Sustainability-linked loans (SLL) aim to facilitate and support environmentally and socially sustainable economic activity and growth. The Sustainability-Linked Loan Principles (SLLP) are a framework allowing individuals and firms within the market to ensure the credibility of SLLs. The principles are reviewed on a regular basis in light of the development and growth of SLLs.

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 key performance indicators (KPIs)
2. Calibration of sustainability performance targets (SPTs)
3. Loan Characteristics
4. Reporting
5. Verification

The borrower of a sustainability-linked loan should clearly communicate to its lenders its rationale for the selection of its KPIs and the motivation for the SPTs.

Selection of KPIs

SLLs look to improve the borrower’s sustainability profile over the term of the loan, aligning loan terms to external and/or internal sustainability KPIs.

The KPIs should be clearly defined and:

• Relevant, core and material to the borrower’s overall business, and of high strategic significance to the borrower’s current and/or future operations;
• Measurable or quantifiable on a consistent methodological basis; and
• Able to be benchmarked, i.e. as much as possible using an external reference

Calibration of SPTs

The process for calibration of the SPTs per KPI is key to the structuring of SSLs. The SPTs should be set in good faith and remain relevant (so long as they apply) throughout the life of the loan.

The SPTs should be ambitious and represent a material improvement in the respective KPIs. Targets should be based on recent performance levels and be based on a combination of benchmarking approaches.

Disclosure on target setting should make clear reference to timelines, verified baselines, any recalculations or adjustments, and how the borrower intends to reach SPTs.

Loan characteristics

A key characteristic of an SSL is that an economic outcome is linked to whether the selected predefined SPTs are met. For example, the margin under the relevant loan agreement may be reduced, where the borrower satisfies a pre-determined SPT, as measured by the pre-determined KPIs or vice versa.

Reporting

Borrowers should, where possible and at least once per annum, provide the lenders participating in the loan with up-to-date information sufficient to allow them to monitor the performance of the SPTs and to determine that the SPTs remain ambitious and relevant to the borrower’s business.

Transparency is highly regarded, and borrowers are encouraged to report information publicly relating to the SPT. Where appropriate, a borrower may choose to share this information privately.

Verification

Borrowers must obtain independent and external verification of the borrower’s performance level against each SPT for each KPI (for example, limited or reasonable assurance or audit by a qualified external reviewer with relevant expertise, such as an auditor, environmental consultant and/or independent ratings agency), at least once a year. It is recommended that the verification of the performance against the SPTs be made publicly available where appropriate.

SSLs enable lenders to incentivise the sustainability performance of the borrower.

1. Sustainability linked loans (SLL) aim to facilitate and support environmentally and socially sustainable economic activity and growth.
2. The goal of the Sustainability Linked Loan Principles (SLLP) is to promote development and preserve integrity of the sustainability-linked loan product, by providing guidelines capturing the fundamental characteristics of such loans.
3. External reviews should be performed by a qualified and independent third party agreed to by the loan participants.
4. Reviews should occur at least annually with public disclosure of the reviews encouraged.
5. Where reviews are not required, the borrower should be able to demonstrate the internal competency and thoroughly document the processes for validating its sustainability performance and the expertise of the relevant employees. These documents should be shared with all participants to the loan.
6. Common environmental categories of sustainability performance targets (SPTs) include: energy efficiency, greenhouse gas emissions, waste disposal, renewable energy, water consumption, sustainable sourcing, circular economy, sustainable farming and food, biodiversity, and global environmental, social and governance (ESG) assessment.
7. Common social categories of sustainability performance targets (SPTs) include: human rights and community relations, affordable housing, data security, employee health and safety, employee engagement, diversity and inclusion, and employee training.
8. Common governance categories of sustainability performance targets (SPTs) include: business ethics, and building strong corporate governance and transparency.
9. SPTs have corresponding potential improvements to be measured. For example, for the energy efficiency SPT, the energy efficiency rating of buildings and/or machinery owned or leased by the borrower can be measured and improved upon.
10. Since sustainability-linked loans are meant to incentivise the borrower to improve their sustainability profile, the loan’s terms are linked to the borrower’s performance against targets. For example, reducing the interest rate of the loan if benchmarks are met.