March 20, 2019 - (updated March 25, 2019) – Today, the LSTA, together with the Loan Market Association (LMA) and Asia Pacific Loan Market Association (APLMA), published Sustainability Linked Loan Principles. This voluntary framework represents the next step in collaborating to develop global standards for sustainable lending.
Global volume of sustainable loan transactions has grown and 2018 saw the first green loans and sustainability linked loans come to the US loan market. In December 2018, the LSTA, together with the LMA and APLMA, published the Green Loan Principles which sets forth a standard framework for certain loans that are used to finance green projects. (For more information, please click here.) The new Sustainability Linked Loan Principles (SLLP) set forth a voluntary, high-level framework for a different type of loan. Unlike green loans, the use of loan proceeds is not a determinant. In most instances, sustainability linked loans will be used for general corporate purposes. The SLLP categorizes loans which incentivize the borrower, typically through margin, to achieve ambitious, predetermined sustainability performance objectives. In this way, sustainability linked loans represent one of the most direct ways of incentivizing a borrower to improve its sustainability profile. Through the setting of meaningful performance targets, lenders can make a real impact in motivating companies—whether those borrowers are already leaders in sustainability or just beginning to work toward sustainable goals. As reported by Reuters, the SLLP are expected to bolster borrower and investor confidence in sustainable lending.
The SLLP enable market participants to clearly identify and understand the key characteristics of sustainability linked loans, based around the following four components which are designed to facilitate transparency and disclosure.
- Relationship to the borrower’s overall CSR strategy: The borrower should clearly communicate its sustainability objectives to its lenders, as set out in its corporate social responsibility (CSR) strategy and how these objectives align with the sustainability performance targets (SPTs) proposed for use in the loan.
- Target setting – measuring the sustainability of the borrower: For each transaction appropriate SPTs are to be negotiated between the borrower and lenders. The SPTs should be ambitious and meaningful to the borrower’s business and should be tied to a sustainability improvement in relation to a predetermined performance target benchmark. The SPTs should be based on recent performance levels and may be internal or external. For instance, such a loan may be tied to borrower’s internal key performance indicators or tied to external ratings. Using the predetermined SPTs, margin is often tied to the borrower’s performance thus incentivizing the borrower to improve.
- Reporting: The SLLP encourages the borrower to make and keep readily available up to date information relating to its SPTs and provide this information to all lenders at least once a year. While it will not always be the case, a borrower is also encouraged to publicly report information relating to its SPTs and such information will often be included in a borrower’s annual report or its CSR report.
- Review: For each transaction the need for external review is to be negotiated and agreed between the borrower and lenders. For loans where information relating to the SPTs is not made publicly available or otherwise accompanied by an audit/assurance statement, it is strongly recommended that a borrower seek external review of its performance against its SPTs. With respect to certain SPTs, even if data is publicly disclosed, verification of the borrower’s performance by independent external review may be desirable. Where no external review is sought, it is strongly recommended that the borrower demonstrates or develops the internal expertise to validate the calculation of its performance against its SPTs – and to thoroughly document any such expertise. This information should be communicated to all lenders and, when appropriate, also made publicly available.
The LSTA is committed to facilitating the growth of sustainable lending and hopes to encourage the growth of sustainable products as well as preserve flexibility and foster innovation in this dynamic space. To this end, the LSTA will continue to offer voluntary standard frameworks, where appropriate, as well as educate loan market participants on sustainable lending.