Green and social money
Corporations are on a continuing basis met with diverse requests and demands for environmental friendly and sustainable solutions, that being from their shareholders, investors, regulators or the general public.
The financial market is no exception with increasing demands and initiatives for sourcing funding towards sustainable projects and operations. It is common to distinguish between A) green finance being finance linked to green/environmental friendly aspects, B) social finance being finance linked to social aspects and/or C) sustainable finance being finance linked to both green/environmental friendly and social aspects.
Global associations’ guidelines for green and social financing – overview
The International Capital Market Association (“ICMA“), the Loan Market Association (“LMA“), the Asia Pacific Loan Market Association (“APLMA“) and the Loan Syndications & Trading Association (“LSTA“) have developed, and continue to update, several non-binding market wide principles and guidelines promoting sustainable finance by setting principles for sustainability features and promoting transparency, disclosure and reporting in the market. The guidelines cover:
A) ICMA’s Green Bond Principles (“GBP“)
¨ Guidelines containing four core principles for bonds qualifying as “green bonds”:
- Principles for use of proceeds, incl. list of eligible green project categories
- Principles for the issuer’s green project evaluation and selection
- Principles for the issuer’s management of proceeds for green projects
- Principles for the issuer’s reporting on application of funds and expected green impact
B) ICMA’s Social Bond Principles (“SBP“)
¨ Same as for GBP, however linked to bonds with social objectives
C) ICMA’s Sustainability Bond Guidelines (“SBG“)
¨ Clarifying that sustainable bonds are combined green and social bonds with further reference to the principles and guidelines of the GBP and the SBP
D) LMA/APLMA/LSTA’s Green Loan Principles (“GLP“)
¨ Same as for GBP, however linked to loans / tranches with green objectives
E) LMA/APLMA/LSTA’s Sustainability Linked Loans Principles (“SLLP“)
¨ Guidelines containing four core principles incentivising borrowers’ sustainability profile:
- Principles for the borrower’s corporate social responsibility (“CSR“) strategy and sustainability performance targets (“SPTs“)
- Principles for the choice of SPTs and incentives
- Principles for the borrower’s reporting on performance of the SPTs
- Principles for external review and lenders’ evaluation
Sustainability Linked Loan Principles (SLLP) – what is new?
The SLLP is the newest addition to the set of market wide sustainable finance guidelines, launched in March 2019. In contrast to the other guidelines, the SLLP does not as such aim at increasing funding of sustainable projects, but rather introduce incentives for improving borrowing corporations’ sustainability generally. These principles may therefore be applied on a deal-by-deal basis for any loan and/or contingent facilities (e.g. guarantee lines) regardless of the facility’s purpose.
SLLP – 1) CSR strategy and SPTs
The first SLLP core principle relates to the Borrower’s CSR strategy which is to be communicated to the lenders and in content clearly should outline the borrower’s sustainability objectives and how these relate to the suggested SPTs.
SLLP – 2.1) SPTs
The first part of the second SLLP core principle relates to the borrower’s and lenders’ agreement on the SPTs to be applied for the facility. The parties need to agree on which targets that should be set and at which level. Relevant examples are included in appendix 1 of the SLLP.
The SLLP urge for SPTs that apply over the lifetime of the facility, are ambitious and meaningful for the borrower and are set based on predetermined performance benchmarks with targets based on recent performance levels.
The SPTs may either be internal, i.e. defined and measured based on the borrower’s sustainability targets, or external, i.e. based on external rating criteria and assessed by independent third parties. The SLLP also encourage requirements for third party opinions confirming appropriates of the chosen SPTs or alternatively requiring that the borrower demonstrates or develops internal expertise to verify its metrologies.
SLLP – 2.2) Incentives for SPTs
The second part of the second SLLP core principle relates to the borrower’s and lenders’ agreement on the incentives for fulfilment of agreed target SPT benchmarks. The SLLP exemplifies such incentive by suggesting a margin ratchet decreasing and increasing the applicable margin based on the borrower’s performance of its target SPTs as measured by pre-determined SPT thresholds.
SLLP – 3) SPT performance reporting
The third SLLP core principle relates to data collection and reporting of performance against the SPTs. The SLLP emphasize the importance of transparency and suggest that SPT measuring data is kept readily available to the lenders and reported on at least on an annual basis. The SLLP also encourages both disclosure of underlying metrology / assumptions and, if possible, public reporting for the SPTs.
SLLP – 4) External review and lenders’ evaluation of SPT performance
The fourth SLLP core principle relates to external review and evaluation of the SPT performance. The SLLP suggests that the borrower’s performance against its SPTs on an annual basis is subjected to external independent qualified review and validation, at least if the information is not made publicly available or accompanied by audit/assurance statements.
Upon completion of the agreed review and reporting, the lenders are left to evaluate the SPT performance and introduce any adjustments based on the facility’s pre-determined SPT incentives.