Contribution of the sustainable finance to the sustainability strategy of the issuer/borrower
A second party opinion may start with the issuer’s/borrower’s sustainability strategy. It then discusses how the sustainable bond/loan and its framework can actualize the strategy and lead to positive environmental and social outcomes. The reviewer may also comment on that quantitative results which may be achieved through the sustainable finance, e.g. extent of electricity consumption reduction, contribution to carbon offset, creation of affordable houses, increase in recycle content, reduction in waste. References can be made to international benchmarks such as the Science-Based Targets Initiative[8].
Notwithstanding the benefits, eligible projects could create environmental and social risks, e.g. employee injuries, negative environmental impacts and production of harmful materials at the construction and operation stages, unbalanced allocation of affordable resources amongst vulnerable groups, safety issues of new products. The opinion may report on how the issuer/borrower manages the risks via its policies, trainings, compliance with regulations, as well as how the issuer/borrower works with employees, suppliers, customers, regulators, local communities and other stakeholders to assess and mitigate the risks.
(2) Verification
It refers to an independent verification on the bond/loan framework or the underlying projects against a designated set of internal sustainability criteria.
In the case of a sustainability-linked bond/loan, it is a must to obtain independent and external verification on measuring performance against the key performance indicators or on the progress of achieving the sustainability performance targets. According to the ICMA Sustainability-Linked Bond Principles[2] and the LMA Sustainability-Linked Loan Principles, the verification must be conducted at least once a year, and at the time for assessing whether an adjustment to the bond/loan characteristics is triggered, until after the last trigger event has been reached.
A bond issuer usually reports, at least once a year, on the proceeds amounts applied to eligible projects. Some issuers of Hong Kong listed bonds engage professional firms (including EY) to examine and provide limited assurance in certain assertions set out in the issuer’s post-issuance reports, in order to give comfort to investors. The professional firm reviews the issuer’s procedures on the project selection and proceeds management, implementation of the procedures, calculations performed and disclosure policies. The conclusion is normally taken in the form of a negative statement as to whether anything has come to the professional firm’s attention that causes it to believe the assertions do not meet the requirements of the relevant international principles or the issuer’s bond framework.
(3) Certification
The issuer/borrower can engage a qualified and independent third party to certify its sustainable bond/loan, the relevant framework, use of proceeds, key performance indicators and sustainability performance targets against recognised external sustainability standards which define specific criteria.
(4) Rating/scoring
A third-party rating agency or specialized research provider may evaluate or assess the sustainable bond/loan framework, use of proceeds, selection of key performance indicators, calibration of the level of ambitiousness of sustainability performance targets SPTs, according to an established scoring/rating methodology.
Although rating and scoring are not very common, certain bonds listed in Hong Kong have been scored via evaluation approaches encompassing sustainability benefits, governance (proceeds management and impact assessment structure) and transparency in reporting.
Key takeaway
Bond issuers and loan borrowers are engaged to make good use of external reviews, because they promote best practice for the issuer’s/borrower’s internal control, allow stakeholders to understand how the bond/loan framework is aligned with international principles, and give comfort to investors on how their monies are channeled to sustainable uses.
