As Environmental, Social and Governance (“ESG”)1 trends continue to evolve, the industry continues to publish best practices and guidance to aid in the development of this rapidly growing market. Most recently, the Loan Syndications and Trading Association (“LSTA”) jointly with the Asian Pacific Loan Market Association and the Loan Market Association, published “Guidance for Green, Social, and Sustainability-Linked Loans External Reviews” (“External Review Guidance”) and “Guidance on Social Loan Principles” (“SLP Guidance”).2
The External Review Guidance is based on the International Capital Market Association 2021 Guidelines for Green, Social, Sustainability and Sustainability-Linked Bonds External Reviews3 and takes into consideration other published guidance in the industry to “promote consistency across debt (bond and loan) markets.” The guidance addresses the following aspects of external reviews: types, ethical and professional standards for reviewers, organization, content, and disclosure.
The SLP Guidance is a complement to the Social Loan Principles4 published in 2021 (the “Principles”) and takes a question-and-answer approach to provide greater clarity for market participants related to the Principles, which identify four core components to be considered when determining if a loan qualifies as social—(1) use of proceeds, (2) process for project evaluation and selection, (3) management of proceeds, and (4) reporting.
Key information included in the SLP Guidance includes the following:
- A loan can follow a combination of or all SLP, Sustainability Linked Loan Principles (“SLLP”) and Green Loan Principles, but this is rare and may be complex to structure.
- Like greenwashing, social washing should be avoided to maintain the integrity of social loans. Greenwashing and social washing are misleading practices that entail misrepresenting or overstating the positive environmental or social aspects of a project and its outcomes and/or failing to state or minimizing the negative environmental and social aspects of a project and its outcomes. To avoid such misleading practices requires ensuring that information provided related to a project and its outcomes does not make “misleading, inaccurate or inflated claims”.
- Social loans can take any form, including revolving lines of credit or refinancings, so long as it aligns with the Principles. A revolving line of credit may still be deemed a social loan even if a social project was not designated at the time of entering into the loan, but parties to the loan will need to carefully consider how to approach the use of proceeds and consider whether additional reporting requirements or additional conditions for drawdown are needed.
- The social designation relates to the project being funded, not the borrower; however, borrowers are recommended to “clearly communicate to lenders their sustainability objectives overall and how they will identify and manage potential social and environmental risks associated with proposed projects.”
- Template language does not yet exist related to social loans because it is an emerging and varied area of finance, but the SLP Guidelines provide broad concepts to consider when drafting.
- Loan documents should identify and define what constitutes a “social” breach in each deal. The Guidelines suggest that a loan should not be considered a social loan following a breach, especially a breach with respect to use of proceeds, subject to any cure rights.
As the volume of social, green and sustainable loans increases, loan parties will need to take a case-by-case approach to SLP and SLLP as they structure financings. While there is guidance in the industry, there is not uniformity, which means that each deal will inform and help shape this evolving market.
1 For more information on the development of ESG in the financial industry see Sarah Null’s March 16, 2022 blog post, “ESG Metrics in Credit Agreements” at https://www.foley.com/en/insights/publications/2022/03/esg-metrics-in-credit-agreements.
2 LSTA simultaneously published updates to its SLLP and corresponding guidance. These updates were made “to reflect cosmetic, conforming changes.”
3 ICMA 2021 Guidelines were published in February 2021 and are available at https://www.icmagroup.org/assets/documents/Sustainable-finance/Guidelines-for-GreenSocialSustainability-and-Sustainability-Linked-Bonds-External-Reviews-February-2021-170221.pdf.
4 Social Loan Principles