The European Leveraged Finance Association (ELFA) and Loan Market Association (LMA) have partnered to publish a best practice guidance to Sustainability Linked Leveraged Loans.
Leveraged loan market participants face unique opportunities to lead the way in sustainability and this guidance seeks to ensure that loan market participants in Europe incorporate ESG provisions in an effective and appropriate way as this practice gains pace. Loan market investors also recognise the threats posed by “greenwashing” and the need to promote transparency on sustainability related features of a transaction.
This Guide provides practical guidance as to the application of the Sustainability Linked Loan Principles (SLLP) to “ordinary” leveraged loans which seek to incorporate any kind of ESG factor or metric (referred to in this guide as Sustainability Linked Leveraged Loans or SLLLs). It also sets out what borrowers, finance parties and their respective advisors should consider when looking to integrate sustainability factors into their loan agreements (e.g. ESG-linked
margin ratchets). The Guide should be read in conjunction with the SLLP and Guidance on Sustainability Linked Loan Principles. The ELFA and LMA have addressed several areas in the guidance, summarised below:
- Terminology: As with all areas of industry, there is a common language evolving in relation to sustainability. For those new to sustainability, this can seem daunting and act as a barrier to entry. For that purpose, the LMA has put together a Glossary of Terms4 common to sustainability lending products generally.
- Roles: The Guide seeks to explain a number of specialised roles that have arisen when applying the SLLP to any loan transaction including ESG rating providers, ESG Consultants, Sustainability Coordinators and External Reviewers.
- Selection of KPIs: Pertinent ESG information should be provided to prospective lenders by the borrower in disclosure and offering materials, helping a company to demonstrate a pre-existing and meaningful commitment to ESG prior to entering the transaction. KPIs, and the associated Sustainability Performance Targets (SPTs), should then be communicated ahead of, or at the time of, marketing the deal for syndication, to allow sufficient time for the
prospective syndicate to fully review and, where appropriate, challenge the proposed KPIs, and associated SPTs.
- Reporting & verification: Borrowers should make and keep readily available up to date information relating to their SPTs, with information provided at least once a year and externally verified.
- Documentation: There is currently no template wording available for use in sustainability linked loan documentation due to the varied and precedent-based nature of this market and, as such, a case-by-case approach will be required. The Guide outlines considerations for both Term Sheets and Loan facilities.
Sabrina Fox, Chief Executive Officer, European Leveraged Finance Association, commented:
“Together with the LMA, we have put together a practical guide to support a strong approach and implementation of ESG principles documentation with a solid basis in the company’s overall business. Importantly, a borrower should not rush to structure a sustainability linked loan until it is ready to do so. This Guide provides a common starting point, bringing legitimacy and helping to ensure proposals are robust and ambitious enough to guarantee the integrity of the
product and limit greenwashing risks.”
Gemma Lawrence-Pardew, Director – Legal, Loan Market Association, added:
“Our Guide with the ELFA provides a transparent and standardised ESG approach from the beginning, allowing market participants to have a resilient model to follow in the leveraged finance market. This is supported by the already uniquely positioned market which offers close relationships between borrowers and lenders and investors already accustomed to performing “deep dives” into borrowers’ businesses.”