Social Bonds, Green Bonds, and Sustainable Bonds

On September 19, 2018, the Argentine Securities and Exchange Commission (the “CNV” after its acronym in Spanish) published General Resolution No. 764/2018 (the “Resolution”) in the Official Gazette, which includes the Argentine Guidelines for the Issuance of Social, Green, and Sustainable Bonds (the “Guidelines”) to the CNV Regulations (New Text 2013, as supplemented) (the “CNV Regulations”).

The purpose of this Resolution is to promote the development of financial securities that make social, environmental and/or sustainability impacts through capital markets.

The main incentive for companies to issue Social Bonds, Green Bonds and/or Sustainable Bonds will be the possibility of placing them to certain types of institutional investors. It is and will be a growing tendency for institutional investors to require the total or partial investment of their funds in values that create social and/or environmental benefits, especially for investors located in countries that are members of the Organization for Economic Co-operation and Development (OECD). Moreover, both issuing and investing in this type of securities will provide reputational benefits. Therefore it is expected that the demand for these securities will increase.

The Resolution does not provide any special tax benefits for this type of securities, beyond those that they already have according to the type of security. In this respect, they will offer comparable returns to conventional securities, except for the possible effect of a higher demand for them due to an expansion of the investor base.
 

Definition of SGS Bonds

Securities which are used as vehicles to finance projects with social and/or environmental purposes can be classified into three types: Social Bonds, Green Bonds, and Sustainable Bonds (“SGS Bonds”).
 

1. Green Bonds: Securities whose proceeds are used to finance or re-finance, in whole or in part, new or existing projects with environmental benefits. These projects can be related to, among other categories: renewable energy, energy efficiency, prevention and control of pollution, sustainable management of natural resources, conservation of terrestrial and aquatic biodiversity, clean transportation, climate change adaptation, ecological buildings, etc.
    
2. Social Bonds: Securities whose proceeds are used to finance or re-finance, in whole or in part, new or existing projects with social benefits. These projects can be about, among other categories: affordable basic infrastructure and housing, access to essential services, employment creation, food security, socio-economic development and empowerment, and gender equality.
    
3. Sustainable Bonds: Securities whose proceeds are used to finance or re-finance, in whole or in part, new or existing projects with environmental and social benefits. In other words, these bonds have joint characteristics of both Green Bonds and Social Bonds.
    

The definition of the use of proceeds that would allow securities to be categorized as SGS Bonds is based mainly on the principles of the International Capital Market Association (“ICMA”) and the standards of the Climate Bond Initiative (“CBI”).

The main objective of ICMA guidelines is to support transparency and disclosure of information, promoting integrity in the development of the SGS Bonds Market. These are based on four core principles that guide the issuer in four areas: (i) use of proceeds, (ii) process for project evaluation and selection, (iii) management of proceeds, and (iv) reporting.

Within these principles, Green Bonds are guided by the Green Bond Principles (“GBP”), while Social Bonds are based on the Social Bond Principles (“SBP”) and Sustainable Bonds on the Sustainability Bond Guidelines (“SBG”), which are referred to eligible assets under the GBP and SBP principles.

In addition to the ICMA guidelines, the CNV also recognizes the International Climate Bonds Standards (“CBS”) when regulating the SGS Bonds. CBS are standards created to be used as tools by governments and investors whose objective is to mitigate the adverse effects of climate change. These standards establish pre and post requirements for bond issuances and have a list of project categories.
 

Financing structures for SGS Bonds

SGS Bonds are instrumented in the same way as traditional securities, and they may give similar returns to a common debt security. The main difference between both is that the proceeds obtained through SGS Bonds will be exclusively used to finance social, green or sustainable activities or projects, certified by institutions dedicated exclusively to evaluate the transparency of this type of projects through external reviews.

By way of example, in Argentina, SGS Bonds can be issued through the following structures:
 

1. Bonds (Obligaciones negociables, Law No. 26,576);
2. Project Bonds (Bonos de Proyecto, CNV General Resolution No. 747/2018)[1];
3. Mutual Investment Funds (Fondos Comunes de Inversión, Law No. 24,083); and
4. Financial Trusts (Fideicomisos Financieros, sections 1666 to 1700 of the Argentine Civil and Commercial Code).
    

This means that the issuance requirements will be those established for the issuance of securities of the chosen structure, with an additional description, according to the Guidelines, of: (i) use of proceeds; (ii) categories of projects to be financed or refinanced; and (iii) estimated impacts based on their possibility of measurement; among others.
 

External reviews

There are international best practices to guide issuers and provide certainty on the credibility of the bond label to investors. One of the suggested tools consists of external reviews, which can be carried out through different alternatives:
 

1. Second Party Opinion: An institution with social/environmental/sustainability expertise that is independent from the issuer may provide a Second Party Opinion, which normally entails an assessment of the alignment with the GBP/SBP.
2. Verification: An issuer can obtain independent verification against a designated set of criteria, typically pertaining to business processes and/or social/environmental/sustainability criteria. Verification may focus on alignment with internal or external standards or claims made by the issuer.
3. Certification: a certification of qualified, accredited third parties who verify consistency of issuers’ internal process and controls against a recognized external green/social/sustainability standard or label.
4. SGS Bonds Scoring/Rating: an evaluation or assessment of SGS Bonds and issuers’ internal process and controls, through an established scoring/rating methodology to measure the environmental and/or social impact of investments.
    

External reviewers are responsible for validating green and/or social credentials of SGS Bonds. In turn, markets will control the validity of external reviews.

These reviewers can be selected from the CBI approved list of reviewers available on its website, or from other recognized national or international sources, and they will have to make a report in Spanish indicating their opinion regarding the social, green or sustainable bond category.
 

Exclusions

Markets may withdraw the social/green/sustainable label if issuers do not meet the requirements specified by the current Guidelines and regulations. In this sense, an SGS Bond may lose its “SGS” label if: (i) it does not meet the use of proceeds criteria; and/or (ii) issuers do not comply with their reporting obligations.
 

Post-issuance

The issuer of SGS Bonds should comply with all the regulations’ requirements in accordance with the selected financing structure. Additionally, it should publish an annual report on use of proceeds and impact of the issued bond until the total allocation of funds.

Unallocated proceeds can be temporarily maintained in investment securities or applied to reduce indebtedness, but investors should be informed of this situation.  
 

Participation Regime

The provisions of the Resolution were  subject to public consultation under a procedure through which the CNV received opinions and/or proposals of interested parties until October 11, 2018, through the website www.cnv.gob.ar.