The world’s three loan trade associations are working to bring sustainability-linked loans in line with more detailed and rigorous principles designed by ICMA for sustainability-linked bonds, potentially bringing more transparency to ESG lending and making it easier to refinance in either format.
The Loan Market Association in Europe, the Loan Syndications and Trading Association in the US, and the Asia Pacific Loan Market Association are seeking to align SLL principles with ICMA’s SLB principles, which were launched in June.
"We're looking to align with ICMA's SLBPs to ensure as much coherence and integration between the markets as possible, and we believe that is the best path for promoting ESG as a whole," said Gemma Lawrence-Pardew, senior associate director for legal at the LMA.
The three loan associations will send out updated drafting this week and are aiming to update the SLL principles by March, before turning attention to their main 2021 project of producing social loan principles, which will also be based on ICMA’s social bond principles.
Sustainability-linked lending was developed in the private loan market, which came up with the concept of linking margins to progress against key performance indicator targets, but the lack of visibility led to concerns that the KPIs set were not sufficiently stretching.
The SLL principles were first published in 2019 to provide a framework for the new product, and were followed by guidance on the SLL principles in May 2020 to address some of these concerns, but problems remained as borrowers continued to set their own targets with little benchmarking.
“The previous guidance was pretty light touch; it didn’t feel like you were moving the needle greatly. There's a level of rigour that we can go to, to give this whole topic a little bit more credibility ,” a senior loan syndicator said.
Public scrutiny
The creation of the SLB market in late 2019 with bonds for Italian utility Enel forced the pace of change as KPI targets were exposed to the harsh court of public opinion. Sustainability performance targets were also developed to calibrate KPIs.
“By clearly distinguishing between KPIs and SPTs, ICMA have provided an additional level of clarity that our principles could benefit from,” Lawrence-Pardew said.
Although loan documents and KPI details will remain confidential (other than broad details that borrowers may disclose), the improved standards should still help loan bankers push clients harder on targets, in a market where the balance of power has been tilted to borrowers that often dictate terms to relationship lenders in self-arranged deals.
"It will make things so much simpler to aim for best practice when we push some corporate clients on SLL discussions," said Cecile Moitry, co-head of sustainable finance markets at BNP Paribas.
Adding clarity will also help with refinancings by eliminating potential difficulties due to different standards between bonds and loans. The SLB market only took off in the second half of 2020, so few have been seen to-date, but the market is already considering a bridge loan to an SLB.
"Framework alignment of product is going to be key, as it's preferable to have an issuer or lenders on the same reporting systems for SLLs and SLBs. Greater convergence between the products is essential and we more than welcome this approach," Moitry said.
The three loan associations have also discussed adopting the EU’s green taxonomy, but rejected the idea as the SLL principles are global and the EU taxonomy has not been adopted by the US and Asia. The UK has also announced its intention to create a separate taxonomy.
The bodies are also discussing whether to adopt the "do no significant harm" principle of the taxonomy, which has already been included by ICMA, as part of their guidance around greenwashing.