ELFA and ICMA publish Practical Recommendations for High Yield Sustainability-Linked Bonds


ELFA and ICMA Practical Recommendations for High Yield Sustainability-Linked Bonds May 202322 May 2023 The European Leveraged Finance Association (ELFA) and the International Capital Market Association (ICMA) have partnered to create a set of recommendations for the high yield bond market in line with ICMA’s Sustainability-Linked Bond Principles (SLBP) and are today publishing the Practical Recommendations for High Yield Sustainability-Linked Bonds.

There has been a steady increase in issuance of sustainability-linked bonds (SLBs) by borrowers rated sub-investment grade (high yield). Issuing an SLB makes issuers accountable for their sustainability targets and trajectories and allows issuers to demonstrate a commitment to sustainability. However, market participants are cognisant of the importance of enhancing integrity through the choice and target observation date of KPIs and/or the ambition of the Sustainable Performance Targets, how meaningful any stated incentives are, and the need to promote strong standards and transparency for these debt instruments.

The practical guide lays out 10 recommendations addressing specific characteristics of high yield bonds such as redemption provisions, covenant provisions, generally shorter tenor and higher representation of private companies (not publicly listed), which has implications for disclosure and reporting.

The resource notes that high yield SLBs are not an asset class of their own, but rather are high yield bonds to which the SLB label has been applied, as per ICMA’s SLBP. This document is designed to address the specific needs of the subinvestment grade bond market in respect of these core components where bond characteristics or market practice depart from the investment grade bond market. As such, it should be read alongside the SLBP, and high yield SLBs should be aligned with the five core components of the SLBP.

Sabrina Fox, Chief Executive Officer of the European Leveraged Finance Association, commented: “High yield bonds as an asset class contain unique features warranting independent consideration and market guidance. Whilst the Sustainability-Linked Bond Principles should be applied to the asset class, this resource has been developed to provide recommendations to enhance the impact and effectiveness of high yield SLBs. We were delighted to collaborate with ICMA to support strong principles for sustainability-linked instruments.”

Nicholas Pfaff, Deputy CEO and Head of Sustainable Finance, International Capital Market Association added: “Sustainability-Linked Bonds have always aimed to further develop the key role that debt markets can play in funding and encouraging companies that contribute to sustainability. ICMA is therefore delighted to work in partnership with ELFA to create these practical recommendations for the issuance of high yield Sustainability-Linked bonds. Integrity is at the heart of what we do, and these recommendations aligned with the Sustainably-Linked Bond principles will help drive accountability and consistency in this growing segment of issuance.”

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