Primary Market Bulletin 41

Newsletters Published: 29/06/2022 Last updated: 29/06/2022

Newsletter for primary market participants 

June 2022 / No. 41

About this edition

Welcome to the 41st edition of the Primary Market Bulletin (PMB).

Feedback Statement 22/4 – ESG integration in UK capital markets

In this edition, we elaborate on our response to feedback received to the discussion chapter included in CP21/18: Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets. In particular, we cover important issues related to ESG-labelled debt instruments.


  • encourage issuers of ESG-labelled Use of Proceeds (UoP) debt instruments to consider voluntarily applying or adopting relevant industry standards, such as the Principles and Guidelines that the International Capital Market Association (ICMA) has developed for green, social, and sustainability bonds
  • remind issuers, their advisors and other relevant market participants of their existing obligation to ensure any advertisement is not inaccurate or misleading, and is consistent with the information contained in the prospectus
  • encourage issuers and their advisors to consider verifiers’ and assurance providers’ expertise and professional standards, and to engage with second party opinion (SPO) providers and verifiers who adhere to appropriate standards of professional conduct, such as ICMA’s Guidelines for External Reviewers

For more detail on our wider response to CP21/18, please read Feedback Statement 22/4.

Supporting high standards in the issuance of ESG-labelled UoP debt instruments

Most global ESG-labelled UoP bond issuances, including the UK Green Gilt, are issued in line with at least some of the principles and guidelines set out in voluntary industry principles published by ICMA. These principles and guidelines are established as the current market standard. They include the Green Bond Principles (GBP), Social Bond Principles (SBP), and Sustainability Bond Guidelines (SBG) – hereafter referred to collectively as ‘the ICMA Principles for UoP bonds’. These are described by ICMA as ‘Voluntary Process Guidelines’ that promote the role of global debt capital markets in financing progress towards environmental and social sustainability. We note, however, that other standards exist, and market standards may develop over time.

The ICMA Principles for UoP bonds

The ICMA Principles for UoP bonds are voluntary frameworks that outline best practices when issuing bonds serving social and/or environmental purposes that promote transparency and disclosure. They seek to promote integrity in the development of ESG-labelled UoP bond markets.

There are four core components to the ICMA Principles for UoP bonds:

  1. Use of Proceeds: Green, Social and Sustainability Bonds are debt instruments where the proceeds (or equivalent amount) are intended to finance or re-finance, new or existing projects.
  2. Process for Project Evaluation and Selection: ICMA recommends that issuers of UoP bonds communicate to investors the sustainability objectives of the eligible Green and/or Social projects.
  3. Management of Proceeds: ICMA recommends that ‘the net proceeds of the [UoP] bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner, and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for eligible [Green/Social] Projects’.
  4. Reporting: ICMA advocates a high level of transparency, specifically recommending that issuers should make available up to date information on the use of proceeds renewed annually until full allocation.

ICMA also articulates two key recommendations to further strengthen transparency. The first encourages issuers to align their sustainability-labelled bond issuance/programme to the four core components within the ICMA Principles for UoP bonds in a bond framework or in their legal documentation. The second invites issuers to appoint external review providers to conduct a pre-issuance external review of that alignment. Post issuance, they recommend that an issuer’s management of proceeds is supplemented by the use of an external auditor, or other third party, to verify the internal tracking and the allocation of funds from the bond proceeds to eligible projects.

How industry standards can help to make primary markets more effective

The ICMA Principles for UoP bonds and other industry standards can improve the effectiveness of primary markets in several ways. They can guide companies through the process of issuing debt for specific social or environmental purposes and they can support underwriters and sponsors in the work they undertake as part of their role in supporting and providing assurance over transactions. Most importantly, they can improve the quality and type of information available to investors to inform their assessment of the environmental and/or social sustainability features of their investments.

As the current market standard, we consider that the ICMA Principles for UoP bonds’ core components and associated recommendations provide a suitable and appropriate starting point for issuers when they are preparing the documents needed for issuing green bonds and other UoP debt instruments.

Better alignment between advertisements and ESG-labelled UoP bond prospectuses

We would like to remind issuers of their obligations under the UK Prospectus Regulation and our recently updated guidance regarding the UK Prospectus Regulation advertisement regime in TN 604.2, and draw readers’ attention to how they may interact with the ICMA Principles for UoP bonds.

What we have seen

With the growth of ESG-labelled debt, we have seen examples of green bond frameworks in which the issuer advertises certain outcomes and makes certain commitments, especially around the allocation of the proceeds of the bond and the governance around the allocation of such proceeds. The frameworks also typically advertise the issuer’s intention to seek independent review, assurance and verification, and publish a report on the impact of the activities and projects that have been funded through those proceeds.

These aspects include the first component of ICMA’s GBP and SBP referred to above, which notes that:

‘The cornerstone of a [Green/Social] Bond is the utilisation of the proceeds of the bond for eligible [Green/Social] Projects, which should be appropriately described in the legal documentation of the security.’

This is further elaborated in the key recommendations:

‘Issuers should explain the alignment of their [Green/Social] Bond or [Green/Social] Bond programme with the four core components of the [GBP/SBP] (i.e., Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds and Reporting) in a [Green/Social] Bond Framework or in their legal documentation. Such [Green/Social] Bond Framework and/or legal documentation should be available in a readily accessible format to investors.’

Where bond frameworks form part of a communication that relates to an offer or admission of securities, they are likely to be advertisements for the purposes of the prospectus regime, so must comply with the Prospectus Regulation and the Prospectus RTS Regulation.

Occasionally, the language used in green, social and sustainability bond frameworks could be considered more definitive than the relevant sections in the prospectus. In particular, on matters that are likely to be important to certain investors such as the use of proceeds. We are concerned that investors may form expectations based on bond frameworks and other marketing materials instead of relying on the contractual terms of the issuance and associated disclosures included in the prospectus.

Investors with specific mandates or pursuing certain sustainability strategies may consider that a failure of the issuer to achieve some of the outcomes advertised in the bond framework could have material implications on their investment. Given the requirements that apply to communications that amount to advertisements, investors would expect the language of such a communication to be consistent with the disclosures in the prospectus.

Our limited analysis has revealed that, in some circumstances, while prospectus disclosure clearly states an issuer is not obligated to use the proceeds in a specific manner, accompanying documents imply a stronger commitment.

More carefully crafted language may therefore be appropriate within bond frameworks to make clear to investors and other stakeholders which actions the issuer is contractually bound to, in contrast to those actions which it aspires to achieve but has not made contractually binding.

We are monitoring activities in this area and will consider whether to take further action to better understand how pervasive this is and whether an additional regulatory response is necessary.

Existing requirements on advertisements and prospectuses

Existing requirements regarding advertisements and prospectuses can be found at:

  • The Prospectus Regulation: Art. 2(k), Art. 22,
  • Prospectus RTS Regulation: Art. 14(1), Art. 15(1) and (3), Art. 16
  • PRR: 3.3
  • TN 604.2.

When considering green, social or sustainability bond frameworks that fall within the scope of the Prospectus Regulation’s requirements on advertisements, we would draw issuers’ attention to a number of points:

  • Advertisements must be clearly recognisable as such. (Prospectus Regulation Art 22.3)
  • Information in the advertisement must not be inaccurate, or misleading. (Prospectus Regulation Art 22.3)
  • Advertisements must state that a prospectus has been or will be published and indicate where investors are or will be able to obtain it. (Prospectus Regulation 22.2)
  • Information in the advertisement must be consistent with the information contained in the prospectus, if already published, or with the information required to be in the prospectus, if the prospectus is published afterwards. (Prospectus Regulation Art 22.3)
  • An advertisement disseminated to potential retail investors must also contain the word “advertisement” in a prominent manner, and a recommendation that potential investors read the prospectus before making an investment decision, where the advertisement contains a reference to a prospectus approved by the FCA. (Article 14(1) of the Prospectus RTS Regulation)
  • All information concerning an offer or an admission to trading disclosed in an oral or written form (even if not for advertising purposes), must be consistent with that contained in the prospectus. (Prospectus Regulation Art 22.4)
  • Such information must not contradict the information in the prospectus, or present the information in the prospectus in a materially unbalanced way; or contain alternative performance measures unless they are contained in the prospectus. (Prospectus RTS Regulation, Art 16)

Ensuring that verifiers and second party opinion providers perform their role well

As elaborated in the key recommendations included in the ICMA Principles for UoP bonds, investors increasingly expect that the issuers of UoP bonds will submit bond frameworks for review by a second party opinion provider.

The provider should be able to give a view as to whether the bond framework is aligned to prevailing market practices and expectations of sustainability in terms of use of proceeds. There are also increasing expectations that, post-issuance, allocation of proceeds for UoP bonds be verified on an ongoing (annual) basis. There are a variety of ways for issuers to obtain external validation for their green, social, sustainability and sustainability-linked bonds processes, frameworks or specific offerings as well as various types of reviews that can be provided. Endeavours to provide such reviews are usually not binding, as we have seen above. But there are exceptions, most notably for sustainability-linked bonds, where assurance or verification to confirm the achievement of certain performance targets against specified Key Performance Indicators (KPIs) is typically part of the terms and conditions.

In its Sustainability Linked Bond Principles (SLBP), ICMA states that:

‘Issuers should seek independent and external verification of their performance level against each sustainability performance target (SPT) for each key performance indicator (KPI) by a qualified external reviewer with relevant expertise, such as an auditor or an environmental consultant, at least once a year, and in any case for any date/period relevant for assessing the SPT performance leading to a potential adjustment of the SLB financial and/or structural characteristics, until after the last SPT trigger event of the bond has been reached. The verification of the performance against the SPTs should be made publicly available. As opposed to the pre-issuance external review such as a Second Party Opinion, which is recommended, post issuance verification, is a necessary element of the SLBP.’

However, neither second party opinion providers nor verifiers are currently subject to regulation for these activities. It is possible that harm may arise from the potential conflicts of interest inherent to an ‘issuer pays’ model, and a lack of transparency in second party opinion providers’ methodology and approach.

So, it is likely to be important to investors that these service providers adhere to high standards, best practice or principles of conduct to manage conflicts of interest, enhance transparency, and promote good governance, such as those developed by ICMA. ICMA’s Guidelines for Green, Social, Sustainability and Sustainability Linked Bonds External Reviews were developed to provide voluntary guidance relating to professional and ethical standards for external reviewers, as well as to the organisation, content and disclosure for their reports.

This could be supplemented by issuers engaging with second party opinion providers to ensure that they are adhering to appropriate standards of professional conduct.

Beyond this, we would also encourage assurance providers to undertake any such engagements in line with ‘ISAE (UK) 3000 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information’ as issued by the FRC in July 2020, alongside the FRC’s Ethical Standard and the ethical pronouncements established by the assurance practitioner’s professional body where relevant. The FRC standard requires practitioners to comply with UK ethical standards and to apply the International Standard on Quality Control (UK) 1 (ISQC (UK)) including to ensure quality management and ethics standards are upheld.