ICMA - new principles for sustainability-linked bonds

On 9 June 2020, ICMA released the new Sustainability-Linked Bond Principles (the SLPs) a set of voluntary guidelines which recommend structuring features, reporting and disclosure and outline best practice for issuers of sustainability-linked bonds. The SLPs build on already developed  sustainability-linked loan market but with some improvements. The SLPs set out five core components in order to promote a clear process and transparent commitments for all issuers and allow all market participants to understand the structure of the sustainability-linked bonds.

What are Sustainability-Linked Bonds?

Sustainability-linked bonds ("SLBs") are bond instruments where the financial and/or structural features are linked to the achievement of certain sustainability/ESG objectives within a predefined timeline. The objectives are measured against agreed KPIs and assessed against pre-defined sustainability performance targets. 

Unlike Green, Social and Sustainability Bonds, (i) the financial and/or structural characteristics of Sustainability-Linked Bonds depend on whether the issuer achieves the predefined Sustainability Performance Targets, and (ii) the proceeds of the Sustainability-Linked Bonds are used for general purposes rather than for financing underlying projects (issuers however may choose to combine Sustainability-Linked Bonds with existing ICMA's principles/guidelines on Green, Social and Sustainable bonds and apply the proceeds of the SLBs towards the financing of sustainable projects).


Following the last Green & Social Bond Principles annual general meeting held on 9 June 2020, ICMA released the Sustainability-Linked Bond Principles. The SLPs are voluntary guidelines with the intention that they will assist the market to continue to mobilise capital towards SLBs by clarifying features required for the issuance of credible instruments, increasing accountability and setting standards to allow all market participants to understand the structure of the SLBs through the following five core components:

  1.  Selection of Key Performance Indicators ("KPIs")

The SLPs emphasises that the credibility and success of the SLB market itself rests on the need for credible KPIs. The KPIs should:

(i)         be material to the issuer’s core sustainability and present and future business strategy;

(ii)        address relevant environmental, social and/or governance challenges of the industry sector;

(iii)        be under management’s control;

(iv)       be measurable or quantifiable and externally verifiable; and

(v)        be able to be benchmarked to facilitate the assessment of the SPT's level of ambition. In addition to the above, the SLPs recommend that:

  • investors should be enabled to measure historical performance of KPIs by issuers selecting ones that have previously been included in annual financial reports or externally verified KPI values for the past 3 years;
  • issuers should disclose the rationale behind KPI selection; and
  • KPI definitions should include scope and perimeter of KPIs, calculation methodology,   
  1. Calibration of Sustainability Performance Targets

The process of calibration of the Sustainability Performance Targets is the expression of the commitment of the issuer to achieving the sustainability targets. SPTs should be set in good faith and the issuers should  disclose any strategic information which may affect the achievement of the Sustainability Performance Targets. SPTs should be "ambitious" (i.e. shall be (i) beyond a "business as usual" trajectory; (ii) where possible, compared to a benchmark or external reference; (iii) consistent with the issuer's sustainability/ESG strategy; and (iv) determined on a predefined timeline set before (or concurrently with) the issuance of the Sustainability-Linked Bonds).

The SPTs should be based on a number of benchmarking approaches including the issuer's own performance and that of its peers and reference to science, technology and country, region and/or international targets.

The SLPs set out clear and detailed guidance in respect of disclosure requirements.  Disclosure of SPTs should make clear reference to timelines for target achievement, selection and rationale for baseline KPIs (including conditions leading to any recalculation of that baseline), external factors affecting the SPTs and, subject to completion and confidentiality, the issuer's strategy and plans to achieve the SPTs.

  1.  Bond characteristics

The structure of Sustainability-Linked Bonds will vary depending on whether the selected KPI(s) reach (or not) the predefined Sustainability Performance Targets: variability of the coupon during the bond's life is the most common example of this structure, but there are also other financial features of Sustainability-Linked Bonds that issuers may link to the achievement of the Sustainability Performance Targets.

The definition of both the KPI(s) and the Sustainability Performance Targets (including the relevant calculation methodologies) and also the potential variability of certain features of the Sustainability-Linked Bonds are all necessary elements of the bond documentation.

  1. Reporting

Issuers of Sustainability-Linked Bonds should publish, and keep readily available and easily accessible:

(i)         up-to-date information on the performance of the selected KPI(s);

(ii)        a verification assurance report relating to the Sustainability Performance Targets outlining the performance against such targets and the relevant impact (including in terms of timing) on the bond’s financial structure; and

(iii)        any information enabling investors to monitor the level of ambition of the Sustainability Performace Targes (e.g., any update in the issuers sustainability strategy or on the related KPI/ESG governance, and more generally any information relevant to the analysis of the KPIs and Sustainability Performance Targets).

The report should be published regularly, at least annually, and in any case for any date/period relevant for assessing the performance of the Sustainability Performance Targets which may require a potential adjustment to the structure of the Sustainability-Linked Bonds.

  1. Verification.

Issuers should seek independent and external verification of their performance against the Sustainability Performance Targets for each KPI. Such verification should be carried out by a qualified external reviewer with relevant expertise at least once a year - and in any case as required for any period relevant for assessing the performance of the relevant Sustainability Performance Targets. The verification of the performance against the Sustainability Performance Targets should be made publicly available.

As opposed to the pre-issuance external review (such as a second party opinion), which is only recommended, post-issuance verification is a necessary element of the Sustainability-Linked Principles.. Where no second party opinion is obtained, it is recommended that issuers demonstrate or develop the internal expertise to verify their own verification methodologies.

A number of transparency measures are specified throughout the SLPs and a checklist of recommended or necessary pre- and post-issuance disclosures is provided as an annex to the Sustainability-Linked Principles.


In September 2019, Enel Finance International NV (Enel Finance), a subsidiary of the Italian energy group Ene l, issued the first-ever Sustainability-Linked Bond. The new structure was well received by the market, with the deal being oversubscribed by almost three times.  

This is an encouraging start and seems to confirm that investors are increasingly seeking exposure to companies that perform well against clear measurable sustainability KPIs.  Well-designed SLPs should offer investors a way of investing in such entities at pricing levels that reflect the reduced risk that comes with increased sustainability whilst providing some protection against failure to meet those KPIs. The ultimate success of this new form of bonds will depend on issuances being well designed to meaningfully refect that risk analysis.



Authored by Andrew Carey, Sukhvir Basran and Annalisa Feliciani.

Andrew Carey
Senior Counsel


This website is operated by Hogan Lovells International LLP, whose registered office is at Atlantic House, Holborn Viaduct, London, EC1A 2FG. For further details of Hogan Lovells International LLP and the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses ("Hogan Lovells"), please see our Legal Notices page. © 2022 Hogan Lovells.

Attorney advertising. Prior results do not guarantee a similar outcome.