Sustainable lending and finance: key issues examined
In April 2021, a new set of international sustainable lending and finance principles called the social loan principles were announced. They were released in the backdrop of the global economy attempting to grapple with the fallout of the coronavirus pandemic. Intense pressure has been building on companies to address social justice and climate change issues.
This is particularly important, not only for investment banks and financial services, but also for corporates as there is a global push on nearly every level to address systemic social and environmental issues which have previously been seen as being more public sector matters. This is in addition to the international and national focus on global warming and the push to reduce carbon footprints through implementing effective green policy changes.
There have been several high profile shareholder and investor revolts, which act as a warning for those that continue to ignore the call for change.
In response, “Sustainable Lending and Finance”, addressing both environmental and social issues, is becoming a welcomed new norm.
“Sustainable Lending and Finance” is taking the form of the application of three different sets of lending principles:
- Social Loan Principles
- Green Loan Principles
- Sustainability Linked Loan Principles
These three sets of principles sit and operate beside each other.
Social Loan Principles
The Loan Market Association (LMA), together with the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications & Trading Association (LSTA), recently published the Social Loan Principles (SLP) in April 2021 that build upon a suite of related principles.
The SLP set out a high-level framework of voluntary market standards and guidelines for use across the social loan market on a transaction by transaction basis, whose application will depend upon the underlying characteristics of the transaction. They are based on the previously published Green Loan Principles (GLP) and complement the Sustainability Linked Loan Principles (SLLP), both discussed below.
The social loan market aims to facilitate and support economic activity which mitigates social issues and challenges and/or achieves positive social outcomes especially, but not exclusively, for a target population on the basis that the loan will be used for a “Social Project”. The SLP centre around four core components:
- Use of proceeds for use on “Social Projects” (e.g. social housing and access to essential services, potentially aimed at “target populations”, such as people living in poverty, immigrants, disabled persons and undereducated people).
- Process for project evaluation and selection: a set of borrower disclosures to its lenders.
- Management of proceeds: borrower transparency and tracking of fund allocations.
- Reporting: regular reporting by borrower to participating lenders.
Green Loan Principles
The aim of the green loan market is to support environmentally sustainable economic activity on the basis that the loan will be used for a “Green Project”. The GLP, which were published in December 2018, like the SLP, are voluntary and seek to create high-level market standards and guidelines for use across the green loan market.
The GLP’s four core components are identical to the SLP’s, save for the GLP requiring the “use of proceeds” for “green projects” (e.g. renewable energy, energy efficiency, pollution prevention and control, environmental sustainable management etc).
Sustainability Linked Loan Principles
The SLLP, published in March 2019, outline a framework to enable all market participants to understand the characteristics of sustainably linked loans. Sustainability linked loans aim to facilitate and support environmentally and socially sustainable economic growth.
Although similar in aim to Green Loans and Social Loans, a Sustainably Linked Loan is a financial product where the borrower has to demonstrate how it is achieving sustainability performance targets; that include KPIs, external ratings or other metrics which measure improvements.
The SLLP’s four core components are:
- Relationship to Borrower’s Overall Corporate Social Responsibility Strategy: communication of the borrowers sustainability strategy to its lenders.
- Target Setting – Measuring the Sustainability of the Borrower: sustainability performance targets negotiated between the borrowers and the lenders for the life of the loan.
- Reporting: borrowers report up to date data related to their performance targets.
- Review: suggests that external review is to be negotiated and agreed upon between the borrower and lender on a transaction by transaction basis.
Our Expert's Insight
The focus on environmental and social issues in the finance market is becoming mainstream. This is reinforced by legal requirements in the UK for certain companies to report on their environmental and social impacts. Financial institutions are also increasingly being seen as responsible for the environmental and social impacts of their clients’ businesses.
The expansion of sustainable finance and lending principles is therefore not surprising. This, in conjunction with growing community and shareholder activism, and public and media scrutiny of corporate drivers, has an impact on brand value, the ability to secure funding, and the delivery of projects. Market participants therefore not only need to be abreast of best practice, but also need to ensure they identify opportunities as well as having a robust risk management approach to environmental and social issues.
This article has been co-written by Anita Kasseean and Julian Wolfgramm-King. If you need any legal advice on sustainable lending and finance or other green issues, contact our environmental law specialists.
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