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Newest Development in Sustainable Finance: Social Loan Principles

Newest Development in Sustainable Finance: Social Loan Principles
By  Fabien Lanteri-Massa, Rebecca Dawe and Camille Massé-Pfister
May 27, 2021

On April 13, 2021, the Loan Market Association (LMA), the Loan Syndications and Trading Association (LSTA) and the Asia Pacific Loan Market Association (APLMA) jointly published their Social Loan Principles (SLPs).
 
The SLPs comprise voluntary recommended guidelines and aim to create a framework of clear, transparent and consistent market standards for the development and integrity of social loans. Furthermore, the SLPs clarify what type of loans may be categorized as being for social purposes. The SLPs build on and are consistent with the internationally recognized Social Bond Principles (SBPs), administered by the International Capital Markets Association.
 
In addition to the SLPs, the LMA, LSTA and APLMA have previously established Green Loan Principles (GLPs) and Sustainability Linked Loan Principles (SLLPs). Together, these principles promote consistency across the market and facilitate the development of sustainable lending products and economic activity.

DEFINITION AND KEY COMPONENTS OF SOCIAL LOAN PRINCIPLES

A social loan refers to any type of loan instrument made available exclusively for the purpose of financing or refinancing new or existing eligible social projects.
 
The SLPs are based around four core components: (1) the use of the proceeds of the loan towards eligible social projects; (2) the evaluation and selection process for the social project; (3) the tracking of the proceeds of the loan; and (4) the reporting with respect to the social loans. These key components will now be discussed in more detail.

1. Use of Proceeds

Firstly, the proceeds of a social loan must be used towards financing or refinancing eligible social projects, which are programs and activities with the aim of mitigating social issues and/or achieving positive social outcomes, either for society at large or for a specific target population.
 
Appendix 1 of the SLPs sets out a non-exhaustive list of categories of activities that would qualify as social projects. Examples of such projects include the following:

  • Basic infrastructure such as clean drinking water, sanitation, energy, transport

  • Access to essential services such as education and healthcare

  • Socioeconomic advancement and empowerment

  • Food security and sustainable food systems

Appendix 2 of the SLPs sets out a non-exhaustive list of indicative categories of target populations, which includes people living below the poverty line, migrants and various vulnerable groups.

Social loans can be made as term loans or revolving credit facilities, and can take the form of one or more tranches. Appendix 3 of the SLPs sets out additional considerations for social loans made as revolving credit facilities, since it may be more difficult in such cases to identify the use of the proceeds. For instance, lenders may seek external review to monitor and validate the sustainability factors reported by the borrower.

2. Process for Project Evaluation and Selection

There should be clear communication between the borrower and lender with respect to (1) the social objective of the loan, (2) the process by which the borrower determines that the project to be funded is an eligible social project, and (3) any related eligibility criteria, including the process for the identification and management of potentially material social and environmental risks associated with the project.

Borrowers should also disclose how the project fits within their overarching objectives and policy relating to sustainability, as well as any social standards or certifications referenced in its project selection.

3. Management of Proceeds

Borrowers should establish an internal governance process for the tracking of the allocation of funds towards social projects. The proceeds of the loan should either be credited to a dedicated account, or otherwise appropriately tracked.

If a loan takes the form of one or more tranches, each tranche applicable to the social project should be labelled clearly and the proceeds of such tranche should be either credited to a separate account or appropriately tracked by the borrower.

4. Reporting

Borrowers should keep readily available up to date information on the use of the social loan’s proceeds. In particular, this should include a list and description of the social projects to which the proceeds of social loans have been allocated, as well as the amounts allocated and their expected impact. In the event that confidentiality, competition or other practical considerations limit the amount of detail that can be made available, the information should be presented in generic terms or on an aggregated project portfolio basis. Qualitative performance indicators, and, where feasible, quantitative performance measures are recommended. This information must be renewed annually and needs to be provided to the institutions participating in the social loan in question.

EXTERNAL REVIEW

It is recommended that borrowers obtain external input regarding compliance with the core components under the SLPs. This can be provided by specialized consultants or institutions, auditors or independent ESG rating providers. A borrower may also have its loan certified against an external assessment standard, or rated by qualified third parties. External reviews may either be complete, or they may be partial and only cover certain aspects of the social loan.
 
Alternatively, since lenders are likely to have a broad working knowledge of the borrower and its activities, self-certification by a borrower may be sufficient if the borrower can demonstrate that it has the internal expertise required to confirm compliance with the SLPs.

WHAT’S NEXT?

 The publication of the SLPs is only one of many recent developments in the area of sustainable finance and we are closely monitoring the impact of these developments on the Canadian sustainable finance market.  
 
As new innovations in sustainable finance continue to emerge and evolve internationally, we will continue to keep you updated on these developments and their impact on both the international and domestic markets.
 
For further information, please contact:
 
Fabien Lanteri-Massa               514-982-4034
Rebecca Dawe                           514-982-5047

or any other member of our Financial Services group.