The Loan Market Association and The European Leveraged Finance Association have published a best practice guidance to sustainability-linked leveraged loans.
The partnership says the guidance seeks to ensure that loan market participants in Europe incorporate ESG provisions in an effective and appropriate way as this practice gains pace. It also recognises the threats posed by greenwashing and the need to promote transparency on sustainability related features of a transaction.
The guidelines provides practical guidance as to the application of the Sustainability Linked Loan Principles to “ordinary” leveraged loans which seek to incorporate any kind of ESG factor or metric. The LMA and ELFA have addressed several areas in the guidance, summarised below:
• Terminology: As with all areas of industry, there is a common language evolving in relation to sustainability. For those new to sustainability, this can seem daunting and act as a barrier to entry. For that purpose, the LMA has put together a Glossary of Terms common to sustainability lending products generally.
• Roles: The Guide seeks to explain a number of specialised roles that have arisen when applying the SLLP to any loan transaction including ESG rating providers, ESG Consultants, Sustainability Coordinators and External Reviewers.
• Selection of KPIs: Pertinent ESG information should be provided to prospective lenders by the borrower in disclosure and offering materials, helping a company to demonstrate a pre-existing and meaningful commitment to ESG prior to entering the transaction. KPIs, and the associated Sustainability Performance Targets (SPTs), should then be communicated ahead of, or at the time of, marketing the deal for syndication, to allow sufficient time for the prospective syndicate to fully review and, where appropriate, challenge the proposed KPIs, and associated SPTs.
• Reporting & verification: Borrowers should make and keep readily available up to date information relating to their SPTs, with information provided at least once a year and externally verified.
• Documentation: There is currently no template wording available for use in sustainability linked loan documentation due to the varied and precedent-based nature of this market and, as such, a case-by-case approach will be required. The Guide outlines considerations for both Term Sheets and Loan facilities.