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Sustainability-Linked Loans Series, Part 4 – SLLP Core Components In Detail (Continued) – Financial Services

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In our July edition of REF News and Views we began our
deep dive into the Sustainability-Linked Loan Principles
(“SLLP”) core components (“Core

As a reminder, the SLLP set out a framework, with the aim to
enable all market participants to clearly understand the
characteristics of a SLL. The framework is based around the five
Core Components, namely:

  1. selection of key performance indicators

  2. calibration of sustainability performance targets

  3. loan characteristics,

  4. reporting progress against SPTs, and

  5. verification.

In this next article in our Sustainability-Linked Loans Series,
we will continue our examination into the Core Competencies and
look at loan characteristics, reporting progress against SPTs, and

Loan Characteristics

A key characteristic of a SLL is that an “economic
outcome” is linked to the borrower’s performance against
its predetermined KPIs/SPTs.

In practice, the economic outcome will usually take the form of
a margin ratchet where the pricing of the loan changes according to
the borrower’s ESG performance. In contrast to other forms of
ESG loan products (such as green loans), the focus for a SLL is not
based on the purpose for which the loan is made available.

Reporting Progress against SPTs

The SLLPs recommend that borrowers should report at least once
per year with up-to-date information sufficient to allow lenders to
monitor progress and confirm that targets remain ambitious and
relevant to the borrower’s business.

Given the value of transparency in the SLLP market, the SLLPs
recommend that where possible borrowers should be encouraged to
publicly report the underlying calculations and methodologies (such
as in a borrower’s integrated annual report or sustainability
report). To the extent that this is not possible, where
appropriate, a borrower may choose to share this information on a
private basis only with lenders. Borrowers are also encouraged to
provide lenders with details of any underlying methodology of SPT
calculations and/or assumptions.

It will be interesting to track evolving market practice in
relation to the type of detail and information that lenders expect
to receive to enable them to accurately assess the ongoing
relevance of the KPIs and SPTs over the duration of the loan.


The SLLPs encourage borrowers to obtain independent and external
verification of their performance level against its SPT for each
KPI by a “qualified external reviewer with relevant expertise,
such as an auditor, environmental consultant and/or independent
ratings agency at least once a year.” The SLLPs recommend that
verification of the borrower’s performance against the SPTs is
made publically available where appropriate, which we note is not
limited to publicly traded corporates.

It is important to point out that transactions without
independent external verification of performance will not meet the
requirements of the SLLP to be classified as a SLL.

Once reporting by the borrower has taken place, the lenders will
be able to assess the borrower’s performance against the agreed
SPTs and KPIs.

On March 3, 2022, the Loan Market Association, Asia Pacific Loan
Market Association and Loan Syndications and Trading Association
published “Guidance for Green, Social and
Sustainability-Linked Loans External Reviews
.” This seeks
to provide guidance on best practice on the external review process
for borrowers, lenders, external reviewers and other stakeholders
in the ESG loan market. It is voluntary and aims to provide
information and transparency on the external review processes for
borrowers, lenders, external reviewers and other stakeholders in
the loan market.

Final Words

In the next article in this Sustainability-Linked Loans Series,
we will discuss the application of the SLLPs to real estate finance

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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