A Beginner’s Guide and Checklist for Accessing Sustainability-Linked Loans (SLLs)
This guide and checklist can be used to introduce borrowers to, and encourage them to access, Sustainability-Linked Loans (SLLs).
What this clause does
To accelerate understanding of Sustainability-Linked Loans and how to access them, improving access to finance whilst aligning such finance with a company’s net zero transition. For lenders, supporting borrowers to access finance in this way should make it easier to align their lending portfolio to their own net zero transition.
Clauses
[Drafting note: Clara's Guide and Checklist should be read in conjunction with Casper’s Clause.]
[Drafting note: Using this clause in Loan Market Association form documents: While Clara’s Guide & Checklist and Casper’s Clause can be used in recommended form documents published by the Loan Market Association (LMA) neither has 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.]
What are Sustainability-Linked Loans?
Traditional Green/Sustainable Loans are proceeds-based: the proceeds must be used to finance or refinance eligible projects, whereas Sustainability-Linked Loans (SLLs) are not proceeds-based: proceeds may be used for general corporate purposes.
SLLs are similar to other corporate borrowing facilities, with the difference typically being that financial / structural changes to the loan may arise from the meeting of (or failure to meet) certain selected and pre-agreed Sustainability Performance Targets (SPTs).
The SPTs are measured by reference to one or more selected Key Performance Indicators (KPIs). The borrower gains the financial / structural change benefit for meeting the SPTs. In some cases, failure to meet a minimum SPT level may lead to negative financial / structural change for the borrower. The positive and/or negative financial / structural change will be negotiated and determined on a case-by-case basis between corporate borrowers and lenders.
The most common financial/structural change currently in the market is the interest rate paid by the borrower. Typically, the interest rate will decrease if the borrower meets the SPT(s). In some cases, failure to meet a certain level of the relevant SPT(s) leads to an increase in interest rate.
Example The Borrower (B) wishes to enter into a 5-year €1 billion revolving credit facility (RCF) for general corporate purposes. It pays interest of LIBOR + Margin. Without taking into account SPTs, a margin ratchet applies based on its credit rating as follows:
B also agrees for this RCF to be a Sustainability-Linked Loan. It has agreed the following SPTs:
B will provide Sustainability Compliance Certificates at the same time as it supplies Group audited financial statements and other compliance certificates to the lenders. The Sustainability Compliance Certificate will state the number of SPTs met and, based on that, the impact on the Margin:
For example, in April 2022, B has a credit rating of Baa3/BBB-, and thus the applicable Margin would be 1.15%. It provides its audited financial statements for the year ending 2021. Alongside that, it provides a Sustainability Compliance Certificate certifying that, in 2021, it reduced CO2 emissions by 4.20% and Water consumption by 0.32% (in each case compared to the Baseline). B has therefore met both the SPTs. Therefore, the applicable Margin will be reduced by 0.125%, i.e. the Margin B will pay for the applicable interest period will be 1.025%. Note: The example is illustrative only. SLLs do not have to take the form of new money financing. SLL provisions can also be included during the course of any amendment or refinancing of an existing loan facility. | ||||||||||||||||||||||||||||||||||||||||||||
Whilst there are no mandatory frameworks for determining what an SLL is, the European market has coalesced around the LMA Sustainability Linked Loan Principles.
LMA Sustainability-Linked Loan Principles
What is a Sustainability-Linked Loan?
Any type of loan instrument or contingent facility which incentivises the borrower’s achievement of ambitious, pre-determined sustainability performance objectives.
What are sustainability performance objectives?
Sustainability performance is measured using Sustainability Performance Targets (SPTs), set against Key Performance Indicators (KPIs) which measure improvements in the borrower’s sustainability profile.
The Core Components
| Core Component | Consideration | Mandatory? | Y/N | |
| (1) | Relationship to Overall CSR Strategy |
| Mandatory | ? |
| Encouraged | ? | ||
| Mandatory | ? | ||
| Encouraged | ? | ||
| (2) | Target Setting – Measuring the Sustainability of the Borrower |
| Mandatory | ? |
| Mandatory | ? | ||
| Mandatory | ? | ||
| Mandatory | ? | ||
| Mandatory | ? | ||
| Mandatory | ? | ||
| Strongly recommended | ? | ||
| (3) | Reporting |
| Mandatory | ? |
| Encouraged | ? | ||
| Mandatory | ? | ||
| Encouraged | ? | ||
| Encouraged | ? | ||
| (4) | Review |
| Where appropriate | ? |
| If information is not publicly reported, strongly recommended | |||
| ? | |||
| Where appropriate | ? | ||
| Mandatory, if no external review conducted | ? | ||
Documentation
No standard wording is available for use in SLL documentation. There are various voluntary template wording in the market (e.g. The Chancery Lane Project (TCLP) and TCLP’s Casper’s Clause (Sustainability-Linked Loans) available for use. However, most lenders and private practice law firms active in this space would have their own language for use based on prior transaction experience.
Drafting guidelines
Source and baseline of SPTs should be clearly set out. The mechanism for measuring improvement relative to the SPT should be clearly documented.
Are the SPTs specific, measurable, achievable, relevant, and time-bound? Do they set an appropriate level of net zero ambition aligned with achieving the objectives of the Paris Agreement, in particular pursuing efforts to limit global temperature increase to 1.5 degrees Celsius above pre-industrial levels, halving absolute emissions every decade and achieving net zero or net negative emissions by 2050 or sooner? Please see The Chancery Lane Project’s Net Zero Checklist, Net Zero Explainer and Net Zero: What is it? Video for further information.
Where information is being relied on to measure the SPT, consider whether independent verification will be required.
The benefits and consequences of failure to meet SPTs should be clearly defined. The most typical benefit is a margin step-down, and the most typical (if any) consequence for failure to meet a minimum standard is a pricing step-up. Typically, there is no Default / Event of Default arising for failure to meet the SPTs.
Consequences of breaching ancillary provisions (e.g. failure to provide information, inaccurate reporting) should also be clearly set out – unlike failure to meet the SPTs, these could lead to Default / Event of Default.
For longer-term loans, SPTs may not be able to be accurately set in advance, or external events or circumstances may require amendment to the SPTs. Include provisions that clearly define conditions under which SPT definitions or calibrations can be updated to ensure sustained alignment with business and sustainability commitments.
What would an example of an SPT look like?
Sustainability is generally synonymous with ESG. There is no definitive list of sustainability / ESG issues, but the table below provides examples of ESG improvements against which SPT parameters can be defined for guidance purposes.
Ideally, the SPTs should align with existing sustainability targets of the Borrower, its net zero target and its interim targets to achieve its net zero target, including organisational emissions reduction targets, a year on year percentage reduction of the Borrower’s emissions (a minimum of 7% if intended to be consistent with the aim of halving emissions every decade) and the quality of offset credits purchased in neutralising and compensating for residual emissions. They may also include ESG-related governance, training and education of the workforce and climate policy engagement (e.g. lobbying and trade association memberships). Please see TCLP’s Net Zero Checklist and Net Zero Explainer for further information.
| Category | Example |
| Energy Efficiency | Improvements in the energy efficiency rating of buildings and/or machinery owned or leased by the borrower. |
| Greenhouse Gas Emissions | Reductions in greenhouse gas emissions (categorised as scope 1, 2 and 3 emissions by the The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard Revised Edition 2015 published by the Greenhouse Gas Protocol and as amended from time to time) in relation to products manufactured or sold by the borrower or to the production or manufacturing cycle. |
| Renewable Energy | Increases in the amount of renewable energy generated or used by the borrower. |
| Water Consumption | Water savings made by the borrower. |
| Affordable Housing | Increases in the number of affordable housing units developed by the borrower. |
| Sustainable Sourcing | Increases in the use of verified sustainable raw materials/supplies. |
| Sustainable Farming and Food | Improvements in sourcing/producing sustainable products and/or quality products (using appropriate labels or certifications). |
| Biodiversity | Improvements in conservation and protection of biodiversity. |
| Global ESG Assessment | Improvements in the borrower’s ESG rating and/or achievement of a recognised ESG certification. |
Source: Sustainability Linked Loan Principles (May 2021), published by the LMA, APLMA and LSTA.
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