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In our last few editions of REF News and Views, we
featured the Green Loan Series of articles in which we discussed
the emergence of “green loans” and the Green Loan
Principles − those principles that form the proposed
framework for market standards, guidelines and methodology to be
adopted across the green loan market.
In the next series of articles, we want to focus on
sustainability linked loans (“SLLs”), which also emerged
alongside green loans as a result of the movement towards greater
awareness and improving environmentally and socially beneficial
outcomes in the way corporates and lenders effect their lending,
investment and other business decisions. Whilst green loans and
SLLs are similar in their macro mission towards environmental and
social sustainability, there are some important differences in
their approach. We look to explore this further in this
Sustainability Linked Loans series of articles.
What is a sustainability linked loan?
SLL is defined as any type of loan instrument and/or contingent
facility (e.g., bonding line, guarantee line, letter of
credit) that incentivises the borrower’s achievement of
ambitious, predetermined sustainability performance objectives.
The borrower’s sustainability performance is measured by
using sustainability performance targets (“SPT”), which
can include key performance indicators (“KPI”), external
ratings and/or equivalent metrics which measure improvements in the
borrower’s sustainability profile. These can include measures
related to matters such as energy efficiency or sustainable
sourcing of raw materials and supplies.
How are sustainability linked loans different from green
There are three key differences between SLLs and green
- Purpose: There is no use of proceeds
requirement for an SLL; in fact, many SLLs in the market are for
general corporate purpose loans. Instead, SLLs look to improve the
borrower’s sustainability profile by aligning loan terms with
the borrower’s performance against the relevant SPTs. This is
in significant contrast to green loans, which are principally
categorised by the way in which the proceeds are used towards an
eligible green project − that is, the underlying green
project investment, the management of the proceeds, and
- Pricing: A key incentive for a borrower in
entering into an SLL is the pricing adjustment that can be awarded
to it based on its performance against an agreed set of KPIs and
SPTs, external ratings and/or equivalent metrics. The principle
therefore is that if the borrower meets the agreed targets, then
the margin on the loan will decrease accordingly. It is often set
to work in reverse, also, such that if the borrower fails to meet
its targets then the margin will increase.
- Flexibility: With the focus on general
performance as opposed to a specific project itself, SLLs provide
greater flexibility in their application and use case, opening up
the green and sustainable loans market to a broader range of
companies that may not otherwise have any projects that are
specific to a green project.
In the next article in this Sustainability Linked Loans series,
we will introduce the Sustainability Linked Loan Principles, which
were published in order to provide a framework to help market
participants understand and identify the key components in
establishing sustainability linked loans.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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