Strengthening integrity new sustainable finance principles from 9 March

The APLMA has recently published revised Green, Sustainability-Linked and Social Loan Principles and related guidance notes.  The changes aim to strengthen the integrity of the products and respond to recent developments in market practice.

What does this mean for existing transactions?

All loans originated, extended or refinanced after 9 March 2023, should fully align with this updated version of the principles to be classified as the relevant sustainable finance product.  Loans closing on or before 9 March can follow the principles at the date of closing and care should be taken to refer to the correct version of the principles in any materials.

What do I need to know (in 30 seconds)?

There has been no change to the core components of an SLL (selection of KPIs, calibration of SPTs, loan characteristics, reporting and verification) or green/social loan (use of proceeds, project evaluation/selection, management of proceeds and reporting).  However, there have been some key changes in the principles and guidelines, some of which we have briefly set out below.  

1. Sustainability-Linked Loan Principles

(a) Recommendation that an annual sustainability performance target (SPT) be set for each KPI to ensure the SPTs remain relevant and ambitious throughout the life of the loan.

(b) Allowing for the margin ratchet to include a neutral bracket in which no margin adjustment applies (provided there is a strong rationale).

(c) Requirements for borrowers to carry out KPI reporting on at least an annual basis (and whenever there is a potential adjustment), which should include a sustainability confirmation statement with an independent verification report attached, outlining the borrower's performance against the SPTs for that relevant period, and the impact on the loan's economic characteristics.

(d) Confirmation that there is no minimum level of ESG performance to qualify as an SLL and the product is available to support a borrower's transition journey wherever they might be on that journey.  That said, borrowers who are already advancing on their ESG journey may be better equipped to evidence that their chosen KPIs and SPTs meet the SLL Principles.  The focus should be on borrowers showing improvement beyond "business as usual", with lenders taking into account the borrower's overall ESG strategy and the broader conduct of the borrower.

(e) The guidelines also clarify that (i) publicly announced targets can qualify as ambitious, provided they are set in good faith and remain relevant throughout the life of the loan and (ii) if a loan's SPTs and KPIs cannot, due to exceptional circumstances, be set until post-completion, the loan will not qualify as an SLL until those SPTs and KPIs are agreed to by all lenders. 

2. Green Loan Principles and Social Loan Principles

(a) Addition of "green technologies" (such as carbon extraction technologies and energy storage systems) as an example of eligible green projects.

(b) Emphasis on requiring borrowers to have processes in place to mitigate material risks of negative social and/or environmental impacts from the project, and to clearly communicate those processes to lenders.

(c) More detailed guidance on refinancing of projects, including the need to be transparent about the age of a refinanced asset or project and for that asset or project to continue to meet the four core principles of Green or Social Loans (as applicable), and confirmation that loans to a 'pure play' green economy company can be considered a green loan.

(d) Acknowledgement that a Green Project may also have social co-benefits and vice versa, but classification of the use of proceeds as a green or social loan should be determined based on the primary objective of the underlying projects.

What next?

We would love to hear your views on the changes.  Full copies of the revised principles and guidance notes can be found here. If you are interested in more details or would like to discuss the impact on any transactions you might be involved in, please reach out to your Ashurst contacts and we would be more than happy to discuss with you.

Authors: Campbell Johnston, Partner and Cara Stevens, Counsel.