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The LMA, The ELFA and ESG: What You Need to Know

February 2, 2022


In November 2020, the Loan Market Association (LMA) and the European Leveraged Finance Association (ELFA) published the Best Practice Guide for Term Sheet Completeness (Best Practice Guide) in an effort to identify issues faced by the investor community with regard to term sheet sufficiency in the context of syndicated loan transactions. In December 2021, the Best Practice Guide was updated to include a list of material environmental, social and governance (ESG) terms.

The Best Practice Guide is a result of collaborative work with input from respective LMA and ELFA working groups as well as information gathered through investor surveys and includes a list of provisions identified by investors as being of material importance to their investment decision. Feedback from working group discussions identified ESG as an area of growing importance and highlighted the need for ESG terms to be properly identified and analyzed at the term sheet stage. As a result, the Best Practice Guide has been updated to include Section 2.22 which reflects the input of an investor survey conducted in Q3 2021 to determine the material ESG provisions that should be included at the term sheet stage.


Margin linked to borrower’s sustainability/ESG performance

Section 2.22 of the Best Practice Guide lists the following information to be included in term sheets for syndicated loans where the margin is linked to the borrower’s sustainability/ESG performance:

  • which facility(ies) the margin ratchet will apply to;

  • which key performance indicators (KPIs) and sustainability performance targets (SPTs) the margin ratchet will be linked to;

  • the KPIs selected by the borrower, including:

    • the type and details of the relevant KPIs;

    • details of whether KPIs are external or internal;

    • details on how KPIs were selected and any applicable benchmarks and baselines; 

    • details of whether KPIs have been or will be required to be externally reviewed pre-origination;

    • details of any underlying definitions, methodologies and/or assumptions; and

    • details of any lender consent requirements for the amendment of KPIs.

  • the SPTs that have been set for each KPI, including details of:

    • how the SPTs have been calibrated and any applicable benchmarks and baselines;

    • whether the SPTs, benchmarks and baselines will be required to be externally reviewed pre-origination;

    • how and when external verification of the borrower’s performance against each SPT for each KPI will take place post-origination, including whether these differ across KPIs; and

    • the calculation methodology to be used for determining whether the borrower has met each SPT for each KPI.

  • the trigger for the pricing discount/increase (including the number of SPTs that must be satisfied to trigger the margin ratchet);

  • the level of the margin discount/increase to be applied, and when this will apply from;

  • consent requirements for amending KPIs/SPTs post-origination; and

  • to the extent applicable, any requirements around re-investing the amount of any margin discounts.

KPIs/SPTs determined after origination of the loan

Additionally, Section 2.22 of the Best Practice Guide lists the following information that should be included in a term sheet for syndicated loans where KPIs/SPTs are to be determined after origination of the loan:

  • when and how the KPIs/SPTs are to be determined, including any requirements for external review;

  • any restrictions on marketing the deal until such time as KPIs/SPTs have been set; and

  • the consent requirements to approve the KPIs/SPTs.

Information reporting requirements

The Best Practice Guide also covers ESG information reporting requirements and lists the following details, which should be clearly presented in the term sheet when applicable:

  • timing for initial and ongoing ESG information reporting;

  • scope and content of initial and ongoing ESG information reporting; 

  • details of how ESG information is to be provided (for example, in annual reporting);

  • any requirements in relation to audit/external review of ESG information (pre- or post-origination); and

  • details of the consequences of (i) not delivering ESG information and/or (ii) providing inaccurate/ incomplete ESG information.

The details of any ESG information to be provided as a condition precedent should be clearly set out in the term sheet as well.

Use of proceeds

Lastly, the details of the use of proceeds including any green and/or social projects toward which proceeds are to be applied should also be included in the term sheet when applicable.


On November 15, 2021, the ELFA published new questionnaires on ESG provisions (ESG Questionnaires) in both leveraged loans and high yield bonds as part of the ELFA’s New Deal Disclosure Questionnaire Series. According to the ELFA’s press release, the ESG Questionnaires were created in response to demand from investors for greater transparency in deal documentation and aim to promote stronger engagement between borrowers and lenders on ESG provisions.

The “ESG Provisions in High Yield Bonds Questionnaire” and the “ESG Provisions in Leveraged Loans Questionnaire” outline the following key topics and are designed to support investor diligence and serve as a starting point for discussions between borrowers and investors regarding ESG provisions:

  • SPTs

  • Reporting

  • Structure of the ESG provision in the bond

  • Structure of the ESG margin ratchet in the loan

Our team continues to monitor developments in the sustainable finance market.

For more information, please contact any member of our ESG group or your usual Blakes contact.