Updates to the Sustainability-Linked Bond Principles and Illustrative KPIs Registry

The International Capital Market Association (ICMA) has recently updated the Sustainability-Linked Bond Principles (SLBP) and the Illustrative KPIs Registry (the "KPIs Registry"), which provides high-level recommendations as well as illustrative examples for the selection of Key Performance Indicators (KPIs) for Sustainability-Linked Bonds (SLBs).

The main changes to the SLBP, published in June 2024, include:

• clarifications to the existing guidelines on the selection and relevance of KPIs, and
• additions to the Sustainability-Linked Bonds Disclosure data checklist included in appendix II of the SLBPs.
  

Clarifications to the existing guidelines on the selection and relevance of KPIs

The SLBPs recommend that KPIs should be:

• relevant, core and material to the corporate 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; and
• able to be benchmarked.

The 2024 revised version of the SLBPs also add that KPIS need to be “consistent with the overall issuer’s sustainability strategy or policies but also reflecting the most material strategic dimensions for the issuer; for example, the KPI may be included in or supported by a strategy/policy disclosure, or notably for hard-to-abate sectors, by a transition plan”.

These additional guidelines reinforce the prevailing market concept that SLBs should be utilized within the broader context of an issuer's overall sustainability strategy.

Additions to the SLB Disclosure data checklist (Appendix II)

Appendix II of the SLBPs outlines necessary disclosures for SLB issuers. The updated Appendix includes the provision for a backup mechanism if KPIs cannot be satisfactorily calculated or observed, and the need for these to be reflected in any recalculation policy. The update also incorporates market practices for callable bonds, requiring issuers to disclose details to determine the implications for coupon variations, including, the redemption price if SPT is not measured or not met and optional redemption dates.

KPIs Registry

The KPI Registry includes generic and sector specific KPIs, categorized into core and secondary based on their materiality and benchmarkability. 

The KPI Registry covers various sectors, such as Banking/Brokerage, Utilities, Automotive, Aviation, Construction, Consumer Goods, Energy, Food & Agri, Healthcare, Insurance, Maritime, Technology, Telecom, and Transportation. The KPI Registry also provides a curated list of over 50 sovereign KPIs, inspired by the World Bank and other public domain sources, that address a wide range of development and sustainability themes and are aligned with the Sustainable Development Goals (SDGs).

The June 2024 edition of the KPI Registry adds new KPIs. The majority of the newly added KPIs align with EU objectives such as the protection and restoration of biodiversity and ecosystems, the transition to a circular economy, and the sustainable usage and protection of water and marine resources. This reflects the growing investor interest in these areas and the broadening scope of sustainable finance objectives beyond merely climate change mitigation.

Glossary

Sustainability-Linked Bonds (SLBs) are any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined Sustainability/ESG objectives. Those objectives are (i) measured through predefined Key Performance Indicators and (ii) assessed against predefined Sustainability Performance Targets.

Key Performance Indicators (KPIs) are quantifiable metrics used to measure the performance of selected indicators.

Sustainability Performance Targets (SPTs) are measurable improvements in KPIs on to which issuers commit with a predefined timeline.

The Sustainability-Linked Bond Principles (SLBP) are a set of voluntary guidelines that outline best practices for financial instruments using the SLB label and aim at promoting integrity in the development of the SLB market by clarifying the approach for issuance of a SLB.

The Illustrative KPIs registry has the objective to provide some guidance with a thematic lens. It includes high-level recommendations as well as illustrative examples for the selection of KPIs for SLBs.

Core KPIs are material, relatively mature and holistic enough, can in principle be used as a standalone. Core KPIs have been limited to a couple per sector.

Secondary KPIs whilst desirable and necessary, the KPI is subject to important limitations and cannot be used in standalone. For example, secondary KPIs are therefore suggested to be used only as part of a basket as long as they would effectively add up to the equivalent of a core KPI.