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:
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