June 2020 
| 1 
 
 
Clifford Chance
SUSTAINABILITY-LINKED BONDS – 
MAKING SENSE OF SLBs, KPIs AND 
SPTs  
 
On 9 June, the International Capital Market Association 
(ICMA) published the Sustainability-Linked Bond Principles 
(the Principles), a set of voluntary guidelines aimed at 
fostering the development of a sustainability-linked bond 
(SLB) market.  
SLBs are "any type of bond instrument for which the financial and/or structural 
characteristics can vary depending on whether the issuer achieves predefined 
sustainability/ESG objectives" – the typical example would be a change in 
interest rate depending on whether a target sustainability key performance 
indicator (KPI) is met. 
Sustainability-linked loans are already commonplace – that market is 
estimated to have reached USD122 billion in 20191. The intent is to replicate 
that growth in the public bond markets. The Principles aim to provide issuers 
with guidance on how best to issue an SLB whilst ensuring that investors are 
provided with adequate information. At the same time, the Principles look to 
assist underwriters by moving the market towards standardised approaches to 
structuring and disclosure. 
We take a look at the basics of the Principles and how they might be used. In 
addition, we discuss some of the points issuers and underwriters should 
consider when bringing this product to market. 
The basics 
The Principles have five core components:  
1. Selection of Key Performance Indicators (KPIs)  
As a first step, an issuer will need to select the KPI (or KPIs) it wants to use. 
The Principles note the importance of the selected KPIs being "credible". That 
is KPIs should be "material to the issuer’s core sustainability and business 
strategy and address relevant environmental, social and/or governance 
challenges of the industry sector and be under management’s control".  
In addition, KPIs should be:  
• 
relevant, core and material to the issuer’s overall business, and of 
high strategic significance to the issuer’s current and/or future 
operations;  
• 
measurable or quantifiable on a consistent methodological basis;  
 
1 Bloomberg New Energy Finance 
Key issues 
• 
Sustainability-linked loans are 
now a mainstream product. The 
aim is that SLBs will be too 
• 
5 core components – credible 
Key Performance Indicators 
(KPIs), ambitious Sustainability 
Performance Targets (SPTs), 
meaningful changes in bond 
characteristics, verification and 
reporting 
• 
May be particularly useful for 
issuers that want to demonstrate 
ESG commitments but are less 
able to issue a "use of proceeds" 
bond 
• 
Careful consideration of 
disclosure, drafting and 
sustainability impact will be 
essential  
• 
Part of a growing trend for new 
capital markets products in 
sustainable finance, such as 
transition bonds, ESG labelled 
programmes and, soon, the new 
EU Green Bond Standard

SUSTAINABILITY-LINKED BONDS – MAKING
SENSE OF SLBS, KPIS AND SPTS
 
 
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 June 2020 
 
Clifford Chance 
• 
externally verifiable; and  
• 
able to be benchmarked using external reference or definitions to 
facilitate the assessment of the SPT’s level of ambition. 
Various KPIs have been used in the loan market including greenhouse gas 
emissions, ESG ratings, water and energy consumption, proportion of 
renewable energy production, carbon footprint, solid waste sent to landfill and 
gender equality measures such as percentage of women in senior 
management roles. The key point is that the KPI should matter not only to the 
issuer's business but also to wider society. 
2. Calibration of Sustainability Performance Targets (SPTs)  
Once a KPI has been chosen, an appropriate target level needs to be 
calibrated. The Principles state that SPTs should be "ambitious". That is: 
• 
represent a material improvement in the respective KPIs and be 
beyond a “Business as Usual” trajectory; 
• 
where possible be compared to a benchmark or an external 
reference;  
• 
be consistent with the issuers’ overall strategic sustainability/ESG 
strategy; and 
• 
be determined on a predefined timeline, set before (or concurrently 
with) the issuance of the bond. 
It is recommended (although not required) that an issuer appoints an external 
review provider confirming the alignment of the bond with the five core 
components of the Principles. External reviewers are encouraged to disclose 
their credentials and relevant expertise and communicate clearly the scope of 
the review conducted. The Principles point to ICMA's Voluntary Guidelines for 
External Reviews which have been developed to promote best practice in this 
area. 
3. Bond characteristics  
The defining feature of an SLB is that the financial or structural characteristics 
of the bond vary depending on whether the selected SPT is reached. As 
mentioned above, variation in interest rate is likely to be the most common 
example but the Principles stress that other structural features could be 
considered. We have, for example, seen some loans that require a 
sustainability premium to be paid into a specific account used by the borrower 
only for ESG-specific purposes - thus avoiding the potentially challenging 
outcome that lenders benefit from a borrower’s failure to meet sustainability 
targets, and directing additional funds to  improve the borrower's sustainability 
performance. Alternative structures could include prepayment events or an 
undertaking to put a corrective action plan in place to remedy the failure to hit 
the SPT. 
According to the Principles the variation in the bond terms should be 
"meaningful" relative to the original characteristics of the bond. In our previous 
article The Rise of Sustainability-Linked Loans, we cited 2.5 to 3 basis point 
variations as common in investment grade loans, albeit with examples of 
larger redeterminations. The only public sustainability-linked bond to date, 
issued by the Italian energy company, ENEL, featured a larger step-up of 25 
basis points.  
4. Reporting

SUSTAINABILITY-LINKED BONDS – MAKING 
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Clifford Chance
Issuers of SLBs should publish and keep available and accessible:  
• 
up-to-date information on the performance of the selected KPI(s), 
including baselines where relevant;  
• 
a verification assurance report relative to the SPT outlining the 
performance against the SPTs and the related impact, and timing of 
such impact, on the bond’s financial and/or structural characteristics; 
and  
• 
any information enabling investors to monitor the level of ambition of 
the SPTs (e.g. any update in the issuer's sustainability strategy or on 
the related KPI/ESG governance, and more generally any information 
relevant to the analysis of the KPIs and SPTs).  
Reporting should be at least annual and for any date or period relevant for 
assessing whether a particular SPT has been reached. 
5. Verification  
Whilst a second party opinion on alignment with the Principles is not 
mandatory (albeit something we would expect the majority of issuers to 
obtain), the Principles do require independent and external verification of the 
performance of the issuer against each specified SPT.  
Again, this should be done at least once a year and for any date or period 
relevant for assessing whether a particular SPT has been reached. It should 
be carried out by a qualified external reviewer with relevant expertise, typically 
an auditor or environmental consultant. 
A few points to consider… 
A welcome development but with some added complexity 
We have seen considerable interest in sustainability-linked financings and the 
publication of the Principles is a welcome development. For many issuers, the 
Principles will provide legitimacy to the product and enable them to participate 
in the market with increased confidence. SLBs are likely to be attractive for 
issuers that want to demonstrate their commitment to sustainable finance but 
do not have sufficient green or social projects to underpin the issuance of a 
green, social or sustainability "use of proceeds" bond. 
In addition, as there is no exhaustive list of KPIs that can be used, issuers 
have relatively free rein to use KPIs that fit their specific sustainability and 
business strategy. The Technical Expert Group on Sustainable Finance have 
suggested that KPIs could be linked to an improvement of the share of EU 
Taxonomy-aligned activities – a potentially attractive proposition for Issuers 
looking to demonstrate their commitment to sustainability within a regulated 
framework. Certainly, we have seen increasingly bespoke and inventive KPIs 
used in the sustainability-linked loan market. 
The additional structural complexity is, however, likely to lead to additional 
preparation time and some increase in costs. This may be little more than 
faced by issuers on standard sustainable "use of proceeds" financings, but 
issuers will have a new counterparty to negotiate with in the provider of 
verification reports, additional drafting to consider and further reporting 
requirements.  
Issuers and their advisers should also be alert to the fact that novel structures 
may lead to new technical and legal points to consider. It is not clear that the 
variable coupon step structures envisaged by the Principles will be treated as

SUSTAINABILITY-LINKED BONDS – MAKING
SENSE OF SLBS, KPIS AND SPTS
 
 
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 June 2020 
 
Clifford Chance 
eligible collateral by the ECB under current eligibility frameworks. That would 
prevent issuances from participation in initiatives such as the ECBs Corporate 
Sector Purchase Programme or Pandemic Emergency Purchase Programme. 
Similarly, SLBs may not satisfy the requirements of regional incentive 
schemes such as the Hong Kong Green Bond Grant Scheme or Monetary 
Authority of Singapore Sustainable Bond Grant Scheme which are currently 
based on existing "use of proceeds" models. 
Careful drafting will be essential 
Unlike use of proceeds green, social and sustainable bonds, SLBs will embed 
sustainability concepts into the contractual terms of bonds in a way that has 
not been common to date. Particular attention should be paid to ensure those 
terms are precise, clear and unambiguous to avoid future disagreement.  
A number of structural questions will also need to be considered. To give 
some examples: 
• 
is the KPI properly defined? For example, if the KPI is linked to CO2 
emissions are we looking to Scope 1, Scope 2 or Scope 3 emissions? 
How are they being calculated? 
• 
if an issuer fails to hit a SPT leading to an interest rate step-up, what 
happens if the SPT is met at a later date? Should a subsequent step-
down be built in? 
• 
What if the verification provider disappears or cannot confirm whether 
the SPT has been hit? What is the fallback mechanism in that case? 
How would a new verification provider be chosen? 
• 
How to deal with ESG ratings as a potential KPI? Is it a sufficiently 
reliable and predictable metric? There are considerable differences in 
methodology and outcomes between ratings providers, and the 
criteria are not always transparent. 
• 
Standard bond terms and conditions often feature a separate event of 
default that is triggered if obligations other than payment of principal 
and interest are not met. We would typically expect it to be made 
clear that a failure to meet an SPT or reporting requirement would not 
result in an event of default. 
What to disclose and where? 
The Principles encourage disclosure on a range of matters including how KPIs 
have been selected, historic performance of the KPI and what might affect 
future performance or achievement of the SPT. Appendix II of the Principles 
provides further guidance on these disclosures. Issuers should consider these 
recommendations in tandem with their legislative and contractual obligations 
to include all material information in the prospectus and care around the 
inclusion of forward-looking statements. The existing green and sustainable 
bond market has developed an increasingly standardised set of risk factors, 
disclaimers and disclosure practices to address the particularities of that 
market. It is likely a similar set of practices will grow up around the SLB 
market.

SUSTAINABILITY-LINKED BONDS – MAKING 
SENSE OF SLBS, KPIS AND SPTS 
 
 
 June 2020 
| 5 
 
Clifford Chance
Greenwashing can apply here too 
Accusations of greenwashing and associated negative publicity have affected 
certain issuers of green and sustainable bonds. The sustainability-linked loan 
market has not been immune from similar commentary.  Typically, this has 
focussed on whether the product brings tangible sustainability benefits or 
stretches the issuer to materially improve the sustainability of its operations. 
Issuers and their advisers should therefore consider carefully the requirements 
of the Principles to include "credible" KPIs, "ambitious" SPTs and "meaningful" 
variations in bond characteristics. The use of third party verification reports 
confirming alignment with the Principles is also likely to be helpful in mitigating 
these risks. 
The Principles and SLBs are part of a wider trend for new forms of sustainable 
debt. Transition bonds (aimed at financing industries with high GHG emissions 
to become more green) and self-labelled ESG programmes highlighting an 
issuer's ESG rating are becoming increasingly common. At the same time, the 
European Commission is currently developing a new voluntary EU Green 
Bond Standard with use of proceeds linked to the new EU Green Taxonomy.  
Each carries with it particular considerations as to proper structuring, 
documentation and sustainability impact important not only to issuers and 
underwriters from a risk and reputational perspective, but also to the integrity 
of the sustainable bond market as a whole. The existing ICMA Green, Social 
and Sustainability Bond Principles have been important in encouraging a 
consistent approach and best practice for those products. The Principles 
should serve a similar purpose for the new SLB market.

SUSTAINABILITY-LINKED BONDS – MAKING
SENSE OF SLBS, KPIS AND SPTS
 
 
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