March 1, 2023 - Recently the APLMA, LMA and LSTA published updated versions of the Green Loan Principles, Social Loan Principles, Sustainability-Linked Principles and related Guidance. The final versions reflect the active participation of and deliberation across the working groups of the Associations to preserve the global applicability of the standards. The updates themselves are modest (in substance) but do refresh the Principles and Guidance to accurately reflect current market practice and align them, as appropriate, with other frameworks, such as the parallel Principles maintained by ICMA. Below is a summary of the amends to the Sustainability Linked Loan Principles. Summaries of the related Guidance and the other frameworks will follow in subsequent posts.

Sustainability Linked Loan Principles (SLLP) – February 2023

• The SLLP now refer to the broader credit markets rather than the syndicated lending space in which they emerged. This clarification in the language better encompasses the neighboring lending segments, such as private credit, that have adopted SLLs and reinforces the fact that the SLLP offers a framework articulating the fundamental characteristics of SLLs regardless of the lending market.
• The SLLP now has a modified definition of a “sustainability-linked loan” – one which mirrors that in the Sustainability-Linked Bond Principles: “The SLL product incentivizes a borrower to achieve material, ambitious, pre-determined, regularly monitored and externally verified sustainability objectives through Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs).” Alignment of this definition is important to prevent structure arbitrage and make the most sense to market participants. In doing this, previous signposts for KPIs no longer appear. For instance, the SLLP no longer explicitly refer to “external ratings and/or equivalent metrics” as an example of a KPI but this in no way means that an ESG rating is no longer regarded as a suitable KPI. It is for parties to agree on a case-by-case basis depending on the profile of the borrower, together with the sector and jurisdiction within which it operates.
• There has been no change to the core components of an SLL but the language in the SLLP has been refined to more clearly underscore the need for the KPIs selected in an SLL to be material to the borrower’s core sustainability and business strategy and address relevant ESG challenges of its industry sector. The SLLP also now recommend that SPTs for each KPI should be set on an annual basis unless there is a strong rationale for a deviation in frequency. The “Reporting” section now specifically refers to a sustainability confirmation statement by the borrower (with verification report attached) as being a lender expectation. This stems from the 2021 update to the SLLP which added verification of the borrower’s performance over the life of the loan.
• The “Verification” section has been reviewed and refined to clarify the universe of external reviewers who could perform the functions contemplated in the SLLP. In some cases, this service may be performed by an auditor (on a limited or reasonable assurance basis) and, in others an environmental consultant or ratings agency may perform the external review. The Associations will be examining whether further guidance around external reviews would be helpful as an update to our Guidance of External Reviews.
• The Appendix setting out common categories of KPIs has been removed. Market participants are encouraged to review the Illustrative KPI Registry that ICMA published in 2022 for common categories.
• The Associations have also taken the opportunity to cross refer to additional resources (Guidance on External Reviews, the LSTA’s Drafting Guidance for Sustainability-Linked Loans, etc.) to provide a more holistic picture of the SLL market.   

For more information, please contact Tess Virmani.