The European Central Bank has become the world’s first central bank to allow sustainability-linked bonds to be classified as eligible as prudential collateral and for asset repurchase programs. Announced in September of last year, the measures came into force from January 1st, and allows bonds with coupon structures linked to certain sustainability performance targets to become eligible as collateral for Eurosystem credit operations and also as purchases for monetary policy. To be considered, bond issuance must comply with all other eligibility criteria and be linked to a performance target relating to at least one of the environmental objectives outlined in the EU Taxonomy Regulation and/or to one or more of the United Nations Sustainable Development Goals (SDGs) relating to climate change or the environment.
Sustainability-linked bonds normally include a step-up mechanism, whereby the coupon increases if the issuer fails to live up to its pre-agreed ESG commitments and targets, such as emissions reductions, thus introducing a financial motivation for the issuer to meet such commitments and targets. Sustainability-linked step-up bonds can also enhance the ESG reputation of the issuer. This is the first time that such bonds have been accepted as collateral and eligible for asset purchases.
The move is significant because it further promotes and develops the use of climate and sustainability-linked step-up bonds. It also allows companies with a poor climate and environmental reputation to nevertheless fund and make verifiable and strategic decarbonisation commitments, thus adding further momentum to the rapidly expanding ESG sector.
This page was last updated April 23, 2021
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