Is the “S” in ESG Poised for a Breakout Year in 2022 for Sustainability-Linked Loans?

If final 12 months was any indication, 2022 could also be one other record-setting 12 months for the sustainable syndicated mortgage market.  In response to monetary knowledge supplier Refinitiv, new issuances of sustainability-linked loans (“SLLs”) climbed to $717 billion in 2021, a rise of greater than 300 p.c year-over-year from 2020. As urge for food for sustainability-linked credit score amenities grows, lenders must also be ready to deal with the evolving necessities of debtors in this market. Historically, SLLs have been aligned extra towards the environmental part of a borrower’s Environmental, Social, and Governance (ESG) technique; nevertheless, as debtors carve out extra space for non-environmental objectives in their ESG methods, SLLs at the moment are more and more incorporating social objectives as effectively, both on a stand-alone foundation, or in addition to environmental (and/or governance) objectives.

For the uninitiated, sustainability-linked loans are a sort of mortgage instrument designed to incentivize debtors to realize sure predetermined environmentally and/or socially sustainable targets. A distinguishing characteristic of an SLL is that a explicit financial end result, normally a discount (or enhance) in the mortgage’s pricing, is made contingent upon the borrower’s satisfaction of (or failure to fulfill) sustainability efficiency targets (SPTs) that correspond to sure predetermined key efficiency indicators (KPIs). In contrast to inexperienced loans, SLLs don’t require the mortgage proceeds for use for a inexperienced or sustainability-related undertaking, and could also be used to fund any basic company function.

The rising curiosity amongst debtors in the social facets of ESG comes as range and inclusion (D&I) initiatives have gained wider acceptance and employees are more and more returning to the workplace, making worker well being and security a renewed company precedence. As a partial reflection of this development, in April 2021, personal fairness agency Blackrock amended its $4.4 billion revolving credit score facility, introducing a sustainability-linked pricing mechanism that references three separate KPIs, two of which (Black, African American, Hispanic and Latino Employment Charge and Feminine Management Charge) are socially-oriented. In the ensuing months, we’ve got additionally seen increasingly debtors, together with the following, incorporate a number of social KPIs into their SLLs:

  • The Southern Firm (Various Provider Spend);

  • American Campus Communities Working Partnership LP (Variety Employment Charge, Variety Director Charge);

  • HP Inc. (Share of Black and African People amongst US-based Executives);

  • Autodesk, Inc. (Ladies in Technical Roles); and

  • Enerplus (Common 3-year Misplaced Time Harm Frequency price).

Selecting KPIs

When incorporating social-oriented KPIs into an SLL, lenders and debtors will usually set up KPIs which can be bespoke to the borrower.  This strategy gives lenders and debtors with added flexibility to make sure the mortgage’s sustainability provisions carefully conform to the Sustainability Linked Mortgage Ideas (SLLP).1 KPIs that adhere closest to the SLLP will probably be each core to the borrower’s enterprise, related to the sustainability challenges confronting the borrower’s business, and able to being benchmarked.

Importantly, the mortgage’s KPIs must also be linked in some vogue to the ESG technique of the borrower or its father or mother. A evaluate of a corporation’s ESG materiality evaluation can present a foundation for lenders to guage which sustainability matters (whether or not environmental, social, or governance oriented) are most necessary to a borrower’s enterprise and its stakeholders. Lenders needs to be cautious of creating KPIs that haven’t been beforehand documented by the borrower or in any other case established as an inner firm precedence.  An SLL containing KPIs missing demonstrable connection to a borrower’s enterprise or insurance policies can increase questions of so-called “sustainability-washing,” which poses a reputational danger to all events of the mortgage.

Alternatively, lenders and debtors might also select to undertake a KPI that references a sustainability score issued by an unbiased ESG score company, comparable to MSCI, Sustainalytics, or V.E (previously generally known as Vigeo Eiris).  Utilizing their very own inner methodologies, ESG score companies will calculate a borrower’s sustainability efficiency relative to that of the borrower’s business friends. The usage of such a score company can even have the advantage of lending an extra aura of credibility to a agency’s ESG reporting, as ESG score companies will normalize scores inside a given sector, offering extra context to traders.

Calibrating SPTs

In accordance with the SLLP, debtors ought to have vital enter in growing the SPTs, which should stay formidable all through the mortgage’s time period. SPTs, together with for social KPIs, could also be primarily based on a number of benchmarking approaches, together with an evaluation of the borrower’s personal efficiency over a time frame, a comparability of a borrower’s efficiency relative to that of its friends, or by reference to different systematic, science-based proxies, together with targets which will already be set on the nationwide, regional, or worldwide stage. SPTs shouldn’t be set at decrease ranges, or on a slower trajectory, than every other associated targets which will have already been set by the borrower in inner methods or elsewhere.

Typically, SPTs will probably be structured to focus on an enchancment of a borrower’s personal efficiency underneath the related metrics. To make sure that these SPTs stay formidable, lenders and debtors can elect to include a transferring baseline. Utilizing this technique, annually, the borrower’s efficiency from the prior 12 months is integrated into the SPT and would require a set diploma of enchancment over that baseline from the prior 12 months to fulfill the SPT.  


Pursuant to the Could 2021 launch of the SLLP, lenders and debtors at the moment are required to acquire verification from an unbiased and exterior reviewer as to a borrower’s efficiency towards all SPTs. This evaluate should happen no less than as soon as a 12 months and is continuously carried out by the borrower’s monetary auditor, however any certified exterior reviewer with the requisite expertise, comparable to an exterior guide or ESG rankings company, can carry out the evaluate. The reviewer’s verification is usually issued in the type of an unbiased audit or assurance assertion that’s supplied the place the borrower stories its efficiency, typically in its monetary statements or ESG reporting paperwork.


As the SLL market continues to mature, it’s probably extra modifications to market requirements await debtors and lenders. As debtors proceed to refine their ESG methods to include extra social and governance points, it’s probably they may search to harness the reputational advantages of doing so by together with extra KPIs associated to these points in their SLL packages. Moreover, with the rising variety of SLL issuances, “sustainability washing” will stay an ongoing concern in the market. The Could 2021 revisions to the SLLP established the verification requirement, in half, to go off “sustainability washing” and protect the integrity of the SLL product. In mild of those dangers, lenders and debtors could be effectively suggested to include extra flexibility into their mortgage paperwork, notably with respect to the rights to change and modify sustainability targets in addition to necessities associated to reporting and verification.


1. The Sustainability Linked Mortgage Ideas are a set of high-level market requirements designed to advertise the improvement of sustainable loans revealed by the Mortgage Market Affiliation (LMA), the Asia Pacific Mortgage Market Affiliation (APLMA) and the Mortgage Syndications and Buying and selling Affiliation (LSTA).  

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