As environmental, social, and governance (\u201cESG\u201d) initiatives are increasingly implemented by borrowers and lenders, sustainability linked loans provide opportunities for both.<\/p>\n
What are Sustainability Linked Loans?<\/em><\/strong><\/p>\n Sustainability linked loans (\u201cSLLs\u201d) are based on the Sustainability Linked Loan Principles<\/a> developed by the LMA, APLMA and LSTA.\u00a0 In SLLs, a borrower, together with its lender group, determine and set certain sustainability performance targets (\u201cSPTs\u201d) for the borrower to achieve, to be measured by key performance indicators (\u201cKPIs\u201d).\u00a0 Independent organizations, including the Sustainability Accounting Standards Board (\u201cSASB\u201d), provide guidance on the ESG metrics most relevant to certain industry sectors.\u00a0 Once agreed between the borrower and lenders, the KPI\/SPT benchmarks are then integrated into margin adjustments to the interest rate or commitment fee for the credit facility (i.e., by achieving the KPIs, the interest rate is reduced).\u00a0 The credit facility documentation will also include reporting requirements for independent, external verification of the borrower\u2019s performance level with respect to each SPT for each KPI, at least annually.<\/p>\n Borrower Benefits<\/em><\/strong><\/p>\n Many companies have already undertaken ESG data collection and reporting, and more will likely do so as the SEC expands its focus on ESG disclosures and as more investors demand this information. While the above noted third party verification and reporting costs are inherent to SLLs, borrowers that are already engaging in these efforts may find they can efficiently obtain an additional economic incentive through SLL financing.\u00a0 Additionally, SLLs can be part of a comprehensive alignment with the borrower\u2019s ESG strategies and policies.<\/p>\n Lender Benefits<\/em><\/strong><\/p>\n Lenders are undertaking ESG initiatives as well, in which SLLs may be a component.\u00a0 And, regulatory agencies<\/a> for certain lenders are communicating their plans to provide guidance<\/a> on climate-related risks, and integrate these principles into their supervisory expectations.\u00a0 Further, studies have shown<\/a> that companies (e.g., SLL borrowers) that identify and manage their ESG risks have improved financial performance.\u00a0 So, financing SLLs can benefit lenders across policy, regulatory and business aspects.<\/p>\n