Sustainability-Linked Loans
Model clauses, as a set of optional riders divided into product categories and ESG goals, to incorporate SLPs into traditional financing documents, standard T&Cs and finance products.
What this clause does
This clause incorporates the Loan Market Association’s (LMA’s) May 2020 Sustainability Linked Loan Principles into a standard (rather than green) loan agreement. In doing so, this clause mainstreams sustainability into lending, supporting lenders and borrowers to achieve their net zero targets and mobilising finance to support the transition to a decarbonised economy.
Clauses
[Drafting note: Using this clause in LMA form documents: While Casper’s Clause can be used in recommended form documents published by the LMA, it has not been endorsed by, or produced in conjunction with, the LMA. Using and reproducing LMA documents generally are subject to certain restrictions, specifically they may only be used by LMA members for preparing and documenting agreements relating to transactions or potential transactions in the loan markets. Further information is available on the LMA website – www.lma.eu.com.]
[Drafting note: Capitalised 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. Sustainability-Linked Facilities
1.1 [Facility/ Tranche] [●] and [Facility/ Tranche] [●] are each designated as a Sustainability-Linked Facility.
1.2 Sustainability Performance Targets
Each Sustainability-Linked Borrower undertakes to use [its best]/ [all reasonable] endeavours to achieve its SPTs.
1.3 Sustainability Performance Evaluations
1.3.1 Within [15] Business Days of receiving a Sustainability Compliance Certificate under Clause 3.1.1 (Sustainability Compliance Certificate), the Sustainability Coordinator shall provide the Sustainability-Linked Borrower with a Sustainability Performance Evaluation detailing the SPTs that are Achieved SPTs for the purposes of calculating a Sustainability-Linked Margin Decrease or Sustainability-Linked Margin Increase under Clause 1.3.2 below.
1.3.2 Each Sustainability Performance Evaluation shall determine whether a Sustainability-Linked Margin Decrease or a Sustainability-Linked Margin Increase shall apply for the Relevant Period, using the following calculations:
(a) if the number of Achieved SPTs is over [75%] of the total number of SPTs as at the most recent Sustainability Performance Test Date then the Sustainability-Linked Margin Decrease shall apply; or
(b) if the number of Achieved SPTs is under [50%] of the total number of SPTs as at the most recent Sustainability Performance Test Date then the Sustainability-Linked Margin Increase shall apply.
[Drafting note: Users of this clause may wish to tailor this drafting to the lenders’ requirements and borrower’s circumstances by weighting the targets that are the most critical. Rather than specifying a percentage of the total SPTs should be achieved, the Sustainability Performance Evaluation could be assessed on a failure to achieve specific SPTs.]
2. Representations
[Insert sustainability-linked representations and warranties – for example, correct form of reporting on SPTs etc.]
3. Information Undertakings
3.1 Sustainability Compliance Certificate
3.1.1 Within 30 days of each Sustainability Performance Test Date, each Sustainability-Linked Borrower shall supply the Sustainability Coordinator with a Sustainability Compliance Certificate setting out (in form and substance satisfactory to the Sustainability Coordinator, acting reasonably) information that complies with this Clause 3.1.
3.1.2 Each Sustainability Compliance Certificate shall:
(a) report on the Sustainability-Linked Borrower’s performance against each SPT as at the relevant Sustainability Performance Test Date, and identify the Achieved SPTs;
(b) include any relevant report, certification, rating or any other information required by any SPT;
(c) detail any assumptions used by the Sustainability-Linked Borrower to prepare the Sustainability Compliance Certificate and evidence of the Sustainability-Linked Borrower’s compliance with each SPT;
(d) attach a Verification Report signed by the Sustainability Expert;
(e) be reviewed by the Sustainability Committee and signed by a director of the Sustainability-Linked Borrower; and
(f) report on any failure by the Sustainability-Linked Borrower to comply with its Sustainability Objectives.
3.2 Sustainability Strategy
Each Sustainability-Linked Borrower shall:
(a) at all times and in all material respects procure that the Group’s business is carried out in accordance with the Sustainability Strategy; and
(b) only amend or vary the Sustainability Strategy with the prior written consent of the Sustainability Coordinator (acting in accordance with the instructions of the Majority Lenders such consent not to be unreasonably withheld or delayed).
4. [Events of Default]/ [Sustainability-Linked Margin Increase]/ [Declassification]
[Drafting note: The parties may not wish for a breach of the sustainability provisions to be an Event of Default, as it may disincentivise the Sustainability-Linked Borrower from agreeing to more ambitious SPTs. Instead, the parties may agree that (i) a margin increase shall apply or (ii) if the Borrower fails to comply with these provisions, the loan will be "declassified" and can no longer be classified as a sustainability-linked loan. The economic benefits of the sustainability link (i.e. the reduction in margin) will no longer be available to the Borrower and the Borrower will not be able to publicise the loan as sustainability-linked. The parties may wish to include additional events here, i.e. a change in the status or business of the Borrower.]
[An Event of Default]/ [A Sustainability-Linked Margin Increase]/ A Declassification Event] shall occur if:
4.1 The Sustainability-Linked Borrower:
4.1.1 fails to provide a Sustainability Compliance Certificate for a Sustainability Performance Evaluation within 30 days of each Sustainability Performance Test Date under clause 3.1.1; and
4.1.2 does not remedy the failure in clause 4.1.1 within [15] Business Days. For the avoidance of doubt, the [15] Business Days start from the end of the 30 days in clause 3.1.1; or
4.2 [a Sustainability-Linked Borrower fails to remedy a [material] breach reported under Clause 3.1.2(e) within [60] days of a written request by the Sustainability Coordinator (acting on the instructions of the Majority Lenders).]
5. Rendezvous
[5.1 If a Sustainability-Linked Borrower or the Sustainability Coordinator (acting on the instructions of the Majority Lenders) determines that the SPTs cannot be calculated or are no longer fit for purpose, a Sustainability-Linked Borrower and the Sustainability Coordinator (acting on the instructions of the Majority Lenders) shall negotiate in good faith for a period of not more than [60] days to agree revised SPTs.
5.2 If revised SPTs cannot be agreed by a Sustainability-Linked Borrower and the Sustainability Coordinator (acting on the instructions of the Majority Lenders) in accordance with Clause 6.1, a Declassification Event shall occur.]
[Drafting note: The parties may wish to include mechanics such that if the SPTs are not met, the parties can agree to (i) enter into negotiations to revisit the SPTs, or (ii) declassify the loan as a sustainability-linked loan.]
6. Conditions Subsequent
6.1 [Each Sustainability-Linked Borrower shall publish its Sustainability Strategy and [its/ the corresponding] SPTs on the relevant Sustainability-Linked Borrower’s website within [●] Business Days of the date of this Agreement.]
6.2 [Each Sustainability-Linked Borrower’s Net Zero Target shall be verified by the Science Based Targets initiative within [one year] of the date of this Agreement.]
6.3 [Each Sustainability-Linked Borrower shall sign up to Race to Zero within [six months] of the date of this Agreement.]
Schedule [1] – Conditions Precedent (CPs)
1. Sustainability-linked documentation.
1.1 The Sustainability Strategy.
1.2 A certificate of the Sustainability-Linked Borrower (signed by at least 1 (one) director) confirming that the Sustainability-Linked Borrower will undertake its business activities and apply proceeds of the Sustainability-Linked Facilities in accordance with the Sustainability Strategy.
1.3 [Insert specific SPTs CPs/ Industry standard reports/ ratings related to SPTs etc.]
Schedule [2] - Sustainability Performance Targets
[Drafting note: The SPTs listed below are additional to the SPTs listed in Appendix 1 of the Sustainability Linked Loan Principles. Users of Casper’s Clause will need to add to this schedule such of the SPTs listed in Appendix 1 that meet their requirements.]
| SPT | Category | SPT Targets |
| SPT1 | GHG Emission reduction |
|
| SPT2 | Employee Training Programme |
|
| SPT3 | Offsetting |
|
| SPT4 | [●] |
|
* [Drafting note: Ideally, this percentage should be no lower than 7% and if possible, higher, to meet the target of halving absolute emissions every decade.]
** [Drafting note: Consider including a specific number of hours training or other more specific requirements.]
Schedule [3] - Form of Sustainability Compliance Certificate
To: [●] as Sustainability Coordinator
From: [Sustainability-Linked Borrower]
Dated:
To whom it may concern,
[Sustainability-Linked Borrower] – Facility Agreement dated [●] (the “Agreement”)
1. We refer to the Agreement. This is a Sustainability Compliance Certificate. Terms defined in the Agreement have the same meaning when used in this Sustainability Compliance Certificate unless given a different meaning in this Sustainability Compliance Certificate.
2. Sustainability-Linked Borrower’s report on its Sustainability Performance Targets as at the most recent Sustainability Performance Test Date.
| SPT | SPT Category | Developments during period since the immediately preceding Sustainability Performance Test Date | Self-evaluation of Sustainability-Linked Borrower |
| SPT1 | GHG Emission reduction | [●] | [Achieved SPT] [Unachieved SPT] |
| SPT2 | Employee Training Programme | [●] | [Achieved SPT] [Unachieved SPT] |
| SPT3 | Offsetting | [●] | [Achieved SPT] [Unachieved SPT] |
| SPT4 | [Insert additional categories listed in Appendix 1 of the Sustainability Linked Loan Principles.] | [●] | [Achieved SPT] [Unachieved SPT] |
3. The Verification Report signed by the Sustainability Expert is attached.
| Signed: | ………… | ………… |
| Director | Director | |
| of | of | |
| [Sustainability-Linked Borrower] | [Sustainability-Linked Borrower] |
Schedule [4] - Form of Sustainability Performance Evaluation
To: [●] as Sustainability-Linked Borrower From: [●] as Sustainability Coordinator Dated:
To whom it may concern,
[Sustainability-Linked Borrower] – Facility Agreement
dated [●] (the Agreement)
1. We refer to the Agreement. This is a Sustainability Performance Evaluation. Terms defined in the Agreement have the same meaning when used in this Sustainability Performance Evaluation unless given a different meaning in this Sustainability Performance Evaluation.
2. We have evaluated your Sustainability Compliance Certificate dated [Date]. [It is our assessment that [SPT][, SPT][ and SPT] are Achieved SPTs.] [It is our assessment that no SPTs are Achieved SPTs.]
[3. Sustainability-Linked Borrower] has achieved [●]% of its SPTs.
4. As [Sustainability-Linked Borrower] has achieved [[75%] or more][[50%] or less][between [50%] and [75%]] of its SPTs, [Sustainability-Linked Borrower] [will have a Sustainability-Linked Margin [Increase][Decrease]][no Sustainability-Linked Margin Increase or Sustainability-Linked Margin Decrease] shall be applied.
5. Margin from the date of this certificate until delivery of the next succeeding certificate (“Temporary Margin Interest Period”) shall be [●]% per annum.
| Signed: | …………………………………………. |
| Authorised Signatory | |
| of | |
| [Sustainability Coordinator] |
Definitions
Achieved SPT means a Sustainability Performance Target that the Group has [achieved]/ [complied with] according to the most recent Sustainability Performance Evaluation.
Carbon Footprint means the total annual GHG Emissions relating to the Sustainability-Linked Borrower.
[Declassification Event means, in relation to a Sustainability-Linked Facility, that the Sustainability-Linked Facility shall be declassified as sustainability-linked and may no longer be marketed as such by any party to this Agreement.]
GHG Emissions means emissions of GHGs from all sources (including value and supply chains) categorised as scope 1, 2 and 3 emissions by The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015, as updated periodically. [Scope 1, 2 and 3 emissions are defined on page 27 of the GHG Protocol.]
Greenhouse Gases (GHGs) means the gases that trap thermal radiation in the Earth’s atmosphere. They are specified by the United Nations Framework Convention on Climate Change (UNFCCC) in Annex A to the Kyoto Protocol and may be updated periodically.
Margin means:
(a) [●]% per annum; or
(b) in relation to a Sustainability-Linked Facility, if a:
(i) Sustainability-Linked Margin Decrease applies, [●]% per annum minus the Sustainability-Linked Margin Decrease; or
(ii) Sustainability-Linked Margin Increase applies, [●]% per annum plus the Sustainability-Linked Margin Increase.
Net Negative means the GHGs removed from the atmosphere by the Sustainability-Linked Borrower are greater than its GHG Emissions.
Net Zero Target means a target to reduce and remove GHG Emissions, including by Offsetting Residual Emissions, to achieve a balance between the Sustainability-Linked Borrower’s sources and sinks of GHGs. This must be achieved by [2050]/ [insert earlier date] and align with the Paris Agreement Goals.
Offset or Offsetting means buying carbon credits from a project:
(a) that has been verified by [insert name of voluntary standard] or the United Nations Framework Convention on Climate Change (UNFCCC) clean development mechanism [or successor UNFCCC mechanism];
(b) where the emissions of GHGs avoided, reduced or removed by the project are additional;
(c) [that prioritises removing GHGs from the atmosphere rather than avoiding or reducing third party emissions of GHGs;]
(d) that, for removal of GHGs, uses storage methods with a low risk of reversal over millennia; and
(e) that takes account of a just transition and addresses wider social and environmental goals.
Offsetting Strategy means a plan specifying:
(a) the verified credits from a recognised offset provider that may be used by the Sustainability-Linked Borrower to offset its Residual Emissions;
(b) how the Sustainability-Linked Borrower will transition:
(i) from using credits from offsetting projects that avoid or reduce emissions of GHGs to projects that remove emissions of GHGs; and
(ii) to the removal of GHGs that involve long-term storage methods with a low risk of reversal;
(c) how the Sustainability-Linked Borrower will reduce its use of credits by reducing its Residual Emissions [by [●] %] by 2050; and
(d) the impact of the relevant offsetting projects on a just transition and wider social and environmental goals.
Paris Agreement Goals means the three goals set out in Articles 2.1 and 4.1 of the UNFCCC’s Paris Agreement, in particular pursuing efforts to limit global temperature increase to 1.5 degrees Celsius above pre-industrial levels.
Relevant Period means the period from the date a Sustainability Performance Evaluation is delivered to the Sustainability-Linked Borrower until the date the next Sustainability Performance Evaluation is delivered to the Sustainability-Linked Borrower.
Residual Emissions means a Sustainability-Linked Borrower’s GHG Emissions that are emitted after all reasonable efforts have been made to reduce them.
Sustainability Committee means a committee of the board of directors of a Sustainability-Linked Borrower either chaired by a [non-executive] director with experience of improving sustainability and mitigating carbon footprints, or advised by an appropriately qualified climate, sustainability or environmental consultant who has the skills and experience to diligently, competently and professionally advise on improving sustainability and mitigating carbon footprints.
Sustainability Compliance Certificate means a certificate substantially in the form set out in Schedule [3] (Form of Sustainability Compliance Certificate).
Sustainability Coordinator means [insert name]. [Drafting note: The Borrower may wish to use a term other than "Sustainability Coordinator", i.e. "Sustainability Structuring Agent".]
Sustainability Expert means an auditor, environmental consultant, independent ratings agency or industry professional qualified in relation to one or more SPTs, in each case as agreed between the Sustainability Coordinator, Sustainability-Linked Borrower and Majority Lenders from time to time (or in the absence of such agreement, as selected by the Sustainability Coordinator acting reasonably).
Sustainability-Linked Borrower means each Borrower under a Sustainability-Linked Facility.
Sustainability-Linked Facility means each Facility designated as a sustainability-linked facility and made available under this Agreement as described in Clause [1.1].
Sustainability-Linked Margin Decrease means a decrease in the Margin of [●]% per annum.
Sustainability-Linked Margin Increase means an increase in the Margin of [●]% per annum.
Sustainability Objectives means the sustainability objectives detailed in the Sustainability Strategy, including without limitation:
(a) the Net Zero Target;
(b) achieving and maintaining a Net Negative state;
(c) short, medium and long-term interim reduction targets for the Sustainability-Linked Borrower’s GHG Emissions that are aligned with Paris Agreement Goals;
(d) the Offsetting Strategy; and
(e) measures to deliver the Net Zero Target in a way that promotes nature and a just and equitable transition to a low carbon economy. [Drafting note: Consider adding other elements of sustainability to this limb of the definition - for example, biodiversity.]
Sustainability Performance Evaluation means an evaluation provided by the Sustainability Coordinator substantially in the form set out in Schedule [4] (Form of Sustainability Performance Evaluation) [pursuant to Clause 1.3(a) (Sustainability Performance Evaluations)].
Sustainability Performance Target or SPT means the key performance indicators set out in Schedule [2] (Sustainability Performance Targets) that measure progress towards the Sustainability Objectives and which are increased [annually], if both the Sustainability-Linked Borrower and the Sustainability Coordinator (acting in accordance with the instructions of the Majority Lenders) agree to such an increase.
Sustainability Performance Test Date means [31 March, 30 June, 30 September and 31 December] in each calendar year.
Sustainability Strategy means a report provided by each Sustainability-Linked Borrower before the start of the Sustainability-Linked Facility which:
(a) uses suitable and reasonable methodologies;
(b) can reasonably be expected to enable the Sustainability-Linked Borrower to achieve its SPTs; and
(c) is reviewed by the Sustainability-Linked Borrower’s Sustainability Committee and approved by the Sustainability-Linked Borrower’s board of directors;
(d) details:
(i) the Sustainability-Linked Borrower’s Sustainability Objectives (and how achieving the SPTs will further them);
(ii) a business plan detailing how the Sustainability-Linked Borrower will achieve its Sustainability Objectives and achieve the SPTs for the duration of each Sustainability-Linked Facility;
(iii) the Offsetting Strategy;
(iv) how the Sustainability-Linked Borrower will determine whether the Sustainability Objectives have been met, how it will report on implementing and achieving the SPTs and how the Sustainability Compliance Certificate will be prepared;
(v) how executive remuneration is linked to achieving the SPTs; and
(vi) the fees, costs and expenses, stamp, registration and other Taxes incurred or to be incurred by it or any other member of the Group in connection with achieving the SPTs.
Verification Report means a report or certificate issued by the Sustainability Expert which shall independently verify the Sustainability Performance Targets and the Sustainability Objectives and the Borrower's compliance with such SPTs (the cost of which shall be paid for by the Sustainability-Linked Borrower).
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