Legal & Regulatory News
LMA, LSTA and APLMA release a summary of the changes made to the Guidance on the Sustainability-Linked Loan Principles14 March 2023
Following the release of the updated Green Loan Principles, Social Loan Principles and Sustainability-Linked Loan Principles (SLLP) at the end February, we (the LMA) are pleased to share the first of two guidance notes summarising the main changes made.
In this first note, we are pleased to provide a non-exhaustive summary of the amends to the Guidance on SLLPs. A similar summary of the Green Loan Principles and Social Loan Principles (and related Guidance) will follow in a subsequent alert.
- The Guidance highlights that a sustainability-linked loan (SLL) is designed as a transition tool supporting the borrower as it seeks to improve its sustainability performance. Definitions of “sustainable” or “sustainability” may differ across jurisdictions and sectors and borrowers are reminded to keep that in mind when setting key performance indicators (KPIs) and related targets (SPTs). Furthermore, the Guidance clarifies that the term should not be confused with definitions in taxonomies that define a specific sustainable economic activity.
- Relatedly, the Guidance emphasises the broad accessibility of SLLs. A borrower can be at the very beginning of their transition journey or further along. In practice, however, borrowers that have integrated their sustainability strategy into their business strategy will often be able to evidence that their chosen KPIs and SPTs meet the requirements set out in the SLLP. Indeed the goals set out in that strategy will often serve as KPIs in the SLL. There are no minimum requirements in terms of a borrower’s ESG performance set out in the Guidance - rather structuring decisions are left to the transaction parties so long as the core components of the SLLP are met.
- The Guidance expands on its discussion of “materiality” in KPI selection. The multifaceted nature of materiality – materiality with respect to the business or materiality with respect to its impact on the environment or society – is identified. As a best practice, borrowers should undertake a materiality assessment of itself and its industry to inform the selection of KPIs for the SLL. This assessment will identify the most important ESG considerations for the borrower’s business and stakeholders and may reference one or more ESG reporting frameworks and standards.
- The Guidance offers more explicit direction on the “ambitiousness” of SPTs. SPTs can be: “(i) external and set by reference to science; (ii) external and set against a borrower’s ESG performance in relation to its peers; (iii) internal and bespoke to the borrower’s business referencing past performance where possible; or (iv) a combination of any of these”. The SPTs are intended to show improvement beyond “business as usual” and not lower that any applicable regulatory requirements or publicly announced targets. Comparison of the targets against those of industry peers may be instructive. In most cases SPTs will not be lower than the borrower’s past performance. The Guidance further notes that the setting of targets will reflect the relevant geography and governmental policies of the jurisdiction in which the borrower operates so may differ across jurisdictions. It is important that the borrower clearly communicate to lenders the references to benchmarks selected, and how the specificities of a given sector or local context have been identified and addressed.
- The Guidance makes clear that only after both KPIs and SPTs are agreed and set and the other components of the SLLP are met can a loan be referred to as an SLL. However, in exceptional instances the sustainability linked feature may be added to a non-SLL after origination.
- The Guidance no longer has a documentation section, instead it references the drafting guidance developed/being developed by each of the Associations. The LSTA recently published its Drafting Guidance for SLLs.
- The “Verification” section of the Guidance has been expanded to offer specificity around pre-signing and post-signing reviews and the expected contents of a verification report. These reviews may be opinions or KPI/SPT assessments – a clarification intended to be inclusive of the different types of external reviewers. The Associations also intend to review the Guidance on External Reviews to determine if updates are warranted there.