ICMA updates to the Guidance Handbook

On 29 November 2023, the International Capital Market Association (ICMA) and the Executive Committee of the Principles published an updated edition of the Guidance Handbook. The Guidance Handbook, first published in 2019, complements the Green Bond Principles, Social Bond Principles, Sustainability Bond Guidelines and Sustainability-Linked Bond Principles (together, the Principles) providing additional information to market participants on how to interpret the Principles as well as giving more detail on practical application for transactions. 

The main updates relate to additional guidance on use of proceeds for green, social or sustainability bonds (GSS Bonds). The Guidance Handbook now includes additional Q&A for issuers intending to allocate proceeds of a GSS Bond towards investment in pure play companies (i.e., companies that are primarily involved in environmental and/or socially sustainable activities) or fund investment in pure play companies and/or eligible projects.  

Such investments may qualify as use of proceeds for a GSS Bond provided the issuance follows the core components of the Green Bond Principles or Social Bond Principles in addition to the key recommendations where possible, but noting that funds that invest in GSS Bonds should not typically qualify as use of proceeds for GSS Bonds given concerns around double-counting the impact of the same underlying project(s). Guidance is also provided on likely investor expectations regarding evidence and disclosure sufficient to discern how such investments are expected to lead to a meaningful impact. 

There is also a new Q&A addressing GSS Bonds claiming to fund the net asset value of a project instead of capital expenditure or operating expenditure - here the guidance cautions that investors will typically expect that issuers allocate and report on amounts which represent actual cash outflows and provides examples of possible real estate investment trust expenditures.   

New guidance on relabelling a bond as a GSS Bond post-issuance highlights the challenges with this approach given the pre and post issuance processes and disclosures required for a GSS Bond aligned with the core components of the Principles. Additional guidance is then provided for issuers seeking to follow this approach, including around demonstrating, at the time of relabelling, sufficient eligible assets to cover an amount equal to the original bond’s net proceeds and demonstrating how the issuance fits within the issuer’s ESG strategy and clarifying the applicability of its GSS Bond framework. The guidance concludes that given such challenges, post-issuance relabelling is to be viewed as uncommon, and cautions issuers considering retroactive relabelling to be mindful that some investors, indices, exchanges and market data providers may not recognise relabelled bonds as GSS Bonds.   

Finally, additional guidance is included around impact reporting (and the use of actual and/or estimated impacts) and the requirement for social projects to identify a target population under the Social Bond Principles, noting that for broad social issues that affect the general population, the target population could in fact be the entire population (though highlighting additional disclosures expected where this is the case).  

The updated Guidance Handbook also incorporates Q&A previously published on a stand-alone basis relating to securitisations (Chapter 3); Sustainability-Linked Bonds (Chapter 4) and pandemic or social projects to support fragile and conflict states (Chapter 8). 

The new Q&A provide more granular guidance, particularly in relation to use of proceeds for GSS Bonds aligned with the Principles, which is indicative of the increasingly diverse range of issuers exploring this market. 

With the EU Green Bond Regulation now scheduled to apply from 21 December 2024 (following publication in the Official Journal last week) this updated publication is an example of the Principles continuing to develop their suite of materials in this still nascent market, to support the integrity and robustness of the wider ESG bond market. For more detail on the EU Green Bond Regulation, see our earlier blog post and our podcast series.