): Reporting by way of qualitative performance indicators and, where feasible, quantative performance measures. Disclosure of metho­ dology and assumptions used.

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The two key r­ ecommendations of ICMA’s Green Bond ­Principles are the establishment of a g ­ reen bond framework and having pre- and post-issuance external reviews.

Green Bond Framework • Explains the alignment of the green bond with the four core components: (i) use of proceeds, (ii) project evaluation and selection, (iii) management of proceeds and (iv) reporting.

• Sets out the issuer’s overarching sustainability strategy.

• Disclosure of any taxonomies, green standards and certifications used in the selection of eligible green assets/projects.

External Reviews • Pre-issuance: Third party appointed pre-issuance to assess the alignment of the green bond/green bond framework with the four core components of ICMA’s Green Bond Principles.

• Post-issuance: External auditor, or other third party, to verify the issuer’s internal tracking and allocation of proceeds from the green bonds towards eligible green assets/projects.

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Sustainabilitylinked bonds

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Businesses that do not have (enough) eligible green assets/­ projects to issue ­use-of-proceeds green bonds ­may instead consider issuing sustainability-linked bonds.

• Sustainability-linked bonds (SLBs) promote companies to contribute to sustainability from an environmental, ­social and/or governance (ESG) perspective and are forward-­looking instruments.

• The proceeds of a SLB issuance can be used by a business for general corporate purposes.

• The financial and/or structural characteristics of a SLB are linked to whether the issuer meets certain predetermined ESG objectives.

• The ESG objectives are (i) measured on the basis of pre-­determined key performance indicators (KPIs) and (ii) assessed against predefined sustainability performance targets (SPTs) set for each KPI. • The selected KPIs shall address environmental, social and/or governance (ESG) challenges.

• The calibration of the relevant SPTs for each of the KPIs should be ambitious and, to the extent possible, compared to a benchmark or an external reference.

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ICMA has also issued Sustainability-Linked Bond Principles whose guidelines contain five core components. Issuers may choose to establish a sustainability-linked financing framework explaining alignment with the five core components.

Selection of KPIs

Calibration of SPTs

Bond char

The selected KPI ­measures the issuer’s ­sustainability performance. The KPIs should be material to the issuer’s sustainability and business strategy and ­address relevant ESG challenges of the issuer’s industry and be under the control of the issuer’s management.

Sustainability performance targets (SPTs) should be set for each of the KPIs. The SPTs should be ambitious and therefore (i) represent a material improvement in the respective KPI, (ii) be compared to a benchmark or external reference, (iii) be consistent with the ­issuer’s overall strategic sustainability/ESG strategy and (iv) be determined on a predefined timeline.

The SLB’s fi or structural tics can vary whether the s reach (or not fined SPTs. T umentation sh this structure.

The KPIs should be measurable, quantifiable, ­externally verifiable and able to be benchmarked.

The setting of the SPTs should be based on benchmarking against a combination of (i) the issuer’s own performance, (ii) the ­issuer’s peers and (iii) ­science based scenarios or official country/regional/ international targets.

The most comm relates to inter on the SLB.

The bond d can include fal in case the SP calculated or o bond docume also take into potential excep in respect of t M&A activitie this should be spect of the KP

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racteristics

Reporting

Verification

inancial and/ l characterisdepending on selected KPIs t) the predeThe bond dochould cater for .

On an annual basis (at least) the issuer of a SLB should publish information on the performance of the ­selected KPIs and performance against the selected SPTs and what impact this has on the financial and/or structural characteristics of the SLB, e.g. that the margin shall be increased or decreased.

Independent and external verification should verify the performance of the relevant SPTs set for each of the KPIs. Such external review shall be conducted by an external qualified reviewer, e.g. an auditor or environmental consultant.

mon variation rest payments

documentation llback options PTs cannot be observed. The entation may consideration ptional events the ­issuer (e.g. es) and how handled in rePIs and SPTs.

The verification should be made on an annual basis (at least) and in any case for any date/period, which is relevant for assessing a potential adjustment of the financial and/or structural characteristics of the SLB. ICMA recommends that the issuer obtains a ­pre-issuance second party opinion, which confirms alignment with the five core components.

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How can I be ready to issue my first sustainable bond?

The following considerations and steps should be taken 1

2

3

Set the overall sustainability and ESG objectives and profile for the issuer.

Determine the form of the sustainable bond, i.e. use-ofproceeds or sustainability-­ linked.

Engage legal counsel and arranger to further consider the structure for the sustainable bond.

4

5

6

Define and set the eligible projects/assets that can be financed if use-of-proceeds sustainable bond or setting KPIs and SPTs if sustain­ ability-linked bond.

Consider establishing a green bond framework or a sustainability-linked financing framework, as the case may be.

Engage external reviewers to provide relevant second party opinions and verifications.

7

8

9

Internal set-up for allocation of use-of-proceeds or monitoring the fulfillment of the KPIs/SPTs.

Draft relevant issuance docu­ mentation, e.g. bond terms and conditions, subscription agreement and investor information documentation, including relevant sustainable bonds risk factors.

Make sure that everything is in place for the issuer to be able to comply with relevant and applicable post-issuance reporting.

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Listing Should the bond be listed – e.g. on Nasdaq Sustainable Market?

Questions and considerations The ”usual” questions and considerations when issuing a conventional bond must also be considered when issuing sustainable bonds

Target market What is the target market for the sustainable bond?

Only eligible counterparties and professional investors or also retail investors?

Terms and conditions Tenor, early redemption, bondholders’ representative, event of defaults, etc.

Interest structure Floating rate, fixed rate or fixed to floating (reset) and what about reference rate replacement?

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What about the new EU Green Bond Standard?

Does it makes sense to issue sustainable bonds now under ICMA’s Green Bond or Sustainability-­Linked Principles?

Or should you await the entry into force of the EU Green Bond Standard (EUGBS)?

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Why is it still relevant to ­c onsider ­issuing of sustainable bonds under ICMA’s Green Bond Principles or ­Sustainability-Linked Bond Principles?

In July 2021, the ­European Commission adopted its strategy for financing the transition to a sustain­able economy. The strategy includes, among other things, the proposal for a new European Green Bond ­Standard (EUGBS) set out in the Regulation on European Green Bonds.

The EUGBS will be based on ­ICMA’s Green Bond ­Principles, but will also go further in certain key ­aspects, including by requiring full alignment of funded assets/projects with the EU ­Taxonomy Regulation.

• The Regulation on European Green Bonds is still subject to the EU legislative ­procedure.

• The Regulation on European Green Bonds will only provide for the issuance of use-ofproceeds green bonds. Accordingly, sustainability-linked bonds and social bonds would still need to be issued under ICMA’s relevant guidelines.

• Green bonds issued under ICMA’s Green Bond Principles ­before the entry into force of the Regulation on European Green Bonds may contain various transition mechanisms in the bond documentation that would allow for that ICMA Green Bond to subsequently become a EUGBS when the Regulation on European Green Bonds is in place.

• One issuer has however chosen to align its green bond with the draft form of the EUGBS.

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We hope that this guide to issuing sustain­able bonds has generated ­interest and answered some of your immediate questions and considerations relating to the issuance of such instrument for financing the sustain­ able transition of your business.

Should you have any questions or if you wish to consider or discuss your options in relation to issuing sustain­ able bonds ­please do not hesitate to contact us by phone or email.

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Contact Michael Steen Jensen Partner

D +45 33 41 41 96 | M +45 24 41 67 86 msj@gorrissenfederspiel.com

Tobias Linde Partner

D +45 33 41 41 61 | M +45 24 28 68 26 tl@gorrissenfederspiel.com

Morten Nybom Bethe Partner

D +45 33 41 41 14 | M +45 40 31 89 42 mnb@gorrissenfederspiel.com

Tina Herbing Partner

D +45 33 41 41 48 | M +45 24 28 68 15 the@gorrissenfederspiel.com

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