Sustainable Bonds

1. Key policy recommendations

Abstract

This chapter presents policy recommendations to inform discussions by policymakers, regulators and other market participants to further develop sustainable bond markets and safeguard the interests of bondholders. It includes recommendations on the interoperability of standards and taxonomies, the disclosure of sustainability-related metrics, the use of the proceeds of sustainable bonds for refinancing existing projects, second party opinion providers, and stewardship codes.

The development of the sustainable bond markets has been successful. Looking ahead, if funds raised through sustainable bonds are allocated to projects that generate meaningful environmental and social benefits for relatively limited costs, investors and society at large will benefit. However, the regulatory frameworks and relevant institutions must guarantee that markets work efficiently, and that the interest of investors is protected. This chapter proposes recommendations to guide the discussions by policymakers.

A. Regulatory authorities should encourage the interoperability of sustainable bond standards and taxonomies for sustainable activities, with a focus on international comparability and harmonisation between markets

Two types of frameworks are relevant for entities issuing sustainable bonds: standards and taxonomies. Standards present a series of requirements and recommendations for bonds to be classified as use‑of-proceeds bonds such as green, social and sustainability bonds or sustainability-linked bonds. Taxonomies for sustainable activities help issuers define in which projects they can invest the proceeds of “use-of-proceeds” bond issuance.

Although most issuers align their bonds with the principles developed by the ICMA, several local standards are emerging at regional or national levels. Similarly, various taxonomies are used to classify bonds as sustainable. Regulatory authorities should work with relevant standard-setters to improve the comparability of national, regional and international standards and taxonomies that govern sustainable bond issuance. This should take account of scientific evidence and broader policy objectives and recognise that taxonomies focused on the activities of official sector entities may not be easily used by the corporate sector. Any regulatory intervention should weigh costs and benefits and favour aligning standards and taxonomies with established international frameworks. The capacity of issuers and the level of economic development in a jurisdiction should be considered where flexibility could improve access to sustainable and transition finance.

B. The disclosure of sustainability-related metrics relevant to holders of sustainable bonds should be reliable, consistent, and comparable

Issuers of sustainable bonds should be required to disclose reliable, consistent and comparable metrics to ensure bondholders can assess whether proceeds have been used according to the bond contract, in the case of use‑of-proceeds bonds, and how issuers are performing against the sustainability-related targets, in the case of sustainability-linked bonds. Whenever possible, the disclosure should be prepared in accordance with internationally recognised accounting and disclosure standards, and it should be assured by an independent, competent, and qualified attestation service provider. For use‑of-proceeds bonds, investors should have access to transparent information regarding the environmental or social projects financed by their investments, rather than broader and non-project-driven purposes. Information should be disclosed annually, but less frequent disclosure may be allowed whenever the cost of collecting and disclosing the information is excessively high.

C. Standard-setters and regulatory authorities may consider the extent to which refinancing concluded projects using the proceeds of green, social and sustainability bonds should be allowed, and if so, what the appropriate disclosure practices should be

The possibility of refinancing concluded projects using proceeds of use‑of-proceeds bonds allows to differentiate between the capital raised through use‑of-proceeds bond issuances and the amount the issuer invests in new eligible projects. This may not be evident to many investors, and it can reduce the potential of the sustainable bond markets to improve the environmental and social impact of companies and official sector entities. A possible way to mitigate this issue could be to recommend issuers to disclose the planned allocation of proceeds between financing and refinancing of eligible projects in the offering documents.

D. Key service providers, such as second party opinion providers, may warrant treatment comparable to that of external auditors and credit rating agencies

A second party opinion is an assessment of whether the bond contract is aligned with a specific sustainable bond standard and/or a taxonomy for sustainable activities. Requiring a second party opinion is a common practice in the market, with 81% of sustainable bonds from the corporate sector and 69% from the official sector being assured in 2024. These service providers play a similar role to external auditors and credit rating agencies and potentially face comparable conflicts of interest. They provide services relevant to the public interest but are hired by the issuers they are meant to provide assurance to, potentially creating a conflict of interest. Specific codes of conduct, regulation or supervision for providers of second party opinions and other forms of assurance for sustainable bonds may be needed.

E. Institutions setting stewardship codes may consider adopting guidance on institutional investors acquiring sustainability-linked bonds, including the importance of analysing whether they have ambitious sustainability-related performance targets

Sustainability-linked bonds are a useful tool for aligning investors’ sustainability-related preferences with investee entities’ impact on the environment and society. Nevertheless, sustainability-linked bonds with unambitious targets function de facto as conventional bonds because they do not change the decision making process of the issuer and its consideration of sustainability-related impacts. Therefore, institutional investors may need to have their own assessment. In this context, stewardship codes serve as an important complement to regulatory requirements, encouraging institutional investors to monitor and engage with their investee companies.