LMA, APLMA and LSTA release revised sustainable finance principles

Updated principles and guidance for sustainability-linked loans, green loans and social loans

Why should I read this?

The LMA, LSTA and APLMA have jointly published updated versions of the Sustainability-linked Loan Principles (“SLLP”), Green Loan Principles (“GLP”) and Social Loan Principles (“SLP”) and the related Guidance for each product. This briefing highlights the key changes from the previous version.

Alex Smith, Senior Associate in our Banking & Finance team comments:

“The latest updates to the sustainability-linked loan, green loan and social loan principles and guidance have a common theme of integrity of sustainable finance products. The frameworks created by the relevant principles support loan market participants in creating and, as the updates emphasise, maintaining credible sustainable loans that encourage ambition and withstand scrutiny by third parties.”

Five things that have changed

1. New guidance on the timing of sustainability performance target setting

The updates provide new guidance on ‘sleeping’ sustainability-linked loans (“SLLs”) (or ‘switch on’ SLLs). Sleeping SLLs emerged in the market to accommodate scenarios where the parties want to include SLL mechanics but aren’t able to set sustainability performance targets (“SPTs”) on day one. Where this is the case the SPTs must be set within 12 months of origination. The recommendation is for all lender consent to be obtained to the setting of any SPTs to maintain the integrity of the product, although there is flexibility on this for large syndicates. Importantly to address greenwashing concerns, the loan can only be referred to as an SLL once the SPTs have been agreed and set.

Separately to sleeping SLLs, guidance is now given on setting SPTs which only cover part of the life of the Loan. A loan can still be labelled as an SLL where SPTs are set at origination for the first years of the facility but, for a good reason, cannot be set for the later years of the facility term. The SPTs for the later years can be set via an amendment process and, if not subsequently set, the loan should be declassified.

2. Holistic KPI and SPT Guidance

The suggested key performance indicators (“KPIs”) have been removed from the SLLP in favour of more detailed, holistic guidance around the process of identifying KPIs and SPTs. KPIs must be material to sustainability and business strategies and address relevant ESG challenges in the borrower’s industry sector. Materiality in this sense is a multi-faceted concept, being material to the borrower's operation/financial performance and material to the environment/society. Borrowers are guided to be mindful of the sector and geography in which they operate when setting KPIs and SPTs. KPIs can be set on a project basis if they are still relevant, core and material to the borrower’s overall business and of high strategic significance to the borrower’s current and/or future operations. The (strong) recommendation is to have an annual SPT set per KPI for each year of the loan term, however exceptions to this annual frequency could be agreed where a strong rationale is provided.

3. Expanding the types of greenwashing

Focusing on the avoidance of greenwashing, the SLLP guidance adds ‘KPIs that are not material and core to the business of the borrower’ as a type of greenwashing, joining ‘SPTs that are not sufficiently ambitious or meaningful’ and ‘inaccurate or insufficient monitoring, measuring, benchmarking and/or disclosing of borrower performance against SPTs’.

4. Sustainability/Green/Social Co-ordinators

The role of the co-ordinator is reframed, providing further clarity in response to the increased popularity of the role in syndicated transactions. In the SLLP reference to a co-ordinator ‘negotiating’ the KPIs and SPTs has been removed and instead the sustainability co-ordinator’s responsibility is to ‘provide market colour’. In respect of sustainability-linked loans, the changes make it clear that the definition, scope and direction of the KPIs should be provided by the borrower, not by a co-ordinator, and each lender must make its own determination of whether metrics and SPTs are meaningful and ambitious and request the information needed to make that determination. The relevant co-ordinator is also there to answer ESG questions from the lender group and facilitate dialogue between the parties on the sustainable finance aspects of the transaction.

5. Introduction of ‘do no significant harm’ principles

Do no significant harm principles have been added to the GLP and SLP. Alongside advancing green and/or social goals, parties are encouraged to consider the wider ESG and sustainability picture alongside the main green/social project assessment and mitigate other social and environmental risks outside of the main project or investment. The move would be welcomed by those already needing to consider the principle pursuant to the EU taxonomy and demonstrate a move to align with this established framework.

When do the updates come into force?

The Principles are voluntary guidelines although, in our experience, widely used by market participants to provide a framework for sustainable finance transactions. All transactions completed prior to 9 March 2023 will be exempt from following the updated Principles, and should instead be reviewed in conjunction with the relevant previous version in force at the time of origination, extension or refinancing of the loan, as applicable. The updates stress that parties should take care not to misrepresent that such loans have been originated, extended or refinanced in accordance with the current version of the Principles.

Any loans looking to be labelled or marketed as green, social or sustainability-linked which are originated, extended or refinanced after 9 March 2023 must be amended to align with the updated Principles to be (or continue to be) classified as a green, social or sustainability-linked loan.

What else do I need to know about the updates?

The Loan Market Association confirmed its drafting project to create sustainability-linked loan provisions.

Further reading on sustainable finance

For further guidance on sustainable finance, please visit the Eversheds Sutherland ESG Hub or the UK Sustainable Finance Guide app: Apple download or Android download.

For more information sustainable finance please contact: