May 2021 – Sustainability, Resiliency and Risk Mitigation

In this post we will be looking at sustainability-linked loan principles and their application to a recent sustainability-linked private placement by Trafigura Funding S.A. (“Trafigura”), a subsidiary of Trafigura Group Pte. Ltd., a market leader in the global commodities industry. Trafigura’s private placement of $203.5 million of Senior Guaranteed Sustainability-Linked Notes is believed to be the largest sustainability-linked financing on record in the US Private Placement market to date. Duane Morris previously represented Trafigura in its 2020 private placement of Senior Guaranteed Notes to institutional investors in the United States.

Industry Principles

The two primary sustainability products in the loan market are green loans and sustainability-linked loans. The Loan Syndications and Trading Association (“LSTA”), Loan Market Association (“LMA”) and Asia Pacific Loan Market Association (“APLMA”) originally established standards for these products (called the “Green Loan Principles” (“GLP”) and “Sustainability Linked Loan Principles” (“SLLP”)) in 2018 and 2019 respectively. On 5 May 2020 the LSTA, LMA and APLMA published guidelines that outline considerations for the market in structuring such transactions, as detailed in our alert here.

The key element of a green loan is that the proceeds are used for “green” purposes. A sustainability-linked loan can be any type of debt financing where a company is economically incentivized to achieve sustainability objectives. Unlike a green loan, the proceeds of a sustainability-linked loan can be used for general corporate purposes. The objectives are measured using sustainability performance targets (“SPTs”) that include key performance indicators (“KPIs”) and other metrics to measure improvement. The SLLP guidelines provide examples of SPTs with categories including energy efficiency, greenhouse gas emissions, renewable energy, water consumption and biodiversity.

The GLP and SLLP guidelines are increasingly being applied more widely than the loan market, with private placement issuers utilizing the guidelines for green or sustainable private placements. These products are not only intended for “green” companies; any company can access the green or sustainability loan market provided the transaction is structured in the right way. This means a broad range of industries can utilize the guidelines in a transaction provided there is an appropriate commitment to green projects or sustainability objectives.

Components of a Sustainability-Linked Private Placement

The SLLP guidelines outline four components of a sustainability-linked transaction that we will illustrate the practical application of with reference to the recent sustainability-linked private placement by Trafigura. These components are:

1. Relationship to the company’s overall sustainability strategy
2. Target Setting
3. Reporting
4. Review

1. Relationship to the Company’s Overall Sustainability Strategy

As sustainability-linked private placements are intended to improve a company’s existing sustainability strategy, there needs to be 1) a sustainability strategy in place and 2) a link between the sustainability strategy and the SPTs the company is seeking to achieve. Trafigura selected three KPIs in relation to its operations: reducing greenhouse gas emissions, developing its renewable energy portfolio and bringing its procurement program in line with international sustainability standards.

The SLLT guidelines also encourage companies to disclose sustainability standards or certifications to which they are seeking to conform. For example, Trafigura outlined its intention for full alignment of the business with the ISO standard 20400:2017, an international standard for sustainable procurement.

2. Target Setting

The SPTs need to be “ambitious and meaningful” to the company’s business. For Trafigura, the KPI for reducing greenhouse gas emissions is the same target as set in the company’s sustainability-linked revolving credit facility that closed earlier this year. This KPI will measure Trafigura’s performance in reducing scope one and two emissions by 30% by 2023 (compared to 2020 levels) as set out in its 2020 Responsibility Report.

The SLLP guidelines suggest SPTs should be determined using internal or external specialists so that they are “fit for purpose” with respect to the company’s business and industry. In order to set the KPI aligning Trafigura’s procurement program with international standards, an independent sustainability verifier, ERM Certification and Verification Services (“ERM CVS”), conducted a gap assessment of Trafigura’s management system framework against the ISO standards.

The SPTs and calculation methodologies are communicated between the company and the investors. Price incentives are linked to the performance of the company in achieving the pre-determined SPTs. These price incentives could be an upwards interest rate adjustment if an SPT is not met, an downward interest rate adjustment if SPTs are met, or a two-way pricing structure utilizing upward and downward interest rate adjustments depending on performance.

The Trafigura sustainability-linked private placement is structured with only an upward interest rate adjustment if an SPT is not met. The interest rate adjustment is structured in this way to work around any potential ERISA Final Rule issue, as a downwards adjustment in interest rate based on meeting the targets could be interpreted as a sacrifice of return on investment for a non-pecuniary goal. Although the Department of Labor has subsequently issued a notice it will not enforce the Final Rule, until further guidance is published an ERISA fiduciary must only consider pecuniary factors when making investments.

3. Reporting

A company will need to report up-to-date data in relation to SPTs. The SLLP guidelines suggest reporting should be on an annual basis at a minimum. Companies and investors may seek external opinions and reports with respect to methodologies and assumptions used in reporting.

In Trafigura, ERM CVS will undertake an assessment of the KPI performance on the relevant assessment date each year. The results will form the basis of the KPI report, produced and verified by ERM CVS which details performance with respect to the SPTs. The report is attached to a compliance certificate signed by Trafigura and delivered to the investors each year, stating whether SPTs have been achieved for that period.

4. Review

The SLLP guidelines suggest external review and verification is to be negotiated on a transaction by transaction basis between the company and the investors. External review is strongly recommended where information regarding SPTs is not publicly available. The SLLP guidelines strongly recommend verification by an auditor, environmental consultant or rating agency. Trafigura engaged ERM CVS to review and report on KPIs and SPT compliance for each relevant period.

Although sustainability-linked products originate in the loan market, particularly among European lenders, interest from issuers and investors in the capital markets is increasing as ESG issues move back up the public agenda as the impact of COVID-19 begins to recede. Moreover, application of the SLLP guidelines allow issuers across a broad range of industries to access capital from investors who are demonstrating growing support for businesses that incorporate sustainability into their business operations. Trafigura’s recent US private placement is an indication that US institutional investors are also supporting issuers committing to sustainability targets.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.

Note: This post was drafted by Ryan J. Stevens and appears on the Duane Morris Government Strategies blog.

Autonomous vehicles have automated driving systems that allow for self-driving, with little or no human input. While fully automated vehicles are not readily available at this point, lawmakers are already taking action with a myriad of autonomous vehicle legislation. As we have seen with E-Bikes, drones, and personal delivery devices, government regulation is not far behind the new technology.

At least 29 states have already enacted various autonomous vehicle legislation.

Connecticut
One piece of autonomous vehicle legislation introduced by Connecticut lawmakers is H.B. 6486. The bill would require the Connecticut Department of Transportation to develop a program to test and operate vehicles equipped with automated driving systems. It would also eliminate the autonomous vehicle testing pilot program (which never started).

Generally, the bill would require the Department of Transportation to adopt regulations that include both state and federal laws and national best practices on testing. Also, it would set application requirements for owners of ADS-equipped vehicles to seek approval to either test or operate their autonomous vehicles on state roads. Further, the bill would require ADS-equipped vehicles to comply with federal safety standards, be registered, and be adequately insured.

The bill would define a fully autonomous vehicle as an “ADS-equipped vehicle” with an automated driving system designed to function without an operator and classified as level four or level five by SAE. The bill would further define “ADS” (automated driving system) as the hardware and software that are collectively capable of performing the entire dynamic driving task on a sustained basis.

Florida
Florida lawmakers recently passed HB 1289 related to autonomous vehicles. Under the bill, a low-speed autonomous delivery vehicle would be allowed to operate on streets or roads with speed limits under 35 miles-per-hour or less. However, the vehicle may operate between 35 and 45 miles per hour under certain exceptions.

The autonomous vehicle legislation further requires low-speed autonomous delivery vehicles to be equipped with headlamps, stop lamps, turn signal lamps, taillamps, reflex reflectors, and vehicle identification numbers. The bill also requires such vehicles to be covered by an automobile insurance policy. It allows counties and municipalities to prohibit low-speed vehicles on any road under its jurisdiction if necessary in the interest of public safety.

The bill defines a “low-speed autonomous delivery vehicle” as a fully autonomous vehicle not designed for or capable of human occupancy.

Massachusetts
H. 3475, introduced by lawmakers this year, would require autonomous vehicles registered in Massachusetts to register in the state to continue to meet federal standards and regulations for a motor vehicle. The autonomous vehicle legislation stipulates that such vehicles shall not engage in interstate commerce or transport eight or more people or goods for hire unless a human operator is present in the autonomous vehicle. They can monitor the performance of the vehicle and intervene if required.

Nevada
Nevada became the first state to authorize the operation of automated vehicles in 2011 via Assembly Bill 511. In the 2021 legislative session, the Nevada Assembly passed AB 412, which relates to neighborhood occupantless vehicles, defined as low-speed vehicles not designed, intended, or marketed for human occupancy.

Under the bill, neighborhood occupantless vehicles would be allowed to operate on a roadway with a speed limit of greater than 35 miles per hour but no more than 45 miles per hour.

New Jersey
New Jersey lawmakers passed Assembly Joint Resolution 164 in 2019, creating the New Jersey Advanced Autonomous Vehicle Task Force. The Task Force was created to conduct a study of advanced autonomous vehicles and make recommendations for laws and rules.

The resolution called for the Task Force to issue a report to the Governor and the legislature within 180 days of the Task Force’s initial meeting. The report was to include:

an evaluation of existing state laws that may impede the testing and operation of autonomous vehicles on public roads in New Jersey,
an evaluation of existing state and federal laws related to autonomous vehicles as it relates to licensing, registration, insurance, liability, law enforcement, and
accident reporting, land use, road and infrastructure design, public transit, and workforce changes.

The Task Force was also required to make recommendations for implementing pilot programs for autonomous vehicles on public roads and to evaluate existing legislation and regulations in other states concerning the issue.

The Task Force created by AJR 164 issued its report in 2020, which included the recommendation to establish a two-step permitting process to allow companies to test and then employ HAVs (highly autonomous vehicles) on public roadways in the Garden State. The Task Force also recommended the New Jersey Motor Vehicle Commission as the lead agency responsible for approving and overseeing both testing and deploying HAVs in the state and recommended requiring all testing on public roadways be conducted with a safety driver present in all vehicles.

On the legislative side, A1189 would establish a fully autonomous vehicle pilot program. The bill would require the New Jersey Motor Vehicle Commission, in consultation with the state Department of Transportation, to establish the New Jersey Fully Autonomous Vehicle Pilot Program, allowing for autonomous vehicle testers to operate fully autonomous vehicles on New Jersey highways. The pilot program would last one year under the legislation.

Texas
Texas previously enacted autonomous vehicle legislation in 2017, allowing for the testing and deployment of automated vehicles on public roads.

Lawmakers in Texas introduced HB 3026 in the current legislative session. Under the bill, an autonomous vehicle designed to operate exclusively by the automated driving system for all trips is not subject to motor vehicle equipment laws or regulations in Texas that relate to or support motor vehicle operation by a human driver and are not pertinent for an automated driving system.

Further, if a vehicle safety inspection is required to operate an autonomous vehicle, the vehicle must automatically pass inspection with respect to any equipment covered by the bill’s exemption or any equipment not subject to inspection under Texas law.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. For more information, or if you have any questions about this post, please contact Brad A. Molotsky, David Amerikaner, Nanette Heide, Darrick Mix, Michael Schwamm, or the attorney in the firm with whom you are regularly in contact.

Month: May 2021

Sustainability-Linked Private Placements

Autonomous Vehicle Legislation: State Updates