Primary Market Bulletin 41

The ICMA Principles for UoP bonds are voluntary frameworks that outline best practices when issuing bonds serving social and/or environmental purposes that promote transparency and disclosure. They seek to promote integrity in the development of ESG-labelled UoP bond markets.

There are four core components to the ICMA Principles for UoP bonds:

1. Use of Proceeds: Green, Social and Sustainability Bonds are debt instruments where the proceeds (or equivalent amount) are intended to finance or re-finance, new or existing projects.
2. Process for Project Evaluation and Selection: ICMA recommends that issuers of UoP bonds communicate to investors the sustainability objectives of the eligible Green and/or Social projects.
3. Management of Proceeds: ICMA recommends that ‘the net proceeds of the [UoP] bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner, and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for eligible [Green/Social] Projects’.
4. Reporting: ICMA advocates a high level of transparency, specifically recommending that issuers should make available up to date information on the use of proceeds renewed annually until full allocation.

ICMA also articulates two key recommendations to further strengthen transparency. The first encourages issuers to align their sustainability-labelled bond issuance/programme to the four core components within the ICMA Principles for UoP bonds in a bond framework or in their legal documentation. The second invites issuers to appoint external review providers to conduct a pre-issuance external review of that alignment. Post issuance, they recommend that an issuer’s management of proceeds is supplemented by the use of an external auditor, or other third party, to verify the internal tracking and the allocation of funds from the bond proceeds to eligible projects.

The ICMA Principles for UoP bonds and other industry standards can improve the effectiveness of primary markets in several ways. They can guide companies through the process of issuing debt for specific social or environmental purposes and they can support underwriters and sponsors in the work they undertake as part of their role in supporting and providing assurance over transactions. Most importantly, they can improve the quality and type of information available to investors to inform their assessment of the environmental and/or social sustainability features of their investments.

As the current market standard, we consider that the ICMA Principles for UoP bonds’ core components and associated recommendations provide a suitable and appropriate starting point for issuers when they are preparing the documents needed for issuing green bonds and other UoP debt instruments.

With the growth of ESG-labelled debt, we have seen examples of green bond frameworks in which the issuer advertises certain outcomes and makes certain commitments, especially around the allocation of the proceeds of the bond and the governance around the allocation of such proceeds. The frameworks also typically advertise the issuer’s intention to seek independent review, assurance and verification, and publish a report on the impact of the activities and projects that have been funded through those proceeds.

These aspects include the first component of ICMA’s GBP and SBP referred to above, which notes that:

‘The cornerstone of a [Green/Social] Bond is the utilisation of the proceeds of the bond for eligible [Green/Social] Projects, which should be appropriately described in the legal documentation of the security.’

This is further elaborated in the key recommendations:

‘Issuers should explain the alignment of their [Green/Social] Bond or [Green/Social] Bond programme with the four core components of the [GBP/SBP] (i.e., Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds and Reporting) in a [Green/Social] Bond Framework or in their legal documentation. Such [Green/Social] Bond Framework and/or legal documentation should be available in a readily accessible format to investors.’

Where bond frameworks form part of a communication that relates to an offer or admission of securities, they are likely to be advertisements for the purposes of the prospectus regime, so must comply with the Prospectus Regulation and the Prospectus RTS Regulation.

Occasionally, the language used in green, social and sustainability bond frameworks could be considered more definitive than the relevant sections in the prospectus. In particular, on matters that are likely to be important to certain investors such as the use of proceeds. We are concerned that investors may form expectations based on bond frameworks and other marketing materials instead of relying on the contractual terms of the issuance and associated disclosures included in the prospectus.

Investors with specific mandates or pursuing certain sustainability strategies may consider that a failure of the issuer to achieve some of the outcomes advertised in the bond framework could have material implications on their investment. Given the requirements that apply to communications that amount to advertisements, investors would expect the language of such a communication to be consistent with the disclosures in the prospectus.

Our limited analysis has revealed that, in some circumstances, while prospectus disclosure clearly states an issuer is not obligated to use the proceeds in a specific manner, accompanying documents imply a stronger commitment.

More carefully crafted language may therefore be appropriate within bond frameworks to make clear to investors and other stakeholders which actions the issuer is contractually bound to, in contrast to those actions which it aspires to achieve but has not made contractually binding.

We are monitoring activities in this area and will consider whether to take further action to better understand how pervasive this is and whether an additional regulatory response is necessary.

Existing requirements regarding advertisements and prospectuses can be found at:

• The Prospectus Regulation: Art. 2(k), Art. 22,
• Prospectus RTS Regulation: Art. 14(1), Art. 15(1) and (3), Art. 16
• PRR: 3.3
• TN 604.2.

When considering green, social or sustainability bond frameworks that fall within the scope of the Prospectus Regulation’s requirements on advertisements, we would draw issuers’ attention to a number of points:

• Advertisements must be clearly recognisable as such. (Prospectus Regulation Art 22.3)
• Information in the advertisement must not be inaccurate, or misleading. (Prospectus Regulation Art 22.3)
• Advertisements must state that a prospectus has been or will be published and indicate where investors are or will be able to obtain it. (Prospectus Regulation 22.2)
• Information in the advertisement must be consistent with the information contained in the prospectus, if already published, or with the information required to be in the prospectus, if the prospectus is published afterwards. (Prospectus Regulation Art 22.3)
• An advertisement disseminated to potential retail investors must also contain the word “advertisement” in a prominent manner, and a recommendation that potential investors read the prospectus before making an investment decision, where the advertisement contains a reference to a prospectus approved by the FCA. (Article 14(1) of the Prospectus RTS Regulation)
• All information concerning an offer or an admission to trading disclosed in an oral or written form (even if not for advertising purposes), must be consistent with that contained in the prospectus. (Prospectus Regulation Art 22.4)
• Such information must not contradict the information in the prospectus, or present the information in the prospectus in a materially unbalanced way; or contain alternative performance measures unless they are contained in the prospectus. (Prospectus RTS Regulation, Art 16)