Despite being a relatively new concept, the Sustainability-Linked Loan (SLL) market has burgeoned in the last decade. A SLL is a loan facility that is characterised by incentives (usually a margin reduction) for achieving certain pre-defined sustainability targets.
The Loan Market Association (LMA), the Asia Pacific Loan Market Association and the Loan Syndications and Trading Association have together produced the Sustainability-Linked Loan Principles (SLLP) to improve integrity and consistency across the SLL market. Adherence to the SLLP is voluntary, but in practice the SLLP have become a definitive guide to the provisions governing a SLL.
In accordance with the SLLP, the 5 core criteria that must be satisfied for a facility to be classified as a SLL are:
- The presence of relevant, core and material Key Performance Indicators (KPIs) of high strategic significance to the borrower;
- Ambitious calibration of Sustainability Performance Targets (SPTs) per KPI;
- Loan characteristics vary based on SPT performance;
- Reporting; and
- Verification.
On 26 March 2025 a new edition of the SLLP was published, with various updates to reflect current market practice. Here are three interesting changes for borrowers.
Mandatory elements and recommendations
There are linguistic amendments throughout the SLLP, notably introducing a clear distinction between the mandatory elements ("shall"), recommendations ("should"), optionality ("may") and capability ("can"). The added clarity will be welcomed by external reviewers who had called for more precise language to facilitate their assessment of whether SLLs comply with the SLLP. Nonetheless, the new language generally reflects current market practice and so we do not expect lender requirements to significantly change as a result.
Sleeping SLLs
A useful update is the softening of language in respect of "Sleeping SLLs", i.e. where the mechanics are incorporated at origination but the actual KPIs and SPTs are agreed later. The guidance acknowledges that Sleeping SLLs may be appropriate in "certain circumstances" rather than "exceptional circumstances". Nonetheless, the recommended time limit to agree these details is still 12 months post origination and the borrower should "make every reasonable effort to set the KPIs and SPTS before or concurrently with" signing.
External Verification
The scope and means of external verification is often a contentious point for our borrower clients, because the costs can quickly outweigh the benefits offered under the SLL. As a new concession, the SLLP no longer require information that has been verified as part of the borrower's public annual reporting or regulatory submissions to be subject to separate verification for the SLLP purposes.
Principle 1 (Selection of KPIs) and Principle 2 (Calibration of SPTs) also now contain more permissive language around the nature of KPIs and SPTs to recognise that it may not always be feasible for a KPI or SPT calibration to be externally verified. Nonetheless, independent verification continues to be a mandatory requirement under Principle 5 (Verification). We are unclear on the interplay between Principle 5 and the acknowledgement that external verification may not be feasible for certain KPIs and SPTs. In the related SLLP guidance, the language around external verification has not changed significantly:
- Pre-signing, an external opinion is recommended where appropriate to (i) confirm alignment with the SLLP, (ii) assess the meaningfulness, credibility and ambition of the selected SPT(s), and/or (iii) put the SPT(s) in the wider ESG picture to ensure that SPT achievement is not overshadowed by negative effects of other practices by the borrower.
- Post-signing, borrowers must obtain independent verification of their SPT performance where it could lead to a margin adjustment. Previously the language was more general but, in practice, there is little difference. Borrowers are encouraged to obtain an independent assessment in case of any material change to parameters, KPI methodology and SPT(s) calibration.
Borrowers should seek to understand their funder's position on external verification requirements at the "heads of terms" stage of the transaction. We expect this aspect of the SLL to continue to be an area for negotiation.
Overall, the updates to the SLLP have been generally well received. We are already seeing an increase in SLL activity, including regular use of the LMA template SLL drafting published in 2024.
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.
