Welcome guidance for Borrowers engaging in Sustainability Linked Loans:

The rise in popularity of Sustainability Linked Loans (SSLs) shows no sign of slowing and has resulted in them becoming the most popular sustainable finance product - by some way. Given the fact their purpose is not tied to a specific sustainability project (unlike Green Loans or Social Loans), SSLs carry a greater deal of flexibility which is favoured by both Lenders and Borrowers alike.

However, this sense of flexibility has also resulted in a greater focus being placed on the structure and style in which SSLs are being drafted, and whether or not they have sufficient robustness to maintain integrity as a sustainability tool and resist accusations that they are used for the purpose of “greenwashing”.

In order to combat such claims, the Loan Market Association (LMA), in conjunction with the Loan Syndications and Trading Association, published a set of Sustainability Linked Loan Principles (the SLLP) to offer guidance around sustainability loan products and to provide a comprehensive overview of the key components required in a SSL. In May of 2023, the LMA published further guidance in the form of draft provisions for the inclusion in SSLs (the Draft Provisions), which are directly underpinned by the SSLP and aim to provide a greater deal of robustness and integrity in this area. While neither the SSLP nor the Draft Provisions are mandatory for any SSL, they are widely adopted by many Lenders as a useful starting point and base.

Both the SSL and Draft Provisions offer a degree of granular detail not before seen in guidance for draft SSL agreements, and while this is helpful, it has presented some difficulty for Borrowers and their advisors navigating the clauses contained within the Draft Provisions.

On 2^nd August the Association of Corporate Treasurers (ACT) published welcome guidance for Borrowers on SSLs so that Borrowers can have a better understanding of Lenders expectations and requirements, and so they are better equipped when understanding and negotiating SSL agreements.

The ACT guidance offers a thorough overview of SSLs as a product, allowing Borrowers to be au fait with what it takes to make a loan a SSL, while also providing a useful commentary from a Borrowers perspective on the Draft Provisions.

In particular, the ACT guidance outlines 5 key components that will be required in any type of SSL:

1. Selection of KPIs:
   1. Borrowers must have key performance indicators (KPIs) for sustainability, which must be relevant, core and material to a Borrowers’ overall business;
   2. They must be measurable and able to be benchmarked against industry peers or industry standards; and
   3. When selecting KPIs Borrowers may wish to draw from current sustainability goals, engage ESG consultants, or work with Lenders acting as a sustainability co-ordinator;
2. Calibration of SPTs:
   1. Borrowers must have sustainability performance targets (SPTs) which represent a material improvement in the respective KPIs;
   2. These SPTs must push a Borrower beyond both a “business as usual” trajectory and beyond regulatory required targets; and
   3. The Borrower must select these SPTs in good faith and ensure they remain relevant throughout the life of the loan.
3. Loan Characteristics:
   1. There must be an economic outcome linked to sustainability within the loan. E.g. Margin may be linked to the Borrower meeting their SPTs;
   2. If the Borrower consistently meets their SPT then this may reduce the margin of their loan.
4. Reporting:
   1. Borrowers need to report at least annually to Lenders on SPTs so that performance may be assessed and to ascertain whether they remain ambitious;
   2. Borrowers may have to provide a sustainability compliance certificate or report, but emphasis should be placed on the content and quality of the information they are reporting.
5. Verification:
   1. Borrowers must obtain independent and external verification of their performance level against each SPT for each KPI by a relevant and qualified external reviewer.

The most recent update by ACT proves to be welcome guidance for Borrowers in an area that seems to be increasingly fast-paced. It adds substance to the foundations laid down by the SLLP and Draft provisions in order to help create a more standardised approach in SLL agreements. However, it is important to note that the SLLs market remains fluid with the LMA keeping their guidance under regular review.

If you would like any further information or advice, please contact Paul Hadden from the Banking & Finance team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.