New ACT Borrower’s Guide to Sustainability-Linked Loan Terms

The popularity of sustainability-linked loans (SLLs) lies in their breadth of application – they have much wider reach than “use of proceeds” loans. Green and social loans are only available to borrowers requiring funding for specific green and/or social projects. SLLs, on the other hand, carry no restriction on the use of the proceeds and are therefore available to all borrowers seeking to amplify their sustainability strategy by embedding it in their financing terms.

The rise in SLL volumes has brought with it increased focus on the structure and terms of SLLs, in particular whether they are sufficiently robust to withstand accusations of “greenwashing”. SLL terms have tightened and become more sophisticated over the last 12 months (particularly contractual protections for lenders), but there is still quite wide variation both in form and content. Although SLLs remain unregulated, concerns about whether best practices are being upheld in all cases has also recently attracted regulatory attention.

The Loan Market Association’s (LMA) February 2023 updates to the Sustainability-Linked Loan Principles (SLLP), voluntary recommended guidelines published jointly by the LMA and its sister trade associations which specify the key features of an SLL, were heavily focused on protecting the integrity of the SLL product. The SLLP, being high level principles, do not however address how their key features should be fleshed out and reflected in loan documentation.

The LMA’s draft provisions for sustainability-linked loans (the Draft Provisions), published in May 2023 and designed to align with the updated SLLP, provide a framework for a more consistent approach to the documentation of SLLs. While borrowers can expect the Draft Provisions to be used as a reference point in future deals (including refinancings), they are, however, intended to be just that – a reference point requiring a fair amount of case-specific customisation and negotiation.

Against this backdrop, our new Borrower’s Guide to Sustainability-Linked Loan Terms, produced for the Association of Corporate Treasurers (ACT), aims to equip borrowers with an in-depth understanding of key SLL documentation terms, how they are evolving and some of the discussion points to anticipate. It includes an overview of the key features of the SLLP followed by a clause-by-clause commentary on key SLL documentation terms, by reference to the Draft Provisions. It builds on the introductory commentary on SLLs in our ACT Borrower’s Guide to the LMA’s Investment Grade Agreements published in November 2022.