Brief Introduction to the New Legal Regime for Sustainable Bonds by the Taipei Exchange

---

 I. Background

To develop sustainable financing, to assist companies investing in the environment, society and corporate governance (ESG), and to cooperate with the regulators to promote Corporate Governance 3.0 - Sustainable Development Roadmap, Green Finance Action Plan 2.0., and Capital Market Roadmap 2021-2023, the Taipei Exchange (TPEx) established the green bond and sustainability bond market of Taiwan by promulgating the “Operational Directions for Green Bonds” and “Operational Directions for Sustainability Bonds” on April 21, 2017 and October 6, 2020, respectively. According to information published on the TPEx, by May 27, 2021, among the bonds listed on the TPEx, there are 53 green bonds, issuers of which include Taiwan Semiconductor Manufacturing Company (TSMC), Crédit Agricole Corporate and Investment Bank, Taipei Branch, etc., and 5 sustainability bonds, issuers of which include Republic of Chile, Bank SinoPac, etc..

To establish a more comprehensive sustainable bond accreditation regime with more varieties of capital uses, the TPEx, by reference to the practices of international capital market, promulgated on April 29, 2021 the “Operational Directions for Sustainable Bonds” which add to the regulations on the accreditation and issuance of “social bonds” (the “Operational Directions for Green Bonds” and “Operational Directions for Sustainability Bonds” were repealed on the same day.) According to information published on the TPEx, by May 27, 2021, there are already 4 social bonds listed on the TPEx, issuers of which include Bank SinoPac, Far Eastern New Century Corporation, etc.

II. Brief Introduction to the “Operational Directions for Sustainable Bonds”

Below is a brief introduction to and the key points of the “Operational Directions for Sustainable Bonds” (the “Directions”):

1. Definition of Sustainable Bond (Articles 2 and 3 of the Directions):

The term "sustainable bonds" referred in the Directions means green bonds, social bonds, or sustainability bonds that have been accredited by the TPEx. The term "green bond" means a bond whose proceeds are used exclusively for green investment plans; "social bond" means a bond whose proceeds are used exclusively for social investment plans; "sustainability bond" means a bond whose proceeds are used exclusively for a combination of both green and social investment plans.

After the promulgation of the Directions, in addition to the existing green bond and sustainability bond accreditation, an Issuer can also choose to use the proceeds of a bond exclusively for social investment plans, and apply for the social bond accreditation and listing of social bond with the TPEx.

2. Application for Sustainable Bond Accreditation (including Green, Social and                   Sustainability Bond)

n      Type of Securities Eligible to be Accredited as Sustainable Bonds (Article 6 of the Directions)

A.     Straight corporate bonds;

B.     Financial debentures (including NTD-denominated bank debentures issued by a branch of a foreign bank based in Taiwan);

C.     NTD-denominated foreign straight corporate bonds;

D.     International bonds (excluding equity-linked bonds)

E.     Financial asset beneficiary securities or asset-backed securities issued in accordance with the Financial Asset Securitization Act; and

F.      Islamic fixed income securities (Sukuk).

n      The Process for Application for Sustainable Bond Accreditation (Articles 9 and 10 of the Directions)

An issuer applying for sustainable bond accreditation shall apply to the TPEx by submitting a Sustainable Bond Accreditation Application Form, along with the following required documents. The TPEx shall, in principle, complete the review process within 3 business days from the date the application documents are delivered.

After obtaining the accreditation from the TPEx, an issuer shall, in principle, within 2 months from the issuance date of the accreditation certificate, apply to the TPEx for TPEx trading of the bonds. The accreditation certificate shall become invalid if the issuer fails to do so within that period. However, if an application for extension with good cause is filed and the application is approved by the TPEx, a 2-month, one-time-only extension may be granted.

A.     Sustainable Bond Framework;

B.     An assessment opinion or certification report shall be issued by a domestic or foreign certification body stating that the Sustainable Bond Framework meets the requirements of the Directions or of the applicable sustainable bond principles adopted in international financial market practices;

C.     The supporting documents proving that such certification body has the professional capability and experience of issuing such opinion or certification; and

D.     Other supporting documents or information, as necessary (in practice, there were issuers who submit: ICMA Green/Social/Sustainability Bond Information Template, Green/Social/Sustainability Bond External Review Form, etc.).

3. The Bond Framework, Scope of Capital Use and Types of Investment Plans of the Sustainable Bond

n      An issuer applying for sustainable bond accreditation shall adopt a Bond Framework, which shall include the following components (Article 8 of the Directions): 

A.      Description of the investment plan and of the evaluation of their green or social benefits.

B.      Process for investment plan evaluation and selection.

C.      Plan for management of proceeds.

D.      Matters relating to reporting on post-issuance management of proceeds. 

n      Proceeds from the Sustainable Bonds must be exclusively applied to the following, from which the Issuer may choose for the application according to the proposed use of proceeds (Article 7 of the Directions):

A.     Expenditures for investment plans as applied for;

B.     Repayment of debts incurred by such investment plans; and

C.     Financing or re-financing to such investment plans (applicable to, for example, the cases where (i) the bond issuer is a domestic or foreign financial institution or (ii) the obligor of Sukuk issuance which is a financial institution). 

n   Investment Plans of each Type of Bond (Articles 4 and 5 of the Directions) 

Type of Bond	Green Bonds	Social Bonds	Sustainability Bonds
Type of Investment Plans	Green Investment Plans	Social Investment Plans	Green Investment Plans and Social Investment Plans
Items in  the Investment Plans (Issuer may select one or more of the items)	Development of renewable energy and energy technologies;  Improvement of energy efficiency and energy conservation; Reduction in greenhouse gas emissions; Waste recycling or reuse; Conservation of agricultural and forestry resources; Biodiversity conservation; Pollution prevention and control; Conservation, purification, or reclamation, recycling, and reuse of water resources; Adaptation to climate change or other categories approved by the TPEx.	Affordable basic infrastructure;  Access to essential services; Affordable housing; Employment generation, and programs designed to prevent or mitigate unemployment resulting from socioeconomic crises, including through the provision of SME financing and microfinance; Food security and sustainable food systems; Socioeconomic development and rights protection;          Other categories approved by the TPEx.	Should include items from both green and social investment plans

 

4. Information Disclosure Requirements for Sustainable Bonds (Articles 11 and 12 of the Directions)

A.      Information disclosure in the offering documents: the issuer shall disclose the Bond Framework for the Sustainable Bonds in the prospectus or the information required to be disclosed in the Bond Framework (in the case where the bond does not require the preparation of prospectus according to the relevant Taiwan laws and regulations, such disclosure can be made in or offering documents);

B.     Information disclosure before the issuance: before issuing the Sustainable Bonds, the issuer shall upload the Bond Framework and the assessment opinion or certification report for the Sustainable Bonds to the website of the reporting system designated by the TPEx (i.e., the Market Observation Post System, "MOPS"); and

C.     Information disclosure after the issuance: during the term of the bonds, the issuer shall disclose the use of the proceeds of the bonds on MOPS, within 30 days from the date of publication of its annual financial report; provided, however, that the issuer with justifiable reasons may apply to the TPEx for conducting the annual disclosure of such use on a date designated by itself.  For the purpose of reporting the use of the proceeds, the issuer shall further upload the assessment opinion or certification report certified by a certification body stating whether such use meets the investment proposal to MOPS.

5. Penalty (Articles 13 and 14 of the Directions)

A.  Certification Body: If there is any misrepresentation or misleading omission in an assessment opinion or certification report issued by a certification body, the TPEx may void or revoke the sustainable bond accreditation that is based on the assessment or certification by the body, and refuse within a period of 1 year to accept assessment opinions or certification reports issued by the body. 

B.   Issuer of the Bonds: If there is any misrepresentation or misleading omission in a relevant application document submitted or information reported by an issuer, the TPEx may void or revoke the sustainable bond accreditation. If an issuer fails to carry out the reporting procedures according to the Directions or the allocation of the proceeds does not conform to the Bond Framework, the TPEx may notify the issuer to remedy or correct the failure within a prescribed time period. If the issuer fails to remedy or correct the failure within that period, the TPEx may revoke the sustainable bond accreditation.

III.            International Sustainable Bond Principles

 According to the explanation of the promulgation of the Directions, the TPEx prescribed the provisions of the Directions by reference to the international principles published by the following institutions with anticipation of keeping the operational directions of sustainable bonds in Taiwan on track with the practices of the international market:

1. International Capital Market Association

In order to encourage the financing of investments in the projects relating to environmental protection and social responsibility by the international capital market to promote the sustainable development of global economy, the International Capital Market Association (ICMA) prescribed the Green Bond Principles (GBP), the Social Bond Principles (SBP), the Sustainability Bond Guidelines (SBG) and the Sustainability-Linked Bond Principles (SLBP) (together referred to as the "Principles") which provide guidelines on the issuance of sustainable bonds. The Principles are currently the leading global framework for the issuance of sustainable bonds in the international capital market.

2. Other International Principles

With respect to the international principle for green bonds, in addition to the GBP prescribed by the ICMA, there are two other global frameworks as follows:

A.    The Climate Bonds Standard (CBS) issued by Climate Bonds Initiative (CBI)

B.    EU Green Bond Standard (GBS)

The Taiwan bond market has been adopting several bond issuance regimes to strive for the opportunities to get on track with the international market. The promulgation of the Operational Directions for Sustainable Bonds is one example. It is worth keeping an eye on the impetus and impact that the adoption of the new sustainable bond accreditation regime can potentially bring to the development of the domestic market.