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[Ed. note: Today’s blog was written by Meredith Ervine, Editor of our companion products, and Most recently, Meredith was a partner at Honigman LLP, serving as co-chair of the Public Company, Securities and Governance practice where she counseled publicly traded companies headquartered across the U.S. Meredith began her career in 2008 in the New York office of Pillsbury Winthrop Shaw Pittman LLP. Meredith was named a Best Lawyer in America (2023) in the areas of Corporate Governance Law and Securities/Capital Markets Law.]

The market for sustainability-linked bonds has grown quickly in recent years, with issuances reaching $76.3 billion in 2022 according to Climate Bonds Initiative. The capital markets team at Mayer Brown recently released this insight providing practical considerations for documenting and structuring SLB issuances. For those new to sustainable finance, the article distinguishes SLBs from green bonds as follows:

SLBs are bonds where the financial and/or structural characteristics vary depending on whether or not predefined sustainability performance targets (“SPTs”), determined by reference to key sustainability performance indicators (“KPIs”), are met.

Unlike “green bonds”, there is no requirement that the proceeds be allocated to a sustainable project or purpose. The proceeds from an SLB may be used for general corporate purposes or, indeed, any other purpose.

The article goes on to review the following key points for making SLBs successful:

  1. Align the SLB terms and conditions with the SLB framework
  2. SLB specific risk factors and disclaimers
  3. Redemption provisions
  4. Failure to report need not be an event of default
  5. Be clear with your recalculation language
  6. Identify tax and accounting implications early on
  7. Exercise caution with ECB eligibility
  8. Seek to ensure credibility of KPIs, SPTs and implications of failing to hit SPTs
  9. Manage your marketing material
  10. Consider enhanced due diligence

It also notes that this is an evolving market and the Mayer Brown team is beginning to see other innovations that are presumably in early stages – including the increased use of “sustainability co-ordinator” mandate letters, step-down instruments and mechanisms linked to non-cash penalties, such as charitable donations and carbon credits. These things requires specialized securities expertise beyond that of ESG professionals.

For members, more information on SLBs and green bonds is available in our “Sustainable Finance/Bonds” Subject Area and in Lawrence’s book, Killing Sustainability (on the “Guidebooks” page).

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile