Sustainability Linked Loans: more help now available for borrowers

On 2 August the Association of Corporate Treasurers published guidance (ACT Guidance) for the benefit of borrowers who want to engage with the Loan Market Association's template drafting in order to document a sustainability linked loan (SLL).  The LMA's template drafting is available to its members and is designed to align with the Sustainability Linked Loan Principles (SLLP) published jointly by the Loan Markets Association (LMA), the Loan Syndications and Trading Association and the Asia Pacific LMA.  While the SLLP are not mandatory, they are widely followed by lenders across the loan market. In its recent review of the SLL market, the FCA recognised the SLLP as a key tool for embedding good practice.  

The ACT Guidance notes that the LMA's template drafting can offer particular assistance to the borrower in better understanding lenders’ expectations and the parameters of the SLL product, enabling borrowers to anticipate lender requirements with regard to sustainability terms and conditions. The ACT Guidance also articulates what all those involved in the SLL market are observing: that the LMA's template provisions, in their level of granularity and detail, represent a market-wide change in approach to SLL terms.  An understanding of this will be essential for borrowers, both at the documentation stage and also prior to that when negotiating the heads of terms for an SLL.

The ACT Guidance will serve as a useful tool in negotiating and documenting any SLL, since most SLLs (whether or not on an LMA basis) incorporate the same key elements and almost all lenders are keen that their SLLs are aligned with the SLLP.  The ACT Guidance goes on to discuss the requirements of the SLLP and highlights a range of common lender requests, requirements and trends in the current market.  Part 3 includes a clause by clause explanation of the LMA's template drafting and draws out areas for consideration and negotiation.  It also includes borrower-focused commentary on some more controversial terms that often find their way into SLL agreements, such as “ESG controversy” clauses, sustainability related amendments after the signing date and triggers for declassification as an SLL. 

In view of the rapid evolution of the market, the LMA has indicated that it will keep its template provisions under review and is keen to hear borrowers' perspectives in order to inform further iterations, which must continue to reflect market practice.