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IFRS9: Accounting for investments in ESG (Environmental, Social and Governance) bonds

James Estlin, Manager, Department of Professional Practice, KPMG UK looks at accounting for interest changes in ESG bonds.

ESG bonds are designed or structured to achieve or incentivise an ESG objective. The size of the global ESG debt market has increased significantly in recent years, with cumulative green bond issuances surpassing the $1tn mark at the end of 2020, according to data from the Climate Bonds Initiative (an international not-for-profit group aiming to promote sustainable investments). ESG bonds may be attractive to investors pursuing an ESG agenda. The bonds themselves come in different forms, including: 

This article addresses the classification and measurement considerations for IFRS 9 reporters that purchase ESG bonds with KPI-linked interest step-up/down features, focusing on the question of SPPI-compliance (a concept explained below).