Philippines: New Guidelines On Sustainability-Linked Bonds Issuance Now Available

I. Background and Scope

The Securities and Exchange Commission ("SEC") issued Memorandum Circular No. 3, Series of 2023 or the Guidelines on the Issuance of Sustainability-Linked Bonds Under the ASEAN Sustainability-Linked Bond Standards in the Philippines ("SLB Guidelines"), which contains the guidelines on the issuance in the Philippines of Sustainability-Linked Bonds ("SLBs") under the ASEAN Sustainability-Linked Bond Standards ("ASEAN SLBS") of the ASEAN Capital Markets Forum ("ACMF"). The SLB Guidelines took effect on 6 April 2023. The SLB Guidelines primarily govern the issuances of ASEAN SLBs where the proceeds are intended to be used for general purposes.

The SLB Guidelines are aligned with the ASEAN SLBS and the International Capital Market Association Sustainability-Linked Bond Principles ("ICMA SLBP"). The SLB Guidelines defined SLBs as any type of bond instrument where the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined sustainability/environmental, social and governance ("ESG") objectives.

The SLB Guidelines supplements the requirements and procedure of the registration of securities under Sections 8 and 12 of the Securities Regulation Code ("SRC").

According to SEC Commissioner Kelvin Lester Lee, "promoting and enabling a sustainable investment framework would help ensure that business activities and investment decisions contribute to progress while also protecting Philippine resources." In its efforts to further promote capital market integration in the region, the SEC has been actively involved in the regional sustainability agenda of the ACMF, currently working as co-chair of the ACMF Sustainability Finance Working Group.

II. Five Core Components of the ASEAN SLBs A. KPIs

The issuer must select external or internal sustainability Key Performance Indicators ("KPIs") that measure the Issuer's sustainability performance. The SLB Guidelines provide the required standards and criteria for selecting KPIs and the standards that are encouraged, such as aligning the KPIs with the United Nations Sustainable Development Goals. The definition and rationale of the KPI must also be disclosed, among others.

B. Sustainability Performance Targets ("SPTs") The issuer must calibrate one or more SPTs per KPI to express the level of ambition the Issuer is ready to commit to. Moreover, the issuer must disclose strategic information that may impact the achievement of the SPTs. Similar to the KPIs, the SPTs must be disclosed by the issuer through a publicly available website designated by the Issuer throughout the ASEAN SLBs' tenure.

C. Bond Characteristics The financial and structural characteristics of ASEAN SLBs can vary depending on whether the selected KPIs have reached the pre-defined SPTs. Potential variations of the ASEAN SLBs' characteristics and fallback mechanisms must be disclosed.

D. Reporting The issuer of the ASEAN SLB must publish and keep readily available and accessible through a public website designated by the issuer throughout the ASEAN SLBs' tenure (i) up-to-date information on the performance of selected KPI's including baselines, where relevant; (ii) a verification assurance report which includes an assessment on the issuer's performance against SPTs as well as the related impact and timing of such impact, on the bond's financial and/or structural characteristics; and (iii) any information enabling investors to monitor the level of ambition of the SPTs.

There must be a regular (at least annual) reporting of ASEAN SLBs. Issuers are encouraged to do reports more frequently and to provide a timeline as to when reporting on the ASEAN SLBs will be available.

E. Verification Issuers must seek independent and external verification, at least once a year, of their performance level against each SPT and for each KPI. This external verification will continue yearly until the last SPT trigger event of the bond has been reached.

III. External Review Pre-Issuance An external review by a credible and expert provider must be conducted pre-issuance. The external review provider's credentials, expertise, and scope of the verification conducted must be disclosed. Moreover, the report containing the verification must be available to the public and uploaded to a website designated by the issuer throughout the tenure of the ASEAN SLBs.

IV. Applicability on Sustainability-Linked Bonds In certain circumstances, and at the discretion of the SEC, outstanding bonds issued prior to the effectivity of the SLB Guidelines, which were issued by Philippine-based issuers and/or in instances where the proceeds were used in the Philippines, will be considered for eligibility under the SLB Guidelines. However, the issuance must be compliant with the requirements of the SLB Guidelines and have received certification from an internationally recognized certifying body.

You may download the SyCipLaw ESG Bulletin January to June 2023 issue here or via this link.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.