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   EU to allow cooperation between competitors in sustainability projects

   This reform is a significant step in the right direction. Thus far, excessive caution and fear of competition law sanctions have hindered important sustainability projects. The reform will facilitate cooperation between companies that operate in the same sector in performing due diligence under the upcoming Directive on Corporate Sustainability Due Diligence. The Commission is finally making it clear that cooperation to ensure compliance with legally binding international treaties’ obligations or prohibitions is allowed. It is absurd that it has been possible to apply the cartel prohibition to cooperation between competitors trying to prevent the use of child labour in their value chain or the felling of tropical timber, for example. This will now change, allowing competitors to enter into a binding agreement to work together to pursue the goals of sustainable development. Sharing information on the sustainability practices of suppliers is also allowed going forward. The new regulation also includes safe harbour for open sustainability standards, such as criteria for climate-friendly products or minimising packaging waste. An arrangement can be allowed under certain criteria even if the price paid by consumers increases, provided that the market share of the companies involved does not exceed 20%. It can also be allowed if the cooperation will not result in a significant price increase. As before, merely having a sustainability goal will not justify any and all cooperation.  Outside of safe harbour, a detailed assessment of efficiency gains will continue to be required. In this assessment, the willingness of the European consumer to pay for a more sustainable product is still considered important, perhaps excessively so. Learn more about the new guidelines (in Finnish): Komissiolta askel oikeaan suuntaan kestävyyssopimusten kilpailuoikeussääntelyssä

   Published: 28.6.2023

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   Green transition is progressing but the permit system is lagging behind

   There are currently several planned emission-free energy projects in Finland – and they are often unprecedented in the energy industry. For example, the production of wind power is being moved from land to sea, and green hydrogen is expected to provide solutions for the needs of energy production in traffic and industry, among others. However, the regulation and permit systems have not managed to keep up with the pace. As the need of and demand for the green transition is great, projects will advance even if the permit system or regulation is not ready. For example, investors, developers and decision-makers are currently interested in the production of green hydrogen, but the reform of the Industrial Emissions Directive, which is being prepared in the EU, will most likely not be ready before the first hydrogen production plant projects have permits. The situation forces companies to be creative and adapt to uncertain circumstances. It is possible that an appropriate permit system does not yet exist for the project or investment. As a result, project developers have a greater responsibility and role in designing and leading the permitting process. Companies need to have a creative strategy, keep a cool head and find a strategic partner that provides them with business-friendly and solution-oriented thinking as well as experience in advancing new innovations.

   Published: 26.5.2023

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   Loan Market Association has published model provisions for sustainability-linked loans

   The model provisions aim to strengthen the integrity of the sustainability-linked loan market, among other things, by providing a basic drafting framework for negotiations. The model provisions are non-binding and intended to act as a basis for drafting an agreement and negotiation and to reflect current market practice. This brings documentation used in the market closer to a standard while streamlining the negotiation process which, until now, has often been time-consuming given the range of different practices concerning agreements within the market. The model provisions include proposed provisions which, after customisation and negotiation on a case-by-case basis, can be inserted directly into the LMA model leveraged loan (senior/mezzanine) agreement and adapted for use with the LMA’s other recommended model loan agreements. The model provisions also include extensive drafting notes emphasising aspects that parties should consider when undertaking a sustainability-linked loan transaction. However, a sustainable finance transaction naturally involves a range of circumstances and complexities that cannot all be prepared for in advance. This is why certain provisions which are commonly negotiated between parties have been intentionally omitted from the model provisions (sustainability-linked conditions precedent, for example). The model provisions also include a rendez vous clause , which enables the parties to negotiate on the basis that any necessary amendments to the calculation methodology, sustainability objectives, KPIs or related terms included in the loan agreement can be made later. A ‘ declassification concept ’ is also included in the model provisions. It allows the agent to declassify the loan as ‘sustainability-linked’ following specific events. The sustainability-linked loan market is developing rapidly, which makes it challenging to respond to the changes. It will be interesting to see how the market will react to these new model provisions and what the related market practice will look like.

   Published: 19.5.2023

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   Supreme Administrative Court issued a yearbook decision on deducting VAT on listing costs

   What was the case about? A Ltd was the group’s parent company that had been listed in December 2015 and that sold administrative services to other companies in the group. Before the listing, A Ltd’s majority owner was the fund B Limited Partnership, which is managed by the private equity investor C Ltd, and the other largest shareholders of A Ltd were mainly private individuals. A Ltd’s listing was carried out by arranging a share sale consisting of an institutional offering and a public offering, whereby B Limited Partnership and the other shareholders offered their shares in A Ltd for sale. In addition, the company arranged a personnel offering and raised the assets from it. Before the listing, A Ltd had approximately 7.8 million shares in total. The old shareholders sold in total 4 million shares in the listing and received approximately EUR 40.2 million in net assets from the offering. In the personnel offering, a little less than 46,000 shares were subscribed for, and the company raised approximately EUR 300,000 from the offering. Deductibility of purchases relating to listing According to the general provision of the Value Added Tax Act on the deductibility of purchases, the person liable to VAT can deduct the VAT payable on purchases that are made for its business subject to VAT. It was deemed that A Ltd’s business as such was fully entitled to VAT deduction. However, taking into account the amount of shares sold by the old shareholders, it was deemed that the listing was not carried out solely in order to raise assets for the company’s business entitling to VAT deduction but partially in the interest of the old shareholders. Due to this, the Supreme Administrative Court ended up deeming, in the same way as the Administrative Court and the Adjustment Board, that the VAT on the listing costs could not be considered fully deductible for the company. The Supreme Administrative Court deemed, however, that only the purchases made for the share sale of the old shareholders and – with respect to the purchases fully concerning the listing – the part of the purchases that concerned the shareholders’ share sale were excluded from the right of VAT deduction. The company was thus entitled to deduct the purchases related to the personnel offering, the part of the purchases that fully concerned the listing and that could not be deemed to concern the share sale of the old shareholders as well as the purchases that were not really related to the share sale but to changes in the company’s business caused by the listing (such as legal and bookkeeping advisory services concerning changes in the company’s business caused by the listing).  Determining and allocating the right of deduction In accordance with the Value Added Tax Act, VAT can only be deducted from a purchase to the extent the purchase is made for use that is subject to VAT. In this case, the Adjustment Board determined the share of deductible listing costs purely based on the new shares issued in conjunction with the listing in proportion to the total number of shares after the listing. Based on this determination, the company could have only deducted 0.6% of the purchases as general costs relating to its business subject to VAT. The Supreme Administrative Court deemed that the actual allocation of the purchases for different purposes was not presented sufficiently specifically. Basically, the company should have specified for each invoice which purchases were allocated for the company’s deductible business and which for the shareholders’ non-deductible share sale. The distribution ground for the right of deduction should have only been determined after this. The deductible share of 0.6%, as assessed by the Adjustment Board, was deemed to be clearly too low with respect to the fact that only the purchases that concern the sale of the old shareholders’ shares and the share of the total listing costs that concerns the share sale should have been excluded from the right of deduction. The decisions by the Administrative Court and the Adjustment Board were overturned and remitted to the Tax Administration for re-calculation of the deductible share of the listing costs. How does this affect the future? The Supreme Administrative Court’s decision is a good reminder that, when it comes to VAT deductions, particular attention should be paid to whether the question is of a purchase concerning the business subject to VAT or whether the right of deduction is restricted, for example, by the fact that the purchase can be deemed to partially concern some other business or perhaps the business of some other person liable to tax. This applies to purchases made within the company’s business as well as to purchases related to ownership arrangements or mergers and acquisitions, for example. As the Supreme Administrative Court deemed in the aforementioned decision, the contents of purchases and their allocation for the VAT deductible and non-deductible share should be determined as specifically as possible. The process to determine the deductible share of the VAT included in the general costs may be complex and time-consuming. We at Castrén & Snellman will be happy to help your company in all questions related to VAT, such as questions related to the general costs.

   Published: 12.5.2023

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   European Commission proposes a set of measures to simplify listing and post-listing requirements

   Upon superficial discovery, around 20 of total of 58 share prospectuses approved by the FIN-FSA during 2021 and 2022 – record years in IPOs, by the way – might either have been avoided altogether or cleared through significantly reduced disclosures under the Listing Act. This is no small matter in Finland. Therefore, the Finnish Government has embraced proposals alleviating the burden of unnecessary and overly extensive prospectuses, and we expect Finland to be a supportive party in negotiations for the new regime. In the past, we have seen transactions falter when parties discover that a planned structure would lead to a prospectus requirement. Sometimes this can be avoided by changing the shape of the transaction, but this is the tail wagging the dog. Occasionally prospectus level disclosures have not felt justified or proportionate to the event. Rigorous reading of ill-formulated exemptions may have led to drafting a prospectus that no one considers to be useful from the perspective of investors. Therefore, whilst prospectus drafting is a bread-and-butter function for us as a leading business law firm in Finland, we fully grasp the aims of the Listing Act. It remains to be seen whether the international market community is also able to accommodate its prevailing practices to the objectives of the Listing Act. The Commission is more unfortunate in proposals to change the insider regime covered by the Market Abuse Regulation (MAR). From the Finnish perspective, MAR has never been an all-out step forward. The proposals include patchy and haphazard fixes that do not seem to coincide with the good intentions of the Listing Act. Forcing permanent insider lists upon issuers instead of project specific lists would increase the disorder already created by MAR. No wonder that the Finnish Government is less enthusiastic about the Commission’s proposals regarding MAR. Another ill-fitting practical change would be to require issuers to notify the regulator of delay of disclosure of inside information immediately after the decision is taken instead of the current regime under which the regulator is notified when and if the information is ultimately disclosed to the public. Finnish issuers have not notified the FIN-FSA of expired or cancelled insider projects. In the following, we provide more details of the proposals. The Listing Act in a nutshell The Listing Act includes a set of proposals to decrease the administrative burden for companies by simplifying the listing and post-listing requirements to attract more companies to the EU public capital markets. The proposals aim, in particular, to improve access to market-based sources of financing for small and medium-sized enterprises that currently rely excessively on bank financing. Adoption of the proposals can take anywhere from several months to several years. The key amendments proposed in the Listing Act relate to the Prospectus Regulation and the Market Abuse Regulation. Further, the Listing Act includes other proposals, such as proposed amendments to MiFID II and MiFIR, as well as a proposed directive on multiple-vote share structures on SME growth market listings. However, this briefing focuses on only what we believe are the key amendments proposed to the Prospectus Regulation and MAR. Proposed amendments to the Prospectus Regulation Exemptions for secondary issuances of securities fungible with securities already admitted to trading The proposals seek to amend the Prospectus Regulation so that the applicable threshold would be increased from 20% to 40%, and the exemption would apply to both the offer of securities to the public and their admission to trading. Even more importantly, an offer or admission to trading of securities that are fungible with securities already admitted to trading on a regulated market or on an SME growth market continuously for at least 18 months would be exempt from prospectus requirement altogether provided that the issuer files with the authority and publishes a concise set of details on the offer and risks related thereto. The exemption would also cover issuers transferring from an SME growth market (such as Nasdaq First North Growth Market) to a regulated market (such as Nasdaq Helsinki Main Market).    The harmonised threshold for exempting small offers of securities The current threshold under the Prospectus Regulation is proposed to be replaced with a unique harmonised threshold of EUR 12 million. Offers of securities falling below this threshold would be exempted from the requirement to publish a prospectus. Member States would still be allowed to require national disclosure documents, such as basic information documents, for offers of securities to the public below EUR 12 million. English accepted as prospectus language and no paper copies printed The proposal also introduces the possibility for issuers to draw up the prospectus in English only, except for the summary which should be translated into the language of the retail investors targeted. The issuers would be able to publish the prospectus in electronic format only and no paper copies would be required to be printed. More standardised and streamlined prospectus for primary issuances of securities The proposals introduce a more standardised format and sequence of the prospectus (including a fixed order of disclosure of the prospectus sections) to be used across the EU. Furthermore, with a view to enhancing the efficiency and effectiveness of the prospectus requirements, the proposals introduce a 300-page limit for IPO prospectuses, allow issuers to draw-up prospectus in English only, aim to streamline the presentation of risk factors in prospectuses and remove the possibility for investors to request paper copies of the prospectus. New EU Growth Issuance Document to replace EU Growth Prospectus The proposals introduce a new EU Growth Issuance Document, which would permanently replace the EU Growth Prospectus. The EU Growth Issuance Document would be subject to a 75-page limit and follow a standardised format and sequence. The Listing Act introduces new annexes to the Prospectus Regulation, listing the information a company needs to include in the revised EU Growth Issuance Document. Based on these annexes, the disclosure requirements for Growth Issuance Documents would be lighter than the current requirement for Growth Prospectuses. CSRD and ESG disclosure requirements to be adopted The proposals also clarify that the delegated acts setting out specific requirements should also consider; 1) for issuers of equity securities, whether the issuer is subject to the sustainability reporting under the upcoming Corporate Sustainability Reporting Directive; and 2)for issuers of non-equity securities, whether those non-equity securities are marketed as taking into account ESG factors or pursuing ESG objectives. However, the proposals do not specify in a detailed manner which CSRD and ESG disclosure requirements will be added to the delegated acts. Proposed amendments to MAR Narrowing down the scope of the obligation to disclose inside information and enhance legal clarity as to what information needs to be disclosed and when The proposals narrow down the scope of the disclosure obligation in the case of multi-staged events (so-called protracted process), such as a merger, by setting out that the disclosure obligation would not cover the intermediate steps of that process, and that issuers would be obligated only to disclose the information relating to the event that is intended to complete a protracted process. However, intermediate steps of the process could still be deemed to constitute inside information and subject to trading and disclosure prohibitions as under the current regime. Additionally, the proposals aim to enhance legal clarity as to which information falls under the scope of the disclosure obligation as well as to the timing of disclosure by empowering the European Commission to adopt a delegated act to establish a non-exhaustive list of relevant information together with the indication (for each piece of information) of the moment when disclosure is expected to occur. Clarifying the conditions under which issuers may delay disclosure of inside information and modify the timing of the notification of the delay to a national competent authority The proposals would replace the general condition that the delay should not mislead the public by setting out a list of specific conditions that the inside information that the issuer intends to delay must satisfy. Furthermore, issuers would be obliged to notify the competent authority of the decision to delay disclosure at the time of making such a decision, whereas under the current regime, issuers must notify the competent authority of their decision to delay after the inside information, the disclosure of which has been delayed, has been disclosed to the public. Clarification of the safe-harbour nature of the market-sounding procedure The proposals clarify that so-called ”disclosing market participants” carrying out market soundings in accordance with certain information and record-keeping requirements as set out in MAR would be granted full protection against the allegation of unlawfully disclosing inside information. Furthermore, in case of non-compliance, there would be no presumption that disclosing market participants have unlawfully disclosed inside information. Modification of insider lists regime The proposals would require issuers to prepare and maintain list of so-called ”permanent insiders”, including all persons who have regular access to inside information relating to that issuer due to their function or position within the issuer. Such obligation would replace the current requirement to establish and maintain project-specific insider lists of all persons who have access to specific inside information. However, such amendment would only apply to the issuer and not persons acting for the account or on behalf of the issuer. Other key amendments The proposals would raise the annual threshold above which transactions conducted by Persons Discharging Managerial Responsibilities and Persons Closely Associated must be notified to the issuer and to the competent authorities from EUR 5,000 to EUR 20,000. In addition, the value to which competent authorities may decide to increase the threshold applied at the national level would be raised from EUR 20,000 to EUR 50,000. Furthermore, the proposals aim to make administrative sanctions for infringements of disclosure requirements more proportionate to the size of the issuer, and in particular for small and medium-sized enterprises.

   Published: 26.4.2023

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   Certainty is now an asset in the investment market

   Listing projects have also been on hold in many companies, waiting for steadier times. The economic uncertainty has reduced valuations and made pricing difficult, which has caused companies to postpone their listings. In order for the number of listings to start increasing again, companies need a solid basis for the market forecast: companies have to be able to trust that the valuation stays stable and that buyer candidates can commit to the tenders they submit. There is, however, a positive trend in the listing market. If inflation and interest rates settle down and valuations stay reasonable, it is possible that listing activity starts to increase again during the second half of the year, which also makes it easier for private equity investors to exit. It seems that after the winter the market continues to develop in the same direction as now: The financing and energy sectors remain attractive, and there may be a positive trend in the technology sector as well. Private equity investors focusing on buyouts will likely continue to be interested in large deals and shift more and more towards platform and add-on arrangements where the investor buys several small objects to build a larger and more efficient unit out of them. For technology investors, the market can offer profitable investments in promising growth companies with well-reasoned valuations and more time with the management. For listing candidates, now is the time to build their capacity and prepare for when the market picks up again. There is never any extra time for it during a listing process.

   Published: 19.4.2023

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   Cybersecurity directive NIS2 sets out new obligations for enterprises in critical sectors

   Regulated industries and operators In addition to public entities, the NIS2 Directive lays down obligations mainly for large and medium-sized enterprises in critical sectors. Critical sectors under NIS2 include, for example, energy, finance, healthcare, transport and digital infrastructure. Certain highly critical enterprises would be subject to the obligations regardless of their size. New obligations to the management bodies of entities under the Directive’s scope One of the aims of the NIS2 Directive is to ensure a high level of responsibility for the cybersecurity risk-management measures and reporting obligations at the level of the entities under the Directive’s scope. With this in mind, NIS2 sets out new obligations for the management bodies of such entities. NIS2 does not define management bodies in more detail; this will be a task for national legislators instead. However, based on the different language versions and the wording of NIS2, we find it likely that in Finland, these obligations would concern at least the boards of entities. Nevertheless, we will only know the exact definition when the draft bill for national legislation is published. As for the obligations, the management body must approve the cybersecurity risk-management measures taken by the entity and oversee their implementation. The minimum requirements for such measures are laid down in more detail in NIS2, but they include at least the following: Members of management bodies are also required to follow cybersecurity training in order to better identify potential cybersecurity risks and assess cybersecurity risk-management practices. Liability rules extended to individual representatives of entities NIS2 requires that Member States enforce a number of sanction mechanisms – such as administrative orders or fines – for infringements of the NIS2 Directive’s obligations. In certain situations, the new Directive extends liability rules from entities to their individual representatives. Members of management bodies could be personally liable in case they neglect their obligation to ensure compliance with the entity’s cybersecurity obligations. When certain conditions are met, persons in management positions could also be temporarily suspended. Now is a good time to start preparing for the changes All in all, the NIS2 Directive sets out a number of new obligations for the critical sector entities under its scope. NIS2 also expects the management bodies of such entities to take on a more active role in ensuring cybersecurity. In future, individual members of management bodies can be held personally liable if they are unable to ensure compliance with the cybersecurity obligations under NIS2. The obligations under NIS2 will only be fully outlined with national implementation, which must be completed by October 2024. However, entities falling under the Directive’s scope should start evaluating their cybersecurity practices and risk-management measures in good time, also with respect to their supply chains.

   Published: 28.3.2023

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   The EU regulation on digital operational resilience for the financial sector poses new obligations for boards of financial entities

   Regulated industries and operators DORA applies to various financial entities, including banks, insurance companies and investment firms. The regulation also applies to service providers that provide financial entities with critical ICT services, such as cloud computing services and data analytics services. New obligations for boards of financial entities One of the aims of the regulation is to ensure that the boards of financial entities take on a pivotal and active role in steering and adapting the overall strategy concerning ICT risk management and operational resilience. Under DORA, the board is ultimately responsible for the entity’s ICT risk management. First, the board must define, oversee and be responsible for the implementation of all arrangements related to the ICT risk management framework. DORA lays down the concrete minimum requirements for risk management frameworks in more detail, but they must include at least strategies, policies, procedures, protocols and tools that are necessary to protect all ICT assets (such as computer software, hardware and servers) and infrastructures (such as premises and data centres) against ICT risks including damage and unauthorised access or usage. In practice, this includes the following: As part of their ICT risk management framework, financial entities must also define a strategy for the risks related to the use of third-party ICT services. This requires that the board members of financial entities regularly review the risks concerning contractual arrangements on the use of ICT services supporting critical or important functions. Board members of financial entities are also required to keep up to date with sufficient knowledge and skills to understand and assess the entity’s ICT risk. Under the regulation, maintaining sufficient knowledge requires, among other things, regular participation in specific training on ICT risks and their effects. Liability for non-compliance Under DORA, Member States must ensure that the national authorities have the power to apply different administrative penalties and remedial measures in case the obligations are breached. It must be possible to direct these administrative penalties and remedial measures at board members of financial entities and other natural persons who are responsible for the breach of DORA under national law. However, the final form of these sanctions will not be known before the national law is amended as required by the regulation. Authority initiative on this matter has not yet begun in Finland. Preparing for the future All in all, DORA creates a comprehensive and detailed framework for the management of risks related to digitalisation in financial entities. DORA includes new requirements with respect to cyber security and operational resilience. The regulation also lays down new obligations for boards of financial entities. Failure to comply with these obligations could even result in administrative penalties to board members on an individual level. The sanctions for breach in Finnish legislation will likely be specified in the coming years. However, it is advisable that financial entities start to evaluate their ICT risks and practices in good time, also with respect to their ICT service providers.  

   Published: 28.3.2023

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   Product liability rules under reform in the EU

   In its current form, the Product Liability Directive establishes strict, i.e., no-fault, liability of the producer for a damage caused to a natural person and to a property used mainly for private purposes, which is caused by insufficient safety of the producer’s ‘products’, i.e., mainly movable objects and electricity. In Finland, the Product Liability Directive was implemented with the Finnish Product Liability Act (694/1990, as amended). In 2018, the European Commission evaluated the Product Liability Directive and concluded that, despite the passing of time, it has remained mainly efficient and relevant, but that it also has some shortcomings. Among other things, the identified shortcomings were related to the current Product Liability Directive not adequately addressing the challenges posed by digital development and circular economy. To update the product liability rules, the European Commission published a proposal for a new directive on liability for defective products on 28 September 2022, which would repeal the current Product Liability Directive (the proposal is available here ). In the same connection, the European Commission also published a proposal for a directive on AI liability (available here ); however, the latter will not be discussed further in this blog. Digital development and circular economy taken into account in the proposed new Product Liability Directive The proposed new Product Liability Directive includes the following key changes: The definition of a ‘product’ is extended to include both tangible and intangible products. The product liability rules would thus not only cover movables and electricity, but also software and digital manufacturing files which mean digital versions or digital templates of a movable. In future, product liability could therefore exist, for example, for a damage caused by software. The concept of damage is extended to cover, for example, the loss or corruption of data that is not used exclusively for professional purposes. According to the proposal, there would also be no maximum or minimum EUR limits for the compensation in future. Companies making substantial modifications to the products that have already been placed on the market or put into service are also covered by the product liability rules in future in order to take into account circular business models. The burden of proof remains on the injured person, who has to prove the damage they have suffered, the defectiveness of the product and the causal link between these two. However, since especially in complex cases, the injured may have difficulties in proving the damage, the proposal contains various presumption rules to lighten the burden of proof. In future, Member States would be required to publish court judgments relating to product liability so that, in the interests of a more harmonised interpretation of the product liability rules, other national courts can take these judgments into account.   What next? The legislation project in Finland is still in early stages. In Finland, the Legal Affairs Committee issued a statement on the proposal for a new Product Liability Directive at the end of 2022, and the matter will proceed to committee reading in the spring. The Government has deemed it important that the product liability rules are updated to better reflect the impact of the digital age as well as the effects of circular economy and global value chains, but it also deemed that the proposal included a number of questions that require further discussion. The precise timeline of the legislation project has not yet been published, but the preparatory work will continue both at the EU level and the national level in the spring of 2023.

   Published: 27.3.2023

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    Updated loan principles and guidances for sustainable financing

    The updates reflect the recent market developments across global sustainable finance markets, with the aim of ensuring that the frameworks continue to promote the development, and integrity, of sustainable finance products. The updated principles apply to all transactions that are completed after 9 March 2023 and related to green, social or sustainability linked loans. Transactions completed before this date should be reviewed in conjunction with the previous version in force at the time of the completion of the transaction. All loans originated, extended or refinanced after 9 March 2023 must fully align with the updated principles to be classified a loan in accordance with the principles. Changes in a nutshell The updates that concern the Social and Green Loan Principles provide additional information on the project categories that are eligible for support. The updated principles also recommend that borrowers verify the proceeds for such loans in official internal processes relating to the borrower’s borrowing and investment actions concerning social and green projects. The updates provide more information on the requirements that concern external reviewers. Pursuant to the updated versions, borrowers should appoint an external reviewer to evaluate whether the green or social loan is consistent with the relevant principles. Using an external reviewer has, however, only been included in the principles as a recommendation, not as a mandatory requirement. The purpose of the update is to promote transparency in relation to green and social loans. The updates concerning the Sustainability Linked Loan Principles emphasise the materiality of the Key Performance Indicators (KPI) to the borrower’s sustainability and business strategy. It is also emphasised that the KPIs must address the relevant ESG challenges of the borrower’s industry sector. In addition, the update recommends that an annual Sustainability Performance Target (SPT) be set per KPI for each year of the loan term. The update also includes useful updated guidelines and clarifications concerning external reviewers, evaluations and verification reports. The updated principles emphasise that in order for a loan to be sustainability-linked, the KPIs, SPTs and all other key requirements in accordance with the Sustainability Linked Loan Principles must be properly documented from the outset of the project. Under certain very exceptional circumstances, the parties can agree on setting the KPIs and SPTs after the conclusion of the arrangement (but no later than within 12 months), but in this case, the loan cannot be called sustainability-linked before the KPIs and SPTs are in place. Sustainability aspects gain foothold in loan negotiations Even though sustainable financing in its different forms as well as the accompanying guidance are still finding their final form, it is clear that sustainability aspects currently dominate discussions in loan negotiations. That is why it is important that both borrowers and lenders are up-to-date on reforms and updates relating to sustainable financing. The Loan Market Association has announced that it will create standard contractual clauses for sustainability-linked loans, and we look forward to the Loan Market Association’ other potential updates concerning sustainable financing.

    Published: 23.3.2023