The LMA has published model provisions for sustainability-linked loans, following the recent updates to the Sustainability Linked Loan Principles (‘SLLP’) and the Guidance on Sustainability-Linked Loan Principles (the ‘Guidance’) – you can read our commentary on both here.  

The provisions aim to reflect current market practice and protect the integrity of the SLL product by providing a drafting framework and extensive guidance notes for negotiating parties using the LMA’s ′core′ facilities agreement for leveraged acquisition finance transactions. We have summarised the key features of the provisions below.

• Definition of ‘Applicable ESG Standards’
  The provisions benchmark KPIs against applicable industry standards, or ESG standards and certifications – in accordance with the SLLP.  The drafting notes also confirm what details the definition should include, if a benchmark or the like, isn’t available. Details include scope, parameters, and calculation methodology - the latter must be clearly defined. Any changes to the calculation methodology should be highlighted in the Verification Report and will give rise to a Sustainability Amendment Event.
  
  
• Sustainability Amendment Event (‘SAE’)
  The provisions note that certain events may affect sustainability performance, for example the sale or lease of an asset – these are SAEs. If a SAE occurs the Parent has a duty to inform the Agent of any potential impact on sustainability performance. The parties will then enter into good faith negotiations to adjust the calculation methodology, KPIs, or other applicable terms, as necessary. Such adjustments will be made pursuant to the ′rendez vous′ clause (clause 42.6 of the rider) and, in accordance with the Guidance, will help to ensure that SPTs remain material and are never less ambitious than a publicly announced target.
  
  
• Parent, Company or Group
  KPIs and SPTs can be set at any entity level, depending on where the relevant sustainability strategy sits. However, the Parent has specific obligations under the provisions. For example, to support industry need for disclosure, the Parent company must make Sustainability Reports publicly available.
  
  
• Sustainability Margin Adjustment 
  Following market practice, the rider provides for a two-way margin ratchet based on the number of SPTs met. Alternatively, a ‘blended’ margin ratchet could be used (wherein the margin ratchet will vary at the differing SPT thresholds); or a margin ratchet structured so as to give greater weight to a particular SPT achievement. The Sustainability Margin Adjustment resets every SLL Reference Period, disregarding any previous adjustment to the margin.
  
  
• Events of Default
  The rider has ring-fenced the sustainability provisions, separating them from the rest of the facility mechanics. For example, neither a SAE nor a Sustainability Breach is an Event of Default. Instead, non-compliance with the provisions, may impact the Sustainability Margin Adjustment, or potentially constitute a Declassification Event.
  
  
• Declassification Event
  To protect the integrity of the SLL product the rider includes a ‘Declassification Event’. The provisions provide a non-exhaustive list of Declassification Events including Sustainability Breach. Further to a Declassification Event the Lender can declassify all facilities as sustainability linked. After which point all Sustainability Provisions will cease to apply and no Sustainability Margin Adjustment will be available. 
  
  The drafting notes recognise that the market varies in its approach to restrictions on publicity – for example, following a Declassification Event some Obligors must remove any historic references to facilities being sustainability-linked. For now, the rider does not go that far and instead states that no facility can be re-classified as sustainability-linked, and the Borrower group cannot refer to any facility as such, following a Declassification Event.

Finally, negotiating parties should note that the provisions will need to be tailored on a transaction-by-transaction basis. It will be interesting to see how the rider is used in practice and how it will evolve in the future. For now, it is a very useful starting point for negotiations and a welcome addition to the ESG toolkit.