Climate-Related Disclosure and Emissions Data in Loans (Australian law or APLMA)

Clauses

[Drafting note: Using this clause in Asia Pacific Loan Market Association (APLMA) form documents: While Wendy's Clause can be used in recommended form documents published by the APLMA, it has not been endorsed by, or produced in conjunction with, the APLMA. Using and reproducing APLMA documents generally are subject to certain restrictions, specifically they may only be used by APLMA members for preparing and documenting agreements relating to transactions or potential transactions in the loan markets. Further information is available on the APLMA website.]

[Drafting note: For groups of companies, consider whether reporting should refer to the ‘Group’ (in other words the Company and its Subsidiaries) or another combination of entities, for example, Obligors. Changes to the template will be required to implement reporting requirements on groups wider than just the Company.

If using the APLMA documentation structure, this clause should be added as a new sub-clause of the ‘Information Undertakings’ clause. For simplicity, the definitions could be included in that clause as opposed to adding them to the main definitions in clause 1.1. Capitalized terms used below and surrounded by [parentheses] the first time used are defined in clause 1.1 of the APLMA Term & Multicurrency Revolving Facilities Agreement 2020 – check that they are defined in the document you are reviewing.]

[Drafting note: Capitalized terms relate to either a defined term in this clause or a defined term in the main agreement that this clause is designed to be inserted into.]

1. Reporting of Climate-Related Risks and Mitigation

1.1 The [Company] must supply to the [Agent] (in sufficient copies for all the [Lenders], if the [Agent] so requests), with (or as part of) each [Compliance Certificate] a report containing the following information, in a form and substance [satisfactory to the Agent acting reasonably] or [agreed between the Company and the Agent] or [substantially in the form set out in Schedule [●] (Form of Climate and Emissions Reporting)] :

(a) the emissions data of the [Company], being:

(i) the Scope [1, 2 and 3] Emissions itemised by scope and the Total Emissions of the [Company] for the relevant Reporting Period; and

(ii) any increase or reduction in the Scope [1, 2 or 3] Emissions or the Total Emissions for the Reporting Period measured against the Scope [1, 2 and 3] Emissions and the Total Emissions in the previous Reporting Period (except in the first Reporting Period),

(the Annual Emissions Report); 

[Drafting note: Lenders to consider whether any external audit or verification of this information is required. If so, they will need to consider the degree of control that they will have over the identity of the third-party auditor or verifier, and the scope of the assurance OR review.]

(b) details of the processes and procedures implemented by the Company to identify, assess and manage Climate-Related Risks impacting the financial condition, business, operations, strategy and financial planning of the Company; 

(c) details of actual or potential impacts of Climate-Related Risks, which must include (without limitation) the assessment of:

(i) the Physical Risks that may affect the business operations of the Company and the value of the Company’s assets (including without limitation its commercial property); 

(ii) the Transition Risks associated with the transition to a Net Zero economy that may affect the business operations of the Company and value of the Company’s assets;

(iii) the steps (if any) being taken to address or mitigate such risks; and

(iv) an estimate of the reduction in the value of the Company’s assets (and its timing) reasonably likely to arise from those Climate-Related Risks, taking into account the steps being taken to mitigate those risks; and

(d) details of any processes, procedures and any targets implemented by the [Company] that contribute to and/ or mitigate any harm to the following environmental objectives:

(i) Climate Change Mitigation;

(ii) Climate Change Adaptation; 

(iii) Sustainable Water and Marine Resource Use;

(iv) transition to a Circular Economy;

(v) Pollution Prevention and Control; and

(vi) Biodiversity Protection.

[Drafting note: The Borrower and Lenders are at liberty to negotiate the inclusion of some or all of the reporting requirements in clauses 1.1(a), (b) and (c) or (d). It may be that a focus on one or some of these reporting requirements ratcheting up to a full inclusion is a better approach for some parties.]

[Drafting note: Lenders to consider whether a breach of clause 1.1.1 should be treated as a [Review Event] instead of an [Event of Default]. The complexities around reporting this information and the fact that this is an evolving area suggest that a degree of flexibility should be given, particularly as an Event of Default will cross-default other contracts (a Review Event may also cross-default other documents, depending on their terms). The consequences of a Review Event under this agreement are negotiated separately and are still significant. Likewise, consideration should be given to whether instead of triggering default consequences that non-compliance could trigger de-labelling or pricing consequences.]

1.2 If the Company reports to a [Governmental Agency] substantially similar information to some or all of the information described in clause [1.1.1] (Required Reporting), then the Company providing a copy of that Required Reporting to the Agent at the same time as it is provided to the Governmental Agency satisfies the Company’s obligation in clause [1.1.1] in connection with that information to the extent determined by the Agent (acting reasonably).

[Drafting note: Clause 1.2 is intended to contemplate future mandatory reporting and will also be satisfied by reporting by listed companies under Recommendation 7.4 of the ASX Corporate Governance Principles. As the reporting is unlikely to be a complete overlap, the Agent (acting reasonably) retains the discretion to determine what, if any, reporting is still required under clause 1.1]

1.3 Except to the extent provided in the most recent Annual Emissions Report, the Company must promptly supply, or procure the supply of, such documentation and other evidence reasonably requested by the Agent (for itself or on behalf of any [Finance Party] from time to time in relation to an Obligor to enable the Finance Party to comply with any applicable law or regulation in connection with assessing or reporting on that Finance Party’s Climate-Related Risk.  

[Drafting note: Clause 1.3 is intended to allow financiers to request information that they require because they need to report on the climate risk in their own lending book, but not where the relevant information has already been provided in the Annual Emissions Report. Note that ‘regulation’ has a specific meaning in APLMA documents - it includes guidelines that do not have the force of law but with which ‘responsible entities in the position of [the Lenders] would normally comply’. This is intended to be sufficiently broad to cover the ‘if not, why not’ reporting requirements for ASX-listed Lenders.]

Note: 

• APLMA documents are for club or syndicated loans conventionally used in institutional settings (for loans $100M+*) with sophisticated or institutional borrowers who will likely already be subject to TCFD requirements (which will be implemented in Australia for eligible entities (for example large companies that meet particular asset or revenue or employee thresholds) from 2024-2025 onwards) as well Australian Accounting Standards Board (AASB), International Sustainability Standards Board (ISSB) requirements. For this reason, duplication and compliance burden will need to be considered (and extent to which produced sustainability reports meet or can be supplemented to cover requirements proposed in model clause). It is likely that borrowers that are covered by existing mandatory disclosure frameworks may push back on additional requirements being included in Finance Documents (although the clause is drafted so that it is relatively generic and be adjusted as needed). Likewise, given TCFD reflects best practice, consideration will need to be given as to whether this should (over time) become the default disclosure regime and the utility of imposing lesser or alternative obligations.

* [Average syndicated or club loan size typically exceeds $300M according to recent RBA data and syndicated loans used in Mergers and acquisitions (M&A) finance, project and corporate finance markets. Jumbo loans exceed $1b.]

• As noted, the model clause extends beyond climate risk and TCFD disclosures. 
• Clearly this information flow is critical to enable lenders who have signed up to the Net Zero Banking Alliance to understand their loan portfolios and 'financed emissions' which flow into its own TCFD disclosures.
• Whether additional disclosures are required (for example, in relation to nature or biodiversity-related risks), may need to be considered on a case-by-case basis, with regard being had to market or sector dynamics and participant sophistication (and industry sector, supply chains and other relevant factors). 
• If disclosure requirements are imposed on SME, mid-market borrowers (who may not already be subject to other disclosure regimes), capacity to comply will need to be considered. A phased or scaled approach could be adopted to ameliorate this issue (or separate more collaborative regimes developed to encourage development of sustainability and disclosure. 
• Care will need to be taken when negotiating Default Events and Review Events (which often cross-default across other Finance Documents) – this raises existential issues for borrowers. Such events can lead to acceleration or repayment or solvency risk so there may be resistance to linking non-compliance with disclosure requirements to Default or Review Events (particularly where breach does not have a material impact on immediate ability to repay). Alternatively, where relevant provisions or principles are breached, green or sustainability-linked products could be de-labelled or have pricing consequences rather than default consequences. We note the use of the model clause is seen as a prelude to possible SLLs, green loans.
• The Loan Market Association (LMA), Loan Syndications & Trading Association (LSTA) and APLMA jointly published updated versions of Green Loan Principles and Guidance, Social Loan Principles and Guidance and Sustainability-Linked Loans Principles and Guidance, which may be useful resources in this regard. The updated versions reflect recent global market developments (including sleeping SLLs). 
• Lenders may also consider whether collaborative approaches can be adopted either within or outside of the relevant Finance Documents to encourage compliance and engagement with disclosure regimes. This may include allowing some of the financing to be used for measurement and evaluation purposes – or broader ESG – education initiatives and capacity building.