Revised principles for ESG-linked loans released

Changes issued to promote development and integrity of ESG loans as market continues to grow

In February, the Loan Market Association (LMA), the Loan Syndications & Trading Association (LSTA) and the Asia Pacific Loan Market Association (APLMA) published updated versions of Green Loan Principles and Guidance (GLP), Social Loan Principles and Guidance (SLP) and Sustainability-Linked Loan Principles and Guidance (SLLP). The update to the principles reflects recent market developments across the global sustainable finance markets.

The GLP, SLP and SLLP were developed to create high level frameworks of voluntary recommended market standards to promote consistency across the sustainable loan markets. The frameworks aim to preserve and enhance the integrity of these loan products while allowing for flexibility, which is important for the market to develop.

GLP and SLP changes

According to law firm Hogan Lovells, the updated GLP and SLP will:

• give more detail on eligible green or social project categories
• recommend that the proceeds of a green and/or social loan should be attested to by the borrower in a formal internal process linked to the borrower’s lending and investment operations for green and/or social projects (including disclosing any temporary placement for the balance of unallocated proceeds)
• give additional detail on requirements for external reviewers
• recommend that borrowers appoint external review providers to assess alignment of the green and/or social loan or programme with the four core components of the GLP and/or SLP. This has been introduced as a recommendation rather than a mandatory requirement to strike the right balance between transparency and flexibility.

SLLP changes

At the same time, Hogan Lowells says the updated SLLP will:

• highlight the importance of key performance indicators (KPIs) being material to the borrower’s core sustainability and business strategy, while addressing the relevant ESG challenges of its industry sector
• recommend that annual sustainability performance targets (STPs) are set for each KPI for each year of the loan term
• contain helpful updated guidance and clarification on verification reports and external reviewers
• and clarify that for a loan to be a SLL, the KPIs and SPTs and all other core components of the SLLPs must be documented at origination. Only in exceptional circumstances, and only if the borrower already has a clear sustainability strategy in place, can the parties agree to set KPIs and SPTs post-origination, and this must be done no later than 12 months after origination. And until SPTs have been set, in no circumstances can the loan be called a SLL. It is recommended that it be a unanimous lender decision to agree those SPTs and KPIs other than where the size the syndicate makes this impractical.

Grandfathering

All green, social or sustainability-linked loans completed prior to 9 March 2023 will be exempt from following the 2023 Principles and should be reviewed in conjunction with the version of the GLP, SLP and/or SLLP in force at the time of origination. All loans originated, extended or refinanced after 9 March 2023 must fully align with the relevant 2023 Principles to be classified as “green loans”, “social loans” or “sustainability-linked loans”.

For more information

The full details of the amended principles can be found here. A summary of the changes made to the guidance on SLL principles can be found here, while a similar summary for GLP and SLP changes can be found here.

About the author

Philip Smith is the editor of The Treasurer