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Revision of the Sustainability Linked Loan Principles

In May 2021, the Loan Market Association (LMA) has published a revision of its Sustainability Linked Loan Principles (SLLP), which were first published in 2019. The revision follows on a spike in popularity of sustainability linked loans, which comes from the urge of corporates worldwide to incorporate green and sustainable strategies into their business strategy. This coincides with the alignment of their funding instruments to their sustainable development targets.

To facilitate this alignment, a standardized approach is needed for financial institutions and advisors to assist corporates. The updated SLLP guidelines support moving towards a more standardized approach of linking sustainability targets to financing arrangements. Amendments to the SLLP emphasize that sustainability linked loans’ core purpose is promoting ESG compliant activity performed by corporates and reduce appearance of sustainability washing or misuse of the instrument.

The updated SLLP framework consists of five core components:

1. Selection of Key Performance Indicators (KPIs)
2. Calibration of predefined Sustainability Performance Targets (SPTs), which should be ambitious and remain relevant for the tenor of the loan
3. Loan characteristics which link a loan element (usually the margin) to the achievement of the SPTs
4. Reporting, at least once per annum, to:
   • Monitor performance of the SPTs
   • Determine that the SPTs remain ambitious
   • Determine that SPTs and KPIs remain relevant
5. Independent, external verification of a company’s sustainable performance, at least once per annum, is required

Our observation

We observe a few key revisions of the principles. Firstly, credibility of sustainability linked loans rest on the selection of KPIs, which should be material to the company’s ESG strategy and challenges faced by the industry. Preferably, KPIs and SPTs are benchmarked against industry standards and the company’s peers. Secondly, public reporting of SPTs is encouraged to increase transparency in the sustainability linked loan market. Lastly, post-signing verification becomes a necessity and the LMA recommends companies to make the verification publicly available. Please note that the SLLP remain to be voluntary recommended guidelines.

To conclude,

The SLLP are a big step in the sustainable development of the global financial market, as it provides a standardized approach for originating sustainability linked loans and transparency to corporates, financial institutions, advisors, and other market participants. Other examples of initiatives that support the sustainable improvement of the global financial market are carbon accounting, and the green bond principles.
Feel free to reach out to Zanders Debt Advisory if you have questions relating to the SLLP framework, or if you want to know how to embed ESG targets into your current or contemplated financing.