Member Article

In May 2020, the Asia Pacific Loan Market Association (APLMA), the Loan Market Association (LMA) and the Loan Syndications and Trading Association (LSTA) jointly published two guidance papers on green loan principles and sustainability linked loan principles, seeking to address some of the most frequently asked questions about green loans and sustainability linked loans (SLLs).

Green Loans

A green loan is defined as any type of facility made available to a borrower to finance or re-finance Green Projects and must align with the following four core components:

• use of proceeds – loan proceeds should be used for Green Projects only; for a non-exhaustive list of Green Projects, please see Appendix 1 to the Green Loan Principles;

• process for project evaluation and selection – borrowers should clearly communicate their environmental sustainability objectives to their lenders;

• management of proceeds – the proceeds of a green loan should be transparent and easy to track (e.g. by using a separate account for green proceeds); and

• reporting – lenders should obtain up-to-date information on the use of proceeds from borrowers annually until the loan is fully drawn.

Due to the varied nature of the green loan market, currently there is no template wording available for adoption in the loan documentation process. Important clauses such as the purpose or use of proceeds provisions, information undertakings and representations should be given due consideration when drafting green loans. Whilst there is no established market standard as to what amounts to a “green” breach, parties should consider whether such a breach will trigger event of default and cross-default provisions across outstanding loans.

For the complete APLMA/LMA/LSTA Guidance on Green Loan Principles, please see here.

Sustainability linked loans

An SLL is any type of facility which incentivises the borrower’s achievement of ambitious, predetermined sustainability performance objectives. The fundamental difference between green loans and SLLs is the utilisation of loan proceeds – whilst the proceeds of green loans must be used for Green Projects only, the proceeds of SLLs can be used for general corporate purposes. SLLs seek to improve the borrower’s sustainability profile by aligning loan terms to the borrower’s performance against the relevant predetermined sustainability performance targets (SPTs). If the predetermined SPTs are met, borrowers may benefit from a reduced interest rate, depending on the relevant loan terms.

The SLL Principles have four core components:

• relationship to borrower’s overall sustainability strategy – borrowers of SLLs should clearly communicate to their lenders their sustainability objectives and how these align with their proposed SPTs;
• target setting – measuring the borrower’s sustainability—SPTs should be ambitious and meaningful to the borrower’s business; it should be tied to a sustainability improvement in relation to a predetermined performance target benchmark;
• reporting – borrowers should keep their lenders informed of their up-to-date SPTs, together with any underlying methodology and assumptions, at least once per annum; and
• review – for loans where information relating to SPTs is not made publicly available, external review of a borrower’s performance against its SPTs is strongly recommended.

For the complete APLMA/LMA/LSTA Guidance on SLL Principles, please see here.