Addressing some of the most frequently asked questions in relation to the Green Loan Principles (GLP) and the Sustainability Linked Loan Principles (SLLP), new guidance documents have been prepared and published by the Asia Pacific Loan Market Association (APLMA), EMEA’s Loan Market Association (LMA), and the North American Loan Syndications and Trading Association (LSTA).
With representatives from leading financial institutions and law firms across the globe having collaborated in the creation of the original publications (GLP was launched in 2018, and the SLLP in 2019), the goal of the new guidance documents is to move another step closer to a globally acceptable approach to the granting of green and sustainability linked loan products, ultimately supporting further market expansion.
“Whilst the growth of the market for green and sustainability linked loan products has been very encouraging over the last few years, there is still more to be done to bring these products into the mainstream,” explains Gemma Lawrence-Pardew, Senior Associate Director, Legal of the LMA. She hopes the launch of these guidance documents “will help to further break down barriers to the use of these innovative finance products in the syndicated loan market”.
Within GLP guidance preparation, two key areas surfaced in discussion with market participants, says Lawrence-Pardew. One was tracking the use of proceeds, where clarity was sought on how best to ascertain that money lent under GLP was being deployed as intended.
Related to the disclosure of use of proceeds, the new publication indicates what supporting information a borrower is expected to provide. Whilst no specific mechanism to achieve this is prescribed, borrowers are urged to clearly designate ‘loan purpose’ from the outset, with the guidance suggesting the provision for such a statement be provided in the loan documentation.
Another key area of guidance offered concerns the provision of review processes. With ICMA’s Green Bond Principles, external review is required to validate a green project prior to issuance. With green loans existing in a private market, with close client/lender relationships, GLP steers participants towards effective internal reporting of loan suitability, wherever this may be deemed suitable. The new guidance provides greater clarity around the processes, requirements and expertise that a borrower needs evidence of to be able to conduct an internal review with the aim of self-certifying alignment of the green loan with the key features of GLP.
The self-certifying process is designed to be self-contained. In readiness, some market participants have been upskilling their climate change and sustainability teams, to the extent that they have knowledge equivalent to that of some external assessors, says Lawrence-Pardew. This may give lenders the assurance that they seek, without the borrower hiring in third-party help. Of course, this would require the borrower to provide evidence of that in-house expertise, but this may be achieved through clearly documenting the expertise of their staff and making publicly available, via their website or otherwise, the parameters on which they assess green projects, and the internal expertise they have to assess such parameters, for example.
New guidance related to SLLP also features two key areas of focus. The first is borrower ‘ambition’ related to the sustainability performance targets underpinning every sustainability linked loan. Greater definition of ‘ambition’ within the SLLP had been sought by participants. New guidance clarifies that any ambition set should not be any activity likely to be met in a ‘business as usual’ scenario and should represent a true reach for the borrower.
In requiring the borrower step beyond what is already planned or integrated into its day-to-day activities, the guidance acknowledges that no one-size-fits-all approach is possible. It therefore provides introductions to a selection of well-known third-party bodies, such as the Science Based Targets Initiative, that are currently assisting a broad range of market players to shape their sustainability ambitions in accordance with their own sector-specific demands and starting points.
In practice, sustainability linked loans are geared to recognising a borrower’s efforts to improve its broad-based sustainability profile (unlike green loans, which must be directly linked to a specific purpose). Linked loan terms are therefore aligned to the borrower’s performance against a number of mutually agreed sustainability performance targets (its ambitions).
Targets are usually derived from internal analysis of ESG factors. A lender may seek to verify these, some benchmarking them against the loan applicant’s industry or sector peers. Third parties or bodies such as the Science Based Targets Initiative referred to above may be called upon at this stage.
With broad-based performance target-setting required also to be ‘meaningful’ to the borrower’s business, the new guidance seeks to define ‘meaningful’ in this context. Now, says Lawrence-Pardew, with ambition “representing a true reach for the borrower, the obligation that a chosen metric be meaningful means ‘core to the borrower’s business’”.
The lender will often work with its client to confirm the applicability of the stated ambitions and expected outcomes. Here, the new guidance references, amongst others, the work of the Sustainability Accounting Standards Board (SASB) Materiality Map as an educational source for borrowers.
For treasurers, as the main point of contact with lenders, there is an ongoing task to facilitate transparency around their own organisation’s sustainability strategy and framework. Alongside their internal sustainability experts, treasurers should by now expect to be helping to set criteria where green and sustainability linked loan products are sought, and be assisting in the provision of necessary evidence for lenders. The GLP and SLLP, and their new guidance notes, should be essential reading.