March 24, 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. As reported in recent newsletters, summaries of the Sustainability-Linked Loan Principles and related Guidance are available here and here. Below we identify the key changes reflected in the 2023 versions of the use of proceeds structures: Green Loan Principles and Social Loan Principles (and related Guidance).
Generally most of the updates bring the language of the GLP and SLP more fully in line with their bond counterparts maintained by ICMA. The working groups of the Associations want to eliminate any potential arbitrage across loan and bond products so the updates track the language in the loan frameworks closely where appropriate. In some other instances the language of the frameworks was modified to bring greater consistency across the three loan frameworks. Finally, certain sections of the frameworks were believed to be better positioned in the Guidance documents.
Green Loan Principles and Social Loan Principles
- The GLP now explicitly stated that the purpose of the framework is to support the financing of projects that “foster a net-zero emissions economy, protect and restore the environment, facilitate adaptation to climate change, and/or provide other environmental benefits.”
- The non-exhaustive list of eligible project categories that were set forth on Appendix 1 of the GLP have been folded into the body of the framework. Similarly, the non-exhaustive list of eligible project categories and examples of target populations that were set forth in appendices to the SLP have been folded into the body of the framework.
- The four core components – Use of Proceeds; Process for Project Evaluation and Selection; Management of Proceeds; and Reporting – have been augmented to strengthen the frameworks’ commitment to disclosure and transparency. Most notably, the updated frameworks state that the management of proceeds should be attested to by the borrower in a formal internal process and lenders should be informed of temporary placement for the balance of unallocated proceeds. Also, in addition to annual reporting on the use of proceeds and reporting in the event of material developments, the frameworks now expressly call for reporting on use of proceeds until loan maturity for revolving credit facilities.
- The Review section now refers to and adopts the guidance set forth in the Guidelines for External Reviews which was published since the GLP was updated in 2021.
GLP Guidance and SLP Guidance
- Additional guidance has been provided in relation to refinancing via green or social loans, including details of extra information that lenders will require in these circumstances (such as information in relation to look-back periods).
- In relation to reporting, the guidance documents provide more detail around impact reporting for borrowers. It is understood that for certain projects, actual impact cannot be calculated until those assets are operational and/or projects completed, which may/may not be at the origination, extension or refinancing of a green loan. In these cases, borrowers should report on their estimated impact. With either approach, actual or estimated, borrowers are encouraged to provide detailed insight with clear disclosure on the scope and limitations of data presented.
- The section on greenwashing has been removed – not because it has become irrelevant. Indeed, the robust conversations on greenwashing now merit more fulsome treatment and the Associations are looking to produce a research paper on the topic.
- The GLP guidance document also deals with the situation where a borrower is at the start of their transition journey but wants to enter into a green loan. The guidance document suggests a greater level of transparency will be required in the presence of controversial issues, and provides that additional disclosures may be sought around the strategic importance of sustainability for the business. Similar considerations are raised in the SLP guidance where a borrower has low ESG ratings but wishes to enter into a social loan.
- Additional guidance has been provided on documentary provisions that should be considered for inclusion in green and social loans, including disclosure requirements, conditions precedent, no communication clauses and declassification provisions, as well as provisions relating to a green loan or social loan coordinator (where relevant).
For more information, please contact Tess Virmani.