In 2019, sustainable finance went mainstream. Thanks to the publication by the Loan Syndications and Trading Association (LSTA), the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) of the internationally recognized voluntary global Green Loan Principles (GLPs) originally adopted in 2018 and of the Sustainability Linked Loan Principles (SLLPs) adopted in 2019 and the increased demand from market participants, green loans and sustainability linked loans (SLLs) accounted for a large proportion of the strong growth of sustainable finance. For a refresher on the GLPs and SLLPs, see our May 2018 Blakes Bulletin: Canadian Investors Take Note: Budding Green Loan Market Set to Ramp Up in 2018 and April 2019 Blakes Bulletin: Lending Market Sets Sights on Sustainability Linked Loans.
On May 5, 2020, the LSTA, LMA and APLMA jointly issued guidance documents for each of the GLPs and SLLPs (Guidance Documents), with a view to provide market practitioners with practical considerations for structuring, documenting and monitoring green loans and SLL transactions. Additionally, the Guidance Documents are intended to complement the “refreshed” May 2020 version of the GLPs and SLLPs by promoting a harmonized approach in the use of these products, providing clarity on the differences between them and maintaining their integrity to avoid “greenwashing” and “sustainability washing” concerns. We have highlighted below some of the essential notes from the Guidance Documents. However, it is worth pointing out that the Guidance Documents also provide practical considerations for the core components of each product (including, for green loans, use of proceeds and project evaluation; and for SLLS, integration with the borrower’s overall sustainability strategy and target-setting), target-setting and reporting metrics and frequencies, and on the recommendations for external review.
ADVANTAGES OF GREEN LOANS AND SLLS
The Guidance Documents reiterate some of the advantages for borrowers and lenders to enter into green loans and SLLs in the context of The Paris Agreement and the United Nations’ Sustainable Development Goals (SDGs). For the borrowers, the benefits include a positive impact on the environment, climate change mitigation and/or adaptation, a positive impact on reputation and credibility, building stronger values-based relationships with stakeholders and gaining access to new markets, providing greater resilience to market disruption caused by climate change and decreasing risk across portfolios. For the lenders, the benefits are reflected in incorporating environmental, social and governance (ESG) performance into the credit assessment of borrowers, showing commitment to achieve sustainability goals with a correlated economic impact and promoting sustainable long-term growth and profitability.
KEY DIFFERENCES BETWEEN GREEN LOANS AND SLLS
The Guidance Documents outline the key differences between green loans and SLLs. While the fundamental determinant of a green loan is the use of loan proceeds for green projects, use of proceeds is not a key determinant for the SLLs. The main focus of the SLLs is incentivizing the borrower’s efforts to improve its sustainability credentials, by aligning loan terms to the borrower’s performance against mutually agreed, material and ambitious, pre-determined sustainability performance targets (SPTs).
PRESERVING THE INTEGRITY OF GREEN LOANS AND SLLS
The Guidance Documents provide some guidelines on practical ways to avoid greenwashing or sustainability washing, which could undermine the integrity of the products and impact market participant confidence. Both greenwashing and sustainability washing are described as a project held out as having green or sustainable profiles, but where such claims are in fact inflated, inaccurate or misleading.
According to the Guidance Documents, in the context of green loans, by closely adhering to all the core components with a view to being as open and transparent as possible and with the use of external review, the market can take steps to avoid any allegations of greenwashing. Should a project no longer constitute an eligible project, a mechanism can be provided to exclude such project.
With respect to SLLs, the Guidance Documents suggest that sustainability washing may occur when a project’s SPTs are only superficially targeting a sustainable initiative and lack meaningful goals. Inaccurate monitoring, measuring and disclosing of a borrower’s SPTs may also be a form of sustainability washing. Avoiding such scenarios can be achieved by closely adhering to the core components of the SLLPs which were specifically drafted to provide a clear framework to maintain the integrity of SLLs and by seeking external review to ensure appropriateness of the SPTs and transparency of the data.
HARMONIZATION OF THE DOCUMENTATION AND PRACTICAL DRAFTING CONSIDERATIONS
There is currently no template wording available for use in green loans or SLL documentation, given the varied nature of this market. A case-by-case approach is required, but below are some practical considerations highlighted by the LSTA, LMA and APLMA to be kept in mind when drafting documents.
For green loans, the loan agreement should include the following main components: (i) purpose and use of proceeds provisions clearly setting out the eligible green project(s) categories, (ii) clearly identifiable undertakings or covenants of the borrower relating to information in respect of the green project(s), and (iii) representations of the borrower as to the accuracy of any reporting. On a case-by-case basis, lenders and borrowers can determine the consequences of a breach of the use of proceeds provisions, including that the loan would no longer be considered a green loan or, in some cases, actually triggering an event of default.
For SLLs, the critical component to be found in a loan agreement is the determination of the SPTs. The relevant provisions will specifically address the determining of the targets at the outset of the transaction, how they will be measured and the reporting obligations to the lenders, including the sources of information to determine their measurements, whether based on information provided by the borrower, publicly available information or information provided and verified by a third party. The Guidance Documents note that for longer-term transactions, the loan agreement may include provisions providing for an adjustment mechanism of the SPTs which may be applicable during the life of a loan in the event of a change to the business or sustainability commitment of the borrower, as well as extraordinary/extreme events or drastic changes in the regulatory environment. On a case-by-case basis, lenders and borrowers can determine the consequences of a failure for the borrower to meet the SPTs set out in the loan agreement, including the economic impact which may consist in a margin premium or, in some cases, actually triggering an event of default.
We will continue to keep you updated on the development of the green loans and SLLs in both the international and domestic lending markets.
For further information, please contact:
Fabien Lanteri-Massa 514-982-4034
Rebecca Dawe 514-982-5047
Camille Massé-Pfister 514-982-5037
or any other member of our Financial Services group.
Blakes and Blakes Business Class communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.
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