Striving for a sustainable future - New guidance published in respect of reporting on sustainable finance loans
As the growth of sustainable finance loans and products continues unabated, the drive to ensure best practice and achieve a consistent approach in respect of the reporting process remains a prominent feature in the market.
The well-established working party group consisting of the Loan Market Association and other related trade associations has helpfully issued further guidance to assist stakeholders with the reporting requirements expected when structuring and entering into green loans, social loans or sustainability linked loans (“SLLs”).
In May last year, the ante was upped in respect of the reporting requirements relating to SLLs through a set of revisions to the Sustainability-Linked Loan Principles (the “SLLPs”).
The updated SLLPs confirmed that borrowers of SLLs must obtain independent and external verification of their sustainability performance targets (“SPTs”) and related key performance indicators (“KPIs”) by a qualified external reviewer with an appropriate and relevant level of expertise, such as an auditor, environmental consultant or a representative of an independent ratings agency.
This is a position unique to SLLs as distinct from Green Loans and Social Loans which do not, as yet, expressly require verification by an external reviewer as a compulsory aspect of those loan products.
Scope of external reviews available
The new guidance document neatly summarises the variety and scope of external reviews currently utilised in the sustainable finance arena, which are as follows:
- Second Party Opinions – an opinion from an entity independent from the borrower but with sufficient expertise in the relevant environmental, social or sustainability aspects pertaining to the review.
- Verification – if the external review relates to a SLLs, borrowers must now obtain independent verification of the SPTs and related KPIs as indicated above. A borrower of a green loan or a social loan may also wish to seek independent verification against its chosen set of use proceeds criteria and impact metrics to further validate its green or social loan credentials.
- Certification – some borrowers may wish to go a step further than the scope of the above reviews and seek formal certification of their green, social or SLL against a recognised external green, social or sustainability standard or label from an accredited third party.
- Green, Social and Sustainability-Linked Loan Scoring/Rating – a further form of reporting option available is the evaluation or assessment of a borrower’s use of proceeds, KPIs or SPTs by specialised research providers, consultancy firms or ratings agencies using their own established from of scoring or rating methodology.
Standards expected of external reviewers
As the reporting process involves a wide range of professional firms carrying out the different types of external reviews, it is expected that external reviewers should adhere to the following five fundamental and professional principles:
- Professional competence and due care
- Professional behaviour
The scope and expectation of these principles will come as no great surprise to external reviewers. There is certain to be cross-over with the existing professional standards already applicable to, for example, chartered accountants or the regulatory oversight of ratings agencies involved in the reporting process.
The recent guidance also provides links to existing assurance service professional standards and industry-wide codes of conduct that external reviewers should be cognisant of as part of their engagement.
Disclosure of external reviews
In addition to providing the outcome of the external review to the lenders involved in the loan transaction, there is an expectation that borrowers should make the report (or an appropriate summary of its findings) publically available through the usual channels subject to any confidentiality or competitive aspects which need to be factored in.
We expect that the attempts to encourage best practice and a consistent approach across the various aspects of the reporting process will be welcomed by the financial institutions, borrowers and external reviewers involved in sustainable finance loans and is likely to align with the work already being carried out in this area.
The prominence of sustainable finance loans is still in its infancy in the local Northern Ireland marketplace, but we are now finally starting to see that change with sustainability linked loans with local borrowers being documented and the relevant reporting requirements factored into that process.
We hope to see that trend continuing as the strive towards a more sustainable future continues for us all.
If you have any further comments or queries in relation to any aspect of this article, please contact Damian McElholm, Partner in the Banking & Finance team.