Structuring a sustainable use-of-proceeds debt instrument

14 January 2021

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With investors, customers, regulators and the wider public – sensitised by treaties such as the Paris Agreement or the Sustainable Development Goals (SDGs) – increasingly expecting companies to align their business model and practices with environmental, social and governance (ESG) criteria, companies are acknowledging that change is in the air and that their sustainability journey will entail a series of projects which will require funding – capital that can, if done correctly, be more easily raised from ESG investors and is often more competitively priced in the sustainable finance markets.  

Apart from the financial aspect, becoming an issuer of green, social or sustainability bonds, or of any other similar product, can act as a “loudspeaker” for a company, publicly announcing to the markets that it is ready to develop responsible business strategies that are aligned with its corporate purpose and strategy. Furthermore, first time issuers have experienced that entering the sustainable finance market, which requires some additional preparations in comparison to traditional bonds, have also helped to improve the internal awareness of sustainability.[1]

While there’s no restriction on the type of company that can issue green or social bonds – with a number of recent issuances stemming from corporates in “hard to abate” sectors underlining that every business can and must make a start towards sustainability – finance teams will want to look first at what exactly it entails to tap into the sustainable finance market for raising capital before they make their decision.

This article introduces the typical issuance process for green, social and sustainability bonds; also known as use-of-proceeds bonds to distinguish them from general corporate purposes bonds, which we discuss in our next article.

Jargon Buster

GBP: The Green Bonds Principles (GBP) are voluntary process guidelines that recommend transparency and disclosure, and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond. The GBP are intended for broad use by the market: they provide issuers with guidance on the key components involved in launching a credible Green Bond; they aid investors by ensuring the availability of information necessary to evaluate the environmental impact of their Green Bond investments; and they assist underwriters by moving the market towards standard disclosures which will facilitate transactions.

SBP: The Social Bonds Principles (SBP) promote integrity in the Social Bond market through guidelines that recommend transparency, disclosure and reporting. They are intended for use by market participants and are designed to drive the provision of information needed to increase capital allocation to social projects.

ICMA: The International Capital Markets Association (ICMA) brings together over 600 members from all sectors of the wholesale and retail debt securities markets in 62 countries to inform its work on regulatory and market practice issues, which impact all aspects of international market functioning.

Sustainable debt issuance: key steps of the process

Finance teams will quickly find that the process for their inaugural issuance of a green, social or sustainable use-of-proceeds debt instrument – bonds or loans, where the proceeds will be exclusively applied to eligible environmental and/or social projects – isn’t so different from that of a regular bond.

However, selecting the underlying projects for such issuances and producing the accompanying documentation, requires additional manpower. But help is at hand: Banks, in their roles as lead arrangers or bookrunners, as well as other consultants can guide issuers along every step of the process pre issuance, which typically includes the following steps:

  1. Selecting the green, social or sustainability projects and describing the use of proceeds
  2. Writing a bond framework
  3. Selecting a second party opinion provider
  4. Updating the bond prospectus
  5. Marketing the issuance

Following we look at each step in more detail.

High level process and timeline for Green, Social & Sustainability (GSS) Use of Proceeds bond:

  1. Describing the use of proceeds and selecting the green/social or sustainability projects

ICMA’s “The Green Bond Principles” (GBP)[2] and “The Social Bond Principles” (SBP)[3] have gone a long way in helping issuers by clarifying for which green/social or sustainability projects the bonds proceeds can be used and how these projects should be selected.

With regards to the use of proceeds, the GBP recommend that all designated green project categories should provide clear environmental benefits, which will be assessed and, where feasible, quantified by the issuer. The GBP explicitly recognise several broad categories of eligibility for green projects, which contribute to environmental objectives such as: climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention and control. Commonly used types of projects to achieve these objectives include for example: renewable energy (production, transmission, appliances, products), energy efficiency (e.g. new and refurbished buildings, energy storage, district heating), pollution prevention and control (e.g. reduction of air emissions, greenhouse gas control), clean transportation, climate change adaptation and green buildings.

Similarly, the SBP advise that all designated social projects should provide clear social benefits, directly aiming to address or mitigate a specific social issue and/or seek to achieve positive social outcomes especially but not exclusively for a target population(s). In this context, the SBP describe a social issue “as an issue that threatens, hinders or damages the wellbeing of society or a specific target population”. Most commonly used types of social projects include amongst others: affordable housing, programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises, food security and sustainable food systems, and programmes for socioeconomic empowerment. Typical examples for target populations include: those living below the poverty line, people with disabilities, migrants, undereducated, underserved or unemployed populations, ethnic minorities and gender minorities.

For sustainability bonds ICMA recommends that issuers should explicitly set out how the projects for which they seek funding will help meet one or more of the 17 SDGs.

But how do issuers arrive at selecting those green, social or sustainability projects that will benefit from the proceeds of the bond issuance? A formal materiality assessment, which helps identifying the most important projects for a business, is the first step. Such an assessment can be done by asking stakeholders – for example employees, customers, public officials, regulators, investors, executives and industry experts – for feedback about what they consider to be the most important and urgent ESG issues of the issuer. In a second step, the stakeholder feedback should be overlaid with the business interests and the company’s stated values and mission in order to then formulate the projects eligible for the bonds.

In this context, the GBP and SBP outline that the issuer should communicate to investors: the environmental/social/sustainability objectives; the process by which the issuer determines how the projects fit within the eligible green/social/sustainability projects categories identified above; the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental and social risks associated with the projects.

  1. Writing the bond framework

While voluntary and not legally binding, investors today expect issuers intending to launch a green, social or sustainability bond to publish an accompanying Bond Framework. Such frameworks offer detailed information about how individual issuers specifically address the core components of the GBP and SBP.

Apart from detailed information about the use of proceeds and the project selections – as described earlier in this article – the framework also ought to include how the proceeds will be managed and how the issuers ensures regular and transparent reporting.

The GBP and SBP again provide guidance for both these aspects. With regards to the management of proceeds, the principles recommend that “the net proceeds of the green, social or sustainability 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 green/social/sustainability projects.”[4]

In the context of reporting, the GBP and SBP state: “Issuers should provide readily available up-to-date information on the use of proceeds – to be renewed annually until full allocation. The annual report should include a list of the projects to which green bond proceeds have been allocated as well as a brief description of the projects and the amounts allocated, and their expected impact.” Furthermore, the principles recommend the use of qualitative performance indicators and, where feasible, quantitative performance measures (e.g. energy capacity, electricity generation or greenhouse gas emissions for green bonds), and disclosure of the key underlying methodology and/or assumptions used in the quantitative determination. The SBP acknowledge that the reporting on social projects is a greater challenge compared to green projects, because the impact of social projects is often more qualitative than quantitative. Also, the reporting tends to be more localised and is harder to define, especially when compared to environmental issues where the carbon footprint provides for a well-understood, comparable metric. A lot more thought and analysis is therefore required to avoid ‘social washing’ situations[5].

The following chart, as one example, outlines what a Green Bond Framework should ideally include:

  1. Selecting a second party opinion provider

ICMA advises that issuers appoint an external review provider to conduct a second due diligence on whether the planned sustainable issuance and the bond framework are aligned with the four core components of the GBP and SBP.

There are a variety of external providers and services they offer, mainly differing in stringency and auditor requirements:

  • Second Party Opinion: Mainly independent organisations with deep environmental or social expertise (for example the Carbon Trust) offer a Second Party Opinion. The selected institution should be independent from the issuer’s adviser for its bond framework.
  • Verification: Issuers can obtain independent verification against a designated set of ESG criteria or against the whole set of criteria required by for example the GBP or SBP.
  • Certification: Issuers can have each of their core components of their sustainable bonds certified against a recognised external green or social standard. One such standard is the Climate Bonds Standard from the Climate Bonds Initiative (CBI)[6]. The CBI lists 45 verifier organisations, which have been approved by the Climate Bonds Standard Board to do certifications. They include consulting firms, ESG rating agencies and specialised verifiers.
  • ESG rating: Issuers can also employ the services of ESG rating agencies to assess their bond framework or key features of the bonds and subsequently provide a rating. We’ll look in detail at the dual role ESG rating agencies play for issuers and investors in the fourth article of our Sustainable Finance theme.
  1. Updating the bond prospectus – or a prospectus “make-over”

With the rise of sustainable debt issuances, investors have continued to use the prospectus of green, social or sustainability bonds as a first port of call to find information about the green or social character of such bonds. However, apart from the key features of any bond prospectus details on interest payments, time to maturity, the credit quality of the issuer, and call provisions they would find very often only a few sentences about the use of proceeds in this legal document. The reason behind this: issuers so far are separating the voluntary and non-binding green/social/sustainable bond framework from the legal documentation, the prospectus.

However, European regulators are looking to change this. The French and Dutch financial market supervisory authorities (AMF and AFM) issued an announcement last year, advocating greater green bond structural disclosure within the prospectus[7]. The position paper, which was sent to the European Commission, essentially aims at transferring more of the green information from the bond framework into the legally binding prospectus. Issuers of sustainable debt should think about pro-actively embracing this move and working on a prospectus “make-over”, which extends to including the key details from the framework.

Marketing a sustainable debt issuance

While investor roadshows have been at the core of any bond issuance marketing plan, roadshows play an even more important role for issuers – in particular first time issuers – of any kind of sustainable debt. One motivation for issuing a green, social or sustainability bond is to broaden a company’s bond investor base: roadshows can allow issuers and investors to not only discuss the specific bond offering, but to engage on deeper levels, helping investors to gain a better understanding of an issuer’s underlying business dynamics and overall sustainability strategy.

Crucial for the success of roadshows is to decide early on which investors to pursue – exclusively green or social impact investors? A wider group of ESG investors? Or include non-ESG investors, too? Bond underwriters can help guide this decision, and they will also support issuers during the roadshow, answering investors’ questions that usually arise regarding use of proceeds, implementation, and ongoing reporting of impacts and outcomes.


Corporate clients who would like to discuss this topic further should contact:

Dr Arthur Krebbers, Head of Sustainable Finance, Corporates or
Varun Sarda, Head of ESG Advisory

Read the further articles in this series:

#1: Sustainable finance – a success story of change

#2: Sustainability reporting: The story beyond the pure financials

#3: The role of ESG ratings

#4: Sustainable finance product suite flourishes

#6: Structuring a sustainable KPI-linked instrument










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