Top 5 components of sustainability-linked financings
In a sustainability-linked financing, whether in the form of bonds or loans, the financial or structural characteristics of the financing (e.g. the interest rate) can vary depending on whether the issuer/borrower achieves its Sustainable Performance Targets (SPTs) for selected KPIs. Sustainability-Linked Derivatives (SLDs) are also developing.
Unlike for use-of-proceeds financings (Green Bonds/Loans, Social Bonds/Loans and Sustainable Bonds/Loans), the use of proceeds is not a determining factor in sustainability-linked financings: the funds may be used for general corporate purposes of the borrower.
The 5 Key Components of any sustainability-linked financing are as follows:
- Selection of KPI(s): KPIs must be selected in light of their materiality to the issuer/borrower’s sustainability and business strategy; they should be consistent with the issuer/borrower’s overall sustainability strategy or policies, but also reflect the most material strategic dimensions for the issuer/borrower; their definition and method of calculation must ensure that they are measurable and externally verifiable; and they should be under management’s control
- Calibration of SPT(s): the issuer/borrower must commit to achieving, on predetermined dates, ambitious targets for the selected KPIs, calibrated to demonstrate a material improvement in the KPI beyond a “business as usual” trajectory
- Impact on the financial and/or structural characteristics: whether or not the selected KPIs are met, the predefined SPTs must have an impact on the financing; this may be a step-down of the coupon/margin if the SPTs are met, or a step-up – or payment of a premium – if they are not met; the variation of other structural characteristics may be considered; the impact should be meaningful to incentivise the issuer/borrower
- Reporting: the issuer/borrower must report, at least annually (and more frequently if the documentation so provides), on its performance for the selected KPIs and whether or not the SPTs are met
- External verification: the issuer/borrower must appoint an independent expert to provide an external verification of the issuer/borrower’s performance against the SPT set for each KPI; the verification report is recommended to be made public.
EuGB Regulation (2023/2631)
Sustainability-linked bond means a bond whose financial or structural characteristics vary depending on the achievement by the issuer of predefined environmental sustainability objectives.
Pre-issuance disclosure – on 16 April 2025, the European Commission adopted a communication establishing non-binding guidelines for pre-issuance disclosure templates for issuers of bonds marketed as environmentally sustainable or SLBs (official publication will follow after the end of the scrutiny period).
Post-issuance disclosure – issuers of bonds marketed as environmentally sustainable and of SLBs may make periodic post-issuance disclosures using common templates. The European Commission published a draft delegated act on 17 December 2024 to supplement the EuGB Regulation by setting out the content, methodologies and presentation of the information to be disclosed in the templates. It should be adopted by the Commission in the first quarter of 2025.
CRR (575-2013)
In-scope large, publicly listed credit institutions and investment firms are subject to prudential reporting requirements (e.g. activities negatively affecting biodiversity, exposure of the institution to sectors potentially impacted by transition risk, etc.) (Article 449a of CRR).
Taxonomy Regulation (Regulation (EU) 2020/852)
The six environmental objectives of the Taxonomy Regulation can be used as a reference for the selection of KPIs: (i) climate change mitigation, (ii) climate change adaptation, (iii) sustainable use and protection of water and marine resources, (iv) transition to a circular economy, (v) pollution prevention and control and (vi) protection and restoration of biodiversity and ecosystems.
NFRD (2014/95/EU)
Eligible large corporates have to report on the share of their Taxonomy-eligible and Taxonomy-aligned activities (Article 19a of the Accounting Directive (2013/34/EU) as amended by NFRD). These reporting obligations will be further enhanced under the new CSRD (2022/2464) which is to enter into force on 1 January 2024, enlarging the scope of corporates subject to such obligations, providing ESRS for harmonization and improving reporting to stakeholders (Article 19a of the Accounting Directive as amended by CSRD).
SFDR (2019/2088)
Financial companies must report if and how they measure the adverse impact of investment decisions on sustainability factors, using various metrics (e.g. GHG intensity of investee companies, exposure to companies active in fossil fuels, activities negatively affecting biodiversity, etc.) (Article 4 of SFDR).
