Sustainable Finance Update: New Loan Standards, Proposed EU Green Bond Standard and Other Recent Developments

Sullivan & Cromwell LLP - July 8, 2019

Sustainable finance is a fast-growing and diversifying market which is becoming increasingly relevant to investors, investment funds, companies, banks, insurers, regulators and their advisors. Beyond achieving positive environmental and/or social outcomes, sustainable finance can also yield commercial and reputational benefits for market participants. Issuing a green bond or entering into a green or sustainability-linked loan can be a high-profile means of showcasing corporate sustainability efforts. Greater levels of disclosure and operational efforts to address sustainability can lead to deeper, positive stakeholder engagement, including with investors, employees, customers and local communities. Conversely, sustainability commitments may impose operational costs and pose reputational risks in the event of non-compliance. There are also modest, incremental administrative costs associated with green/sustainable products which have thus far not been demonstrably offset by pricing advantages.

This update covers several recent developments in the market following our last update from December 2018. Two new voluntary loan standards were published: the Sustainability Linked Loan Principles and the Poseidon Principles. In addition, new guidance was released on the Green Bond Principles (GBPs) and the Social Bond Principles (SBPs), although no changes were made to the principles themselves. However, the European Union (EU) Technical Expert Group released the proposed voluntary EU Green Bond Standard as part of the European Commission’s comprehensive sustainable finance initiative. Several other proposals were recently published in connection with this initiative. In sum, the new developments generally continue the trend of non-binding, industry-led standards which rely on commercial and reputational incentives to ensure compliance. However, various components of the EU sustainable finance initiative would entail greater levels of regulatory oversight. This should be considered and monitored by market participants both in Europe and beyond, as it is likely to influence sustainable finance policy and practice in other jurisdictions in the future.