As highlighted in Part 1 – Green Loans – Overview of the key features of our two part briefing, the key distinction between a green loan and a sustainability linked loan is the use of proceeds.  The proceeds of a sustainability linked loan may be used for general corporate purposes whilst the proceeds of a green loan must be used for a specific “green project”.

In the table below, we examine the ‘Sustainability Linked Loan Principles' and the accompanying ‘Guidance on the Sustainability Linked Loan Principles' as published by the Loan Market Association.

Sustainability Linked Loan

What is a sustainability linked loan?

A sustainability linked loan is any loan instrument and/or contingent facility (such as a bonding line, guarantee line or letter of credit) which incentivises a borrower's achievement of ambitious, predetermined sustainability performance objectives.

The ‘Guidance on the Sustainability Linked Loan Principles' clarifies that any entity that may borrow in the loan market may borrow a sustainability linked loan provided that it is aligned with the four core components of a sustainability linked loan which we highlight below.

Is a borrower required to use the loan proceeds for a specific purpose?

There is no specific requirement for use of proceeds. A sustainability linked loan could be for a borrower's general corporate purposes. 

Is pricing impacted by a borrower's performance?

The hallmark of a sustainability linked loan is that a borrower's performance against predetermined sustainability objectives affects the interest rate, incentivising improved sustainability performance over time.

The Sustainability Linked Loan Principles set out a non-exhaustive list of 10 common categories of objectives, including reduced greenhouse gas emissions, reduced water consumption and the amount of renewable energy generated or used by a borrower.  Common categories of objectives include:

a. energy efficiency;

b. greenhouse gas emissions;

c. renewable energy;

d. water consumption;

e. affordable housing;

f. sustainable sourcing;

g. circular economy;

h. sustainable farming and food;

i. biodiversity; and

j. global environmental, social and governance (“ESG”) assessment.

Two-way pricing mechanisms have been introduced on certain deals whereby a price reduction applies if the sustainability targets are achieved by a borrower and a price increase applies where a borrower fails to achieve all or some of its key sustainability targets. 

What are the core components of a sustainability linked loan?

To satisfy the Sustainability Linked Loan Principles, a sustainability linked loan must comply with the following four components:

1.    Relationship to a Borrower's Overall Sustainability Strategy

A sustainability linked loan is intended to complement, enhance and support a borrower's existing overall sustainability strategy.  Accordingly, sustainability performance targets will differ on a case by case basis depending on the business of that particular borrower and its strategy.

2.    Target Setting – Measuring the Sustainability of a Borrower

Sustainability performance targets should be ambitious (i.e. should go beyond what a borrower would have achieved in its ordinary course of business) and meaningful (i.e. core to a borrower's business).

The relevant metrics and sustainability performance targets are negotiated and set between a borrower and a lender. The targets can be internal and bespoke to a borrower's business and/or external and set against a borrower's ESG performance in relation to its peers as determined by an external reviewer. 

Examples of certain methodology for selecting the sustainability performance targets include:

(a)  ESG metrics and targets included in a borrower's sustainability strategy and/or policies;

(b)  external analysis to establish sector-specific ESG criteria and best practice; and/or

(c)   verified industry metrics reported against certain frameworks with verification or evaluation by a third party who will determine whether such targets are ambitious for that particular borrower and that borrower's industry.

3.    Reporting

There is no standard methodology for reporting on sustainability performance targets. The methodology will be determined by a borrower's chosen sustainability performance targets.

A borrower should maintain and keep readily available up to date information relating to its sustainability performance targets. Such information should be provided to a lender at least once a year.

Where possible a borrower should be encouraged to publicly report information relating to its sustainability performance targets. This information will usually be included in a borrower's annual report or its sustainability report.

4.    Review

The requirement for an external review is generally agreed between a borrower and a lender.

If information relating to a borrower's sustainability performance targets is not public, a borrower is recommended to seek an external review of its performance against its sustainability performance targets.

Where an external review is sought this should be independently verified by a qualified external reviewer, such as an auditor, environmental consultant and/or independent ratings agency at least once a year.

Should any additional representations and warranties be included in a facility agreement?

A borrower should be under an obligation to represent the accuracy of any reporting.


Should any additional information undertakings/covenants be included in a facility agreement?

Information undertakings/covenants relevant to a borrower's sustainability performance targets should be clearly identifiable in a facility agreement.


Should any additional events of default be included in a facility agreement?

A borrower and a lender should consider whether or not a failure by a borrower to accurately report on its sustainability performance targets or meet its sustainability performance targets will trigger an event of default under a facility agreement.


Originally Published By Eversheds Sutherland, November 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.