The Sustainability-Linked Loan Principles (SLLP) are a framework focused on incentivising a borrower’s efforts to improve its sustainability profile. It does this by aligning loan terms to the borrower’s performance against mutually agreed, material and ambitious, pre-determined sustainability performance measures. Use of proceeds is not a key determinant in the categorisation of a sustainability-linked loan (SSL), and is therefore differentiated from a green loan.

The SLLP were originally published in 2019 and underwent a structural revision in 2021, to provide a clear delineation between the selection of key performance indicators (KPIs), and the calibration of sustainability performance targets (SPTs).

This guidance is to be used alongside the SLLP and serves to provide further clarity on the application of the principles, and differentiation between Green Loan Principles (GLP) and Social Loan Principles (SLP).

The SLLP set out a framework, enabling all market participants to clearly understand the characteristics of an SSL, based around the following five core components:

1. Selection of KPIs
2. Calibration of SPTs
3. Loan Characteristics
4. Reporting
5. Verification

The UNFCCC Climate Agreement, ratified in 2016 (known as the ‘Paris Agreement’), and the publication of the UN Sustainable Development Goals (SDGs) in 2015 are important drivers behind sustainable financing solutions. Companies are increasingly devising green and sustainable strategies, incorporating them into their business strategy, and aligning their funding mechanisms to their sustainable development commitments. Entering into an SLL in this context has a number of wide-ranging advantages for borrowers and lenders.

These benefits could potentially include, but are not limited to:

• Building stronger, values-based relationships with stakeholders;
• Positive impact on reputation and credibility;
• Incorporating environmental, social and governance (ESG) performance into lenders’ credit assessment;
• Enhancing a borrower’s ambitions on ESG performance;
• Engaging lenders to incentivise and support material sustainability improvements by actively directing capital towards borrowers implementing robust sustainability strategies;
• Showing commitment to achieve sustainability goals with a correlated economic impact;
• Promoting sustainable long-term growth and profitability; and
• Increased ability to attract and retain staff who see SDG contribution as an important part of their personal and professional lives.

Sustainability washing is a term that has often been used to describe situations where claims on sustainable credentials are misleading, inaccurate or inflated. In the context of SLLs, sustainability washing can occur in two key ways: either through SPTs that are not sufficiently ambitious or meaningful; or through inaccurate monitoring, measuring and disclosing of borrower performance against SPTs.

The SLLP are drafted so as to give a clear framework of the processes to be followed in order to maintain the integrity of SLLs. The market can take steps to avoid sustainability washing by ensuring close adherence to the core components of the SLLP relative to reporting (made publicly available where appropriate) and obtaining an external review at the outset of the facility (where appropriate), with a view to being as open and transparent as possible.

This report answers key questions and provides in-depth guidance on how to participate in sustainability-linked loans.

1. Sustainability-linked loans can be any type of loan that finances specialised, sustainable models while taking into account a positive economic impact, and borrower's performance on their pre-determined sustainability performance targets. This includes term loans, revolving credit facilities, and contingent instruments.
2. Green loans are fundamentally defined by how proceeds are used towards green projects, as well as how criteria is met for project evaluation, selection, management of proceeds and reporting management. However, for sustainability-linked loans, the use of proceeds is not a determining factor.
3. It is possible for a loan to be in accordance with both the Green Loan Principles and the Sustainability Linked Loan Principles. However, these deals are rare within the financial market.
   
4. Sustainability washing is a term that has often been used to describe situations where claims on sustainable credentials are misleading, inaccurate or inflated. In the context of SLLs, sustainability washing can occur in two key ways: either through SPTs that are not sufficiently ambitious or meaningful; or through inaccurate monitoring, measuring and disclosing of borrower performance against SPTs.
5. Borrowers are encouraged to report their sustainable performance targets at least once per year, and they must also ensure to disclose any changes to calculations or methodology. If a change is present, the lender and borrower should likely reassemble to discuss the scope and impact of this change.
   
6. Borrowers may make their reporting methodology available upon the achievement of the SPTs or on agreed reporting dates, either directly to the lenders or as part of their overall corporate sustainability reporting. Public reporting is encouraged.
7. The mechanism for the measurement of the borrower’s improvement against a KPI must be carefully considered and should be documented.
   
8. Borrowers can use industry initiatives and standards to ensure that selected SPTs are ambitious. Such standards include the Science Based Targets initiative, the Transition Pathway Initiative, or RE100. These help to provide an indication of a borrower’s ambition relative to their industry sector.
   
9. Several sustainability reporting methodologies exist in the market today. These include the Global Reporting Initiative’s Sustainability Reporting Standards, which provide widely adopted global standards for sustainability reporting.
   
10. SLLs are not typically green financings or social financings, but are an important form of specialised financing, which seek to incentivise more sustainable business models. In this way they stand apart as a transition tool.