Updated loan principles and guidances for sustainable financing

Various guidelines and principles exist to clarify and harmonise the playing field of the different forms of sustainable financing created by the financial market. The guidances and principles were updated on 23 February 2023 when the Loan Market Association (LMA) together with the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) published updated versions of the Green, Social and Sustainability Linked Loan Principles and accompanying guidances.

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.