FAQ on sustainability-linked bonds
These frequently asked questions focus on technical elements related to the implementation of the decision announced by the ECB on 22 September 2020 on the acceptance of bonds with coupon structures linked to certain sustainability performance targets (SPTs) as eligible collateral for Eurosystem credit operations and for outright purchases in Eurosystem monetary policy operations. For additional information on collateral eligibility rules, please consult the General framework and the Temporary framework. Further information on the asset purchase programmes is available on the ECB’s website.
Q1 Which SPTs are accepted by the Eurosystem?
The Eurosystem only accepts coupon structures linked to certain SPTs. In particular, the Eurosystem considers SPTs to be acceptable if they refer to targets set by the issuer in a publicly available issuance document that measure quantified improvements in the issuer’s sustainability profile over a predefined period of time relating to:
- one or more of the environmental objectives set out in Article 9 of Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, as supplemented by the delegated acts to be adopted by the European Commission under that Regulation; and/or
- one or more of the Sustainable Development Goals (SDGs) set by the United Nations relating to climate change or environmental degradation (see Question 4).
The Eurosystem does not accept targets that are not set for the issuer (for example, a general target for Europe to achieve carbon neutrality by a certain year).
The Eurosystem adopts an issuer group approach and allows sustainability targets to be (i) set for or (ii) met by one or multiple entities provided all entities belong to a single sustainability-linked bond issuer group. Please also refer to Article 2, point 88-a of Guideline 2015/510 on the implementation of the Eurosystem monetary policy framework for a clarification of the sustainability-linked bond issuer group concept.
Q2 What do you mean by publicly available issuance document?
Publicly available issuance documents refer to prospectus, offering circular and/or final terms, which provides all the relevant terms and conditions for the securities in question.
Q3 What do you mean by quantified improvements over a predefined period of time?
The targets set by the issuer should be able to be reliably measured using quantifiable information (metric, threshold and observation date) and devised in a way that incentivises the issuer to improve its environmental sustainability profile over a predefined period of time decided on by the issuer.
Q4 Can you clarify which of the SDGs set by the United Nations you consider to relate to climate change or environmental degradation?
The Eurosystem considers the following United Nations SDGs to relate to climate change or environmental degradation:
- Ensure availability and sustainable management of water and sanitation for all (SDG 6)
- Ensure access to affordable, reliable, sustainable and modern energy for all (SDG 7)
- Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation (SDG 9)
- Make cities and human settlements inclusive, safe, resilient and sustainable (SDG 11)
- Ensure sustainable consumption and production patterns (SDG 12)
- Take urgent action to combat climate change and its impacts (SDG 13)
- Conserve and sustainably use the oceans, seas and marine resources for sustainable development (SDG 14)
- Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss (SDG 15)
Q5 Can an improvement in an Environmental, Social and Governance (ESG) rating, ESG score or in an ESG certification be considered an acceptable SPT?
The Eurosystem does not consider improvements in ESG ratings or scores as acceptable SPTs for the purposes of determining the eligibility of assets as collateral in its credit operations or for its asset purchase programmes.
The Eurosystem considers improvements in ESG certifications for the purposes of determining the eligibility of assets as collateral in its credit operations or for its asset purchase programmes if these refer directly to a quantified improvement (see Question 3) in an acceptable SPT (see Question 1). In addition, the Eurosystem considers the maintenance of ESG certifications as improvements only if these imply the maintenance of the said certifications at their highest possible level.
Q6 Does the Eurosystem accept securities linked to multiple sustainability targets or goals?
The Eurosystem accepts securities with coupon payments linked to more than one sustainability target or goal as long as all targets and/or goals are eligible SPTs (see Question 1).
By way of an example, a security with coupon payments linked to one environmental objective set out in Article 9 of Regulation (EU) 2020/852 and to SDG 6 of the United Nations would be considered eligible if all other eligibility criteria are met.
Conversely, another security with coupon payments linked to SDG 6 and SDG 17 (Strengthen the means of implementation and revitalize the global partnership for sustainable development) would not be considered eligible since the second SDG referred to does not relate to climate change or environmental degradation. In the same vein, a security with a coupon payment linked to one environmental objective set out in Article 9 of Regulation (EU) 2020/852 and to a social objective would not be eligible.
Q7 How does the Eurosystem assess whether a security fulfils the Eurosystem criteria for SPTs and on what information does it base its assessment?
As a general rule, the eligibility assessment of marketable assets (i.e. securities) is performed by the national central bank (NCB) of the country in which the security is admitted to trading. For more information, please see the eligibility assessment procedure.
Regarding sustainability-linked bonds, the NCB assesses the fulfilment of all eligibility criteria (including the type of acceptable coupon) based on publicly available issuance documents (see Question 2). Therefore, to allow for a swift assessment process on the part of the Eurosystem, it is important that all rules and elements relating to coupon payments linked to the sustainability targets of a specific security are clearly defined in such documents, including, but not restricted to:
- provision of the coupon formula;
- identification of any relevant quantifiable sustainability target (metric, threshold and observation date) and corresponding multi-step coupon in case of partial or non-fulfilment;
- mapping of the sustainability targets with the environmental objectives set out in Regulation (EU) 2020/852 and/or with SDGs set by the United Nations relating to climate change or environmental degradation;
- confirmation of the verification process applied by an independent third party to validate the issuer’s compliance with the predefined sustainability target, including the identification of the independent third party.
Where the mapping of the sustainability targets with the environmental objectives and/or the SDGs mentioned above is not readily accessible in the publicly available issuance documents (see Question 2), the Eurosystem may complement its eligibility assessment by consulting additional documents such as the issuer’s issuance framework (e.g. a sustainability-linked framework) or a second party opinion on the sustainability-linked bond issuance in question. In the event of contradictory information between the additional documents and the publicly available issuance documents, the information contained in the publicly available issuance documents will prevail over information from other sources. The absence of a mapping of the sustainability targets with the environmental objectives and/or SDGs may be a reason for ineligibility of a security. Issuers are therefore strongly encouraged to ensure that the mapping is explicit in the above documents.
The Eurosystem analyses the mapping of the sustainability targets with the environmental objectives and/or SDGs included in the publicly available issuance documents and in the additional documents described above and may diverge from the said mapping for the purposes of the eligibility assessment process. This means that securities with targets mapped to an eligible objective or SDG might be ineligible if the Eurosystem considers that the targets do not relate to an environmental objective or goal (for example, this would be the case for a target linked to a non-environmental objective within SDG 9).
Q8 The Eurosystem requires the issuer’s compliance with SPTs to be verified by an independent third party. How does that work in practice?
As part of the assessment process, the Eurosystem verifies if the publicly available issuance document(s) (see Question 2) include terms and conditions ensuring that an independent third party checks whether the issuer meets the self-imposed sustainability target.
Q9 What happens if one or more SPTs are not met? Will the security in question cease to be accepted by the Eurosystem?
The eligibility status of debt instruments with sustainability-linked coupon structures is not affected by a failure on the part of the issuer to meet SPTs. If the issuer fails to meet one or more SPTs, the respective coupon payment(s) will be updated to reflect this non-fulfilment, but the security in question will continue to be accepted by the Eurosystem.
Q10 What type of sustainability-linked payments does the Eurosystem accept?
The Eurosystem only accepts debt instruments with sustainability-linked coupon structures if these are linked to specific SPTs (see Question 1). The sustainability-linked coupons can be paid (i) during the lifetime of the asset, and/or (ii) at its maturity date in the form of an additional premium, provided that the principal amount paid at maturity is, in any case, at least equal to par.
Debt instruments with payments which do not affect the coupon payments described above or the principal amount paid at maturity (e.g. payments by the issuer to a third party, such as a non‑governmental organisation, if a specific sustainability or social target is not met) can be eligible provided that the debt instruments in question fulfil all the remaining eligibility requirements set by the Eurosystem.
Q11 What type of multi-step or floating coupons with steps linked to SPTs does the Eurosystem accept?
The Eurosystem accepts debt instruments with step-up (i.e. increasing) and step-down (i.e. decreasing) coupons linked to the fulfillment of eligible SPTs (see Question 1) provided that all other eligibility criteria are met.