July 20, 2022 - The LSTA summer series tackled the hot topic of ESG this week when the LSTA’s Tess Virmani was joined by Fanny Charrier of Credit Agricole CIB, Jonathan Gardiner of Bloomberg, Gemma Lawrence-Pardew of the LMA, and Bob Lewis of Sidley to discuss Sustainability Linked Lending (SLL).  In 2019, the LSTA, LMA, and APLMA joined together to publish the Sustainability-Linked Loan Principles (SLLP).  In 2021, the SLLP underwent a structural revision to provide a clear delineation between the selection of key performance indicators (KPIs) and the calibration of sustainability performance targets.  Then earlier this year, in order to promote the development and harmonization of this product and underpin its integrity, the associations produced Guidance on the SLLP, which provided market practitioners with clarity on the SLLP’s application.

If treaty targets for emissions reduction, for example, are to be met, then all companies must be encouraged to take part in the journey with incentives offered to them as they move forward.  For companies looking to issue a sustainability linked loan (SLL) timing will be key and sustainability must be at the heart of the transaction; however, realistically not all companies will be in position today to issue a SLL. These companies may find it helpful to look to one of the market’s recent developments — the “Sleeping Sustainability Linked Loan”.  For those companies not yet in a position to issue a SLL, an option could be to include a “Sleeping Sustainability Linked Loan” in the credit agreement.  For this structure, although no sustainability link feature is included at the time the loan is originated, provision for a future streamlined amendment incorporating sustainability linked features is included in the credit agreement, with pricing incentives being set out.  On this point, it seems that the market is coalescing around the need only for required lender consent (rather than unanimous lender consent) in order to have that type of pricing adjustment take place.  

Another recent though worrisome practice seen in Europe is referred to as sustainability “a la carte”, and this practice risks undermining the concept of SLLs.  The consequence of a borrower not meeting its reporting requirements / targets is the declassification of the sustainability linked loan.  However, in Europe the market is seeing borrowers which have had their SLL declassified then hit their KPIs the following year and the same outstanding loan of that borrower is then reclassified as a SLL.  This practice is frowned on — a loan should not be allowed to swing between declassification and reclassification while it is outstanding.  Clearly, there is still much work to be done in this new area, and the LSTA is committed to working together with its members and the other associations to lead the market and advance the harmonisation of this product.  Click here for the session’s slides and replay.