Sustainable Commercial Paper: Short-Term Paper, Long-Term Impact

Over the past few years, we have seen growing interest in Commercial Paper (CP) programmes with a sustainable focus.

Traditionally used by corporations, financial institutions, sovereigns, and other issuers for short-term liquidity needs, CP is now being adapted to align with environmental, social, and governance (ESG) objectives.

The International Capital Market Association (ICMA) has recognised this shift in its October 2024 paper, The Role of Commercial Paper in the Sustainable Finance Market, underscoring the growing investor demand for sustainable short-term instruments.

As sustainable CP gains traction, several key questions have arisen when structuring these programmes, including:

• How are the sustainability objectives of the Issuer best integrated into a CP programme?
• What should Issuers disclose in the offering documentation for sustainable CP?
• Should sustainable CP be issued under a separate programme, distinct from conventional CP?
• What else should be considered, taking into account the recommendations of the ICMA paper and the short-term nature of CP?

This piece explores these issues in the context of broader market trends and regulatory developments.

Key Takeaways Sustainable CP Market Growth: Sustainable CP is gaining traction, with over EUR300 billion in issuance capacity as of October 2024, led by financial institutions and large corporations. Two Main Structures: Sustainable CP is issued in two forms: Use of Proceeds CP and Sustainability-Linked CP. Sustainability-linked CP is structured differently from longer term sustainability-linked bonds. Key Performance Indicators (KPIs): Observed KPIs for sustainability-linked CP include carbon emissions reduction, renewable energy use, and diversity targets. Disclosure and Risk: Sustainable CP requires enhanced disclosures, addressing risks like sustainability performance, greenwashing, and impact, while ensuring clear labelling to differentiate from conventional CP. Programme Structure: Issuers may choose separate sustainable CP, and non-sustainable CP programmes for greater transparency or integrate them within existing programmes for operational efficiency, with ICMA recommending separate programmes for clearer differentiation.

Market Overview

The sustainable finance market has seen exponential growth, driven by regulatory developments, investor preferences, and commitments to ESG goals. Green, social, sustainable and sustainability-linked bonds have become mainstream financing tools, and this has now extended to the money markets, including CP.

According to ICMA, as at October 2024, there were 33 sustainable CP programmes (23 Use of Proceeds CP programmes and 10 Sustainability-Linked CP programmes) with an aggregate issuance capacity of more than EUR300 billion, with financial institutions and large corporations leading the charge. Europe remains the largest market for sustainable CP, with increasing interest in North America and Asia.

Sustainable CP follows two primary structures:

• Use of Proceeds CP: Funds are allocated exclusively to green, social or sustainable projects, similar to green, social or sustainable bonds. Typically, these programmes are extensions of the existing ICMA Green, Social or Sustainable Financing Frameworks of the Issuer.
• Sustainability-Linked CP: The Programme is tied to the issuer's ESG performance, such as achieving carbon reduction targets, ESG ratings or EU Taxonomy alignments targets. If targets are not met, consequences can include ceasing to issue sustainable CP or committing a portion of proceeds to charitable donations. As CP is short term (and often discounted rather than interest bearing), the consequence of failing to hit a KPI is not an increase in the coupon payable on the debt (as is typical in the long terms sustainability-linked bond market).

Key Performance Indicators (KPIs) in the Market

For sustainability-linked CP, issuers typically select key performance indicators (KPIs) that align with their broader sustainability strategy. KPIs used so far in the market include:

• Carbon Emissions Reduction: Measured in terms of absolute reductions or intensity-based reductions (e.g., CO2 emissions per unit of revenue or production).
• Renewable Energy Usage: Goals related to increasing the share of renewable energy in operations.
• Waste Management: For example, reduction in food waste.
• Diversity & Inclusion Targets: Measurable commitments to gender diversity targets.
• EU Taxonomy Alignment: A commitment to issue sustainable CP only if an EU Taxonomy alignment target is maintained.
• ESG Rating: A commitment to issue sustainable CP only if an ESG rating is maintained.

Key Considerations

Disclosure

Incorporating ESG elements into CP introduces a range of additional considerations. Unlike conventional CP, which is primarily assessed based on credit risk and issuer fundamentals, sustainable CP carries additional complexities that Issuers should address in the offering documentation.

Whilst CP programmes do not typically contain a distinct “risk factor” section, sustainable CP programmes typically carry extended disclosure and disclaimers often addressing, amongst other items:

• Sustainability Performance Risk: Issuers may fail to meet sustainability commitments and targets connected to the CP.
• No Event of Default: Failure to hit a KPI or to use proceeds as anticipated will not be an event of default.
• Greenwashing Risk: A statement that there is no guarantee the CP will meet investors requirements as to “sustainability” or any particular regulatory classification (for example, the EU Green Bond Standard).
• Impact Risk: There is no guarantee the use of proceeds will achieve the desired “real world” impact of an investor.

For use of proceeds paper, there will be a description of the sustainable finance framework and how the proceeds will be used. In some programmes, this is relatively short and focusses on a website link, that is not incorporated by reference, to the framework. For others, this is an expanded section providing detail on the use of proceeds, the process for project evaluation and selection, management of proceeds and reporting (mirroring the trend in recent years for longer term debt for more detailed description of the framework). As CP programmes are not regularly updated, if a longer form approach is adopted it is important to include a clear statement that the framework will change from time to time and that the disclosure is updated in line with those changes.

Separate vs. Integrated Programme

A key structural consideration is whether sustainable CP should be issued under a dedicated programme or integrated into an existing CP programme.

Based on ICMA’s market observations, issuers are split in their approach:

• Approximately 70% of sustainable CP issuers use a separate programme, allowing for more tailored sustainability disclosures and improved transparency for investors.
• The remaining 30% integrate sustainable CP within their conventional CP programme, leveraging existing documentation and infrastructure.

Considerations for Each Approach

Separate Programme:

• Enhances transparency and ensures investors clearly distinguish sustainable CP from conventional CP. A separate offering document allows an Issuer to obtain a clearly identifiable green marker on Bloomberg screens, for example.
• Allows for tailored disclosure, reporting, and third-party verification aligned with ESG best practices.
• Can be more time consuming as it requires additional work to set up the separate programme and liaison with the clearing systems and other parties.

Integrated Programme:

• Offers operational efficiency by leveraging existing CP infrastructure.
• Provides flexibility for issuers to issue both conventional and sustainable CP without duplicating documentation.
• Requires clear labelling and robust reporting to maintain investor confidence.

For transparency purposes, ICMA’s guidance recommends the separate programme approach, one for conventional CP and the other for sustainable CP. It is also helpful if identifiers can be used to differentiate between sustainable and non-sustainable CP in clearing and other systems – having separate programmes facilitates this.

We have worked on programmes where existing programme contractual architecture is maintained with minimal amendments but two offering documents are published (one “sustainable” and one “non-sustainable”). This can be a neat solution that allows for differentiation, transparency and separate identifiers whilst also leveraging existing programme documents.

What else should be considered?

Use of Proceeds Sustainable CP

For Use of Proceeds Sustainable CP, ICMA makes a number of recommendations in its paper in relation to the integration of CP into the framework. In particular, highlighting the importance of:

• explaining alignment of the CP with the four core components of the Principles/Social Bond Principles.
• specifically permitting, referencing and explaining the issuance of Use of Proceeds CP, including expectations on how its proceeds can contribute to the Issuer’s overall sustainability strategy.
• specifying that Use of Proceeds CP is an "enabling funding tool" which can finance eligible green, social or sustainable projects or activities.
• allowing for all eligible green, social or sustainable projects or activities to be capable of being financed by Use of Proceeds CP.

There are also a number of recommendations in relation to reporting and transparency specific to sustainable CP, notably:

• Refinancing – where all or a proportion of the proceeds of the Use of Proceeds CP may be used for refinancing eligible green, social or sustainable projects or activities under the Issuer’s framework, Issuers should aim, where possible, to: (i) provide an estimate of the share of financing versus refinancing, (ii) clarify which eligible green, social or sustainable projects or activities may be refinanced, and (iii) provide transparency of the expected look-back period for Use of Proceeds CP used for refinancing.
• Allocations – Given the short term nature and refinancing use, it is difficult to track CP allocations accurately. Allocation reporting should therefore be “(i) considered by way of a cumulative mechanism on an annual (as is standard in the sustainable bond market) and aggregated portfolio basis under the Issuer’s Sustainable Financing Framework, and (ii) on both the simple average and the highest amount of outstanding Use of Proceeds CP applied to the eligible green, social or sustainable projects or activities over the reporting period, as compared against the spend over the same period, rather than tranche by tranche. The total of the Use of Proceeds CP expenditures should exceed this highest amount, rather than the average amount……”
• Impact – Impact reporting should be integrated in the overall impact reporting under the framework with the impact of the Use of Proceeds CP being viewed in generic terms at least at the project portfolio level.
• Double counting – ICMA have also made a preliminary recommendation that, allocations should be transparently communicated to the market to avoid potential “double counting” complications.

Sustainability-Linked CP

It is more difficult to provide universal recommendations on structuring sustainability-linked CP as these programmes are often bespoke and do not fall neatly within established industry guidelines or principles. We would however recommend considering the following:

• Targets – are they ambitious, stretch targets that have real world impact and are relevant and aligned with the Issuer’s business? This is important to avoid accusations of greenwashing.
• KPIs – Sustainable CP programmes have used KPIs that are not commonly used in longer term debt. For example, ESG ratings. If used, are the risks and difficulties of using ESG ratings (e.g. inconsistent criteria, subjectivity, lack of comparability) adequately described in the offering documentation? If EU Taxonomy alignment is used as a KPI, we would recommend including clear disclosure on how the Issuer calculates its EU Taxonomy alignment and the complexities and uncertainties around calculating such a measure.
• Penalties – What is an adequate penalty for failing to hit a KPI? Thus far, observed options are (a) ceasing issuance of sustainable CP and making a public statement (e.g. by way of supplement to the Programme) on the same; or (b) a payout towards a predetermined charity. Issuers should consider what approach is the best fit for structuring their programme.

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Sustainable CP is becoming an important tool in the sustainable finance landscape, providing short-term liquidity while aligning with ESG objectives. However, its short-term nature and frequent refinancing present unique challenges. As the market matures, clear risk disclosure, robust reporting, and programme structuring choices will be key to ensuring investor confidence and regulatory compliance.

If you would like to know more, please get in contact with any of the Mayer Brown team – we would be delighted to help.