Since the first sustainability-linked derivative (SLD) was executed in August 2019, market participants have entered into a variety of SLDs, mainly in Europe but more recently in Asia and the US. SLDs embed or create a sustainability-linked cashflow using key performance indicators (KPIs) that are designed to monitor compliance with environmental, social and governance (ESG) targets.
KPIs are therefore critical to the effectiveness and integrity of the SLDs to which they relate. KPIs need to be accurately defined in order to have legal certainty over how they operate and impact cashflows and so they can be objectively verified. This will enhance the credibility of SLDs and the sustainability-linked market as a whole.
This paper sets out proposed guidelines on KPIs for SLDs in order to meet the following objectives:
- Educate: As SLDs are currently a niche and nascent market, this paper is intended to provide further information to market participants on the types of transactions that have been executed to date, along with guidance on the overarching principles that need to be considered when structuring KPIs.
- Contribute to best practices: Although this is an area in which customization and bespoke innovation are important, the guidance seeks to establish a transparent, common framework of best practices that can be applied across KPIs and their related SLDs more widely.
- Promote safety and soundness of the market: By establishing best practices and addressing key risks, the guidance seeks to help address greenwashing by encouraging adequate disclosure of how SLDs help attain sustainability objectives, therefore supporting the integrity of this developing market.
- Enhance liquidity: By setting out a best practice framework, the guidance seeks to promote the use of SLDs. This will help build liquidity and ensure SLDs provide an effective tool for counterparties to participate in the transition to a green economy.
This paper provides an overview of SLDs, describes KPIs in the context of SLDs and sets out overarching principles for drafting KPIs for SLDs.
Click on the attached PDF to read the paper in full.
Documents (1) for Sustainability-linked Derivatives: KPI Guidelines
Latest
Industry Report under Project Guardian
ISDA and Ant International led the Project Guardian FX industry group to develop a new report for implementing tokenised bank liabilities and shared ledger in cross-border payments and foreign exchange (FX) settlement. The joint report is produced under the Monetary...
ISDA Letter to FASB on Agenda Consultation
On June 30, ISDA submitted a comment letter to the Financial Accounting Standards Board (FASB) in response to the proposal File Reference No. 2025-ITC100, Agenda Consultation. In the letter, ISDA believes the highest priority should be given to expanding the hedge...
Joint Paper on UK EMIR Reform
On July 1, ISDA and UK Finance published a paper, which recommended a set of reforms for the UK European Market Infrastructure Regulation (UK EMIR), carefully considering each EU EMIR 3.0 reform and asking whether we would wish to adopt...
Response to FCA on UK EMIR Reporting
On June 30, ISDA submitted a response to chapter 5 of the UK Financial Conduct Authority’s (FCA) quarterly consultation CP25/16 on trade repository reporting requirements under the UK European Market Infrastructure Regulation (UK EMIR). Chapter 5 proposes ‘Amendments to the...