The MT REF team recently attended the LMA’s Sustainable Finance Early Evening Seminar – following the publication of the model provisions for Sustainability-Linked Loans (‘SLLs’).

The seminar was an excellent opportunity to discuss the challenges facing sustainable finance, and delve into the decisions behind the drafting of the provisions.

We have summarised our top takeaways below.

Tailoring will be required.

As one panellist commented, we now have ‘an elevated base [and] can focus on the commercial aspects.’ It was stressed throughout the seminar that the rider is a base - designed to ease negotiations and stimulate discussion – but the provisions will need to be tailored for individual transactions.

Not a shopping list! 

The rider is deliberately non-prescriptive. For example, no CPs or sustainability undertakings have been included. This is to ensure that the product remains both current and flexible.  

The market is still evolving. 

There is no singular market approach to SLLs – for example, some companies are struggling to collect and synthesise data, while others are extremely familiar with the reporting process. This made the drafting process particularly challenging! 

However, there is some consensus. For example, it was generally agreed that the sale of an asset should be a Sustainability Amendment Event and bring the parties back to the table for re-negotiation.  

Barriers to Entry

There are barriers to entry in the market which the rider aims to minimise through, among other things, the level of flexibility it provides.

For example, it was noted that some KPIs cannot simply be lifted from a borrower’s sustainability strategy and added directly to a facility agreement. As a result, the rider’s definition of KPIs has been left deliberately vague and parties are instead encouraged to refer to the Guidance on Sustainability-Linked Loan Principles when drafting definitions.

Simplicity is Key

The original draft was a very full document! However, it has been stripped back to ensure that SLLs are as accessible as possible. For example, sustainability information should not overlap with the information which is already being provided under the FA – there should be no duplication!

Greenwashing 

The panel noted that greenwashing continues to pose a serious reputational risk for both borrowers and lenders.

No doubt regulations will be tightened in the future, but for the moment borrowers and lenders are encouraged to consult Sustainability Coordinators and ESG consultants to ensure that their KPIS are material and ambitious.