The International Capital Market Association has highlighted that while sustainable repos are gaining traction, challenges persist, with participants calling for more guidance and industry best practices. These insights were drawn from ICMA’s 2024 Repo & Sustainability Survey, on Friday 30 August, which provided a detailed exploration of current market practices and challenges in the repo market, particularly concerning sustainability.
Based on 20 responses from sell-side firms, market infrastructure operators, rating agencies and public sector issuers, the survey revealed several key findings. The overwhelming majority of market participants are prioritising repo transactions involving sustainable collateral, identifying this category as their top priority. Respondents emphasised the need for clear and dedicated guidance in this area. ICMA’s report also noted that participants see substantial benefits in aligning use of proceeds (UOP) repos under a firm-level sustainability framework, citing improved integration with long-term sustainable projects, better reporting and enhanced documentation. However, respondents also expressed a desire to maintain flexibility in their approach to UOP repos.
The survey further indicated a strong preference for sustainability-linked repos to be issued under overarching sustainability frameworks, which was seen as crucial for ensuring consistency with organisation-level key performance indicators (KPIs) and sustainability performance targets. There was a consensus among respondents that sustainability-linked repos are more suitable for maturities exceeding 12 months. Additionally, there was a call for further dedicated guidance on sustainability-linked repos, with respondents underlining the relevance of the sustainability-linked bond principles (SLBP) as a temporary framework.
The development of repo transactions involving sustainable collateral was another significant theme identified in the survey. Respondents acknowledged the need for market best practices and industry guidelines to facilitate the growth of this segment. However, a lack of client demand was identified as a challenge, leading some respondents to call for regulatory and central bank incentives to support the development of the market for sustainable collateral.
One emerging trend highlighted by the survey was the increasing use of environmental, social and governance (ESG) ratings as a preferred tool for repos with sustainable counterparties. However, respondents expressed concerns that these ratings often emphasised financial risks over broader environmental or social impacts. Although there are currently no agreed market standards for ESG ratings or metrics, the report noted ongoing regulatory developments, such as the EU regulation on the transparency and integrity of ESG rating activities, as well as the consideration of a market-driven voluntary code of conduct for ESG ratings and data products providers.
In line with practices in the sustainable bond market, the majority of respondents did not view a breach of green or sustainable undertakings as grounds for treating it as an event of default. Many supported the idea of adding an annex or supplemental clause to the global master repurchase agreement (GMRA) to address sustainability concerns more directly.
To avoid double-counting from an accounting perspective, the survey concluded that green claims should remain with the repo seller, who retains economic exposure to the assets. While repo buyers do not have economic exposure to sustainable assets, this should not prevent them from disclosing or communicating their sustainability-related repo transactions. Such transactions could be included in other metrics, such as the annual sustainability report. The reinvestment of repo proceeds into new sustainable assets would be counted as separate green claims, with multiple respondents stressing the need for additional guidelines and clarity on this topic.
Repo stands for repurchase agreement. The repo market refers to short-term borrowing between investors and traders involving securities that are sold with a repurchase agreement.