Regulators are facing a rapidly evolving environmental, social and governance debt instruments market, and concerns about greenwashing and mis-selling have resulted in increased scrutiny in the claims issuers are making about the use of proceeds for ESG projects.
On Wednesday 29 June 2022, the Financial Conduct Authority published the Primary Market Bulletin 41, following industry responses to feedback on ESG issues for debt instruments.
The list of questions concentrated on prospectuses, the use of proceeds (UoP) bond frameworks and using third-party verification to increase transparency.
The feedback also commented on data and rating frameworks more generally. The FCA aims to align standards with established International Capital Market Association frameworks and remind market participants of their obligations and encourage third-party verification of ESG claims.
The main concern is the scope of the obligation to use proceeds for ESG projects and how this is communicated to investors.
The FCA noted some cases where language used in a prospectus reflected less of a commitment to use the proceeds for ESG purposes than was suggested by other materials about the investment.
The FCA recommends issuers carefully consider the existing legal requirements on advertisements and prospectuses, and are transparent about their commitments versus aspirations.
ICMA principles
Ratings and creating a standard framework to enable comparison is another issue the market faces.
The FCA is seeking to address this by encouraging issuers to follow the ICMA principles.
The principles are: that the proceeds are intended to finance an ESG project; that investors receive information on the sustainability objectives, and; proceeds are retained for ESG projects and annual reporting obligations.
These principles currently hold voluntary status. However, the FCA encourages issuers to adopt these principles into their bond framework or in their legal documentation. This can result in contractual obligations and perhaps encourage more binding commitments.
The need for closer oversight is also addressed and the FCA is focused on the role of second-party opinion providers and verifiers.
Their role is to provide an opinion on the ESG impact of the proceeds in comparison with the market.
However, the market is unbalanced, as second-party opinion providers are currently unregulated. They are employed by the issuer and there is no standard methodology.
The FCA encourages second-party opinion providers to follow ICMA’s guidelines on external reviews.
It also should be noted that the FCA has not ruled out further enforcement measures and so additional regulatory oversight in this area may well be on the horizon.
Jennifer Kafcas is partner in the Financial Services team at Crowell & Moring
