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Freshfields Sustainability

| 3 minutes read

New LMA guidance on green, social and sustainability-linked loans – what does this mean for corporate borrowers?

On 10 March 2022, the LMA, APLMA and LSTA published two new guidance documents relating to ESG and sustainable finance: the 'Guidance for Green, Social, and Sustainability-Linked Loans External Reviews' and 'Guidance on Social Loan Principles'.

Last year, there was a distinct increase in the volume of sustainability-linked loans issued and this trend looks set to continue throughout 2022 in the loan market. The popularity of these products has resulted in some creative metrics of sustainability being proposed, which lead to proposals that these metrics should be challenging, meaningful and subject to third party verification. The market consensus is that a standardised approach to documentation and independent verification would promote transparency in the market. This blog focuses on the guidance for external reviews.

External reviews – what is available?

The guidance explains the role of external review providers and the types of review available for green, social and sustainability-linked loans (referred to here collectively as ESG loans). These are:

1. Second party opinion – an assessment (either pre- or post-signing of the loan), by an independent expert institution, of the alignment of the loan against the relevant Green, Social or Sustainability-Linked Loan Principles.

2. Verification

a. for sustainability-linked loans, the independent, external audit of performance against key performance indicators (KPIs) in the loan;

b. for green or social loans, audit of standards or claims made by the borrower or the borrower’s tracking methods for use of proceeds.

3. Certification – of the loan, use of proceeds or KPIs and sustainability performance targets (SPTs) certified against a recognised external standard or label.

4. Green, Social and Sustainability-Linked Loan Scoring/Ratings – evaluation of the loan, use of proceeds or KPIs and SPTs against a third party’s established scoring or rating methodology. Typically, these ratings assess exposure and resilience to long term ESG risks.

The guidance sets out ethical standards and organisational requirements expected of external reviewers.

What kinds of external reviews should corporate borrowers expect in their ESG loans? 

  • Second party opinion. In the current investment grade market, the sustainability coordinator (often a lender or a debt advisor) typically assesses the loan against the relevant Sustainability-Linked Loan Principles. Whilst we haven’t seen many second party opinions being required yet, we might expect to see more as lenders demand more transparency and oversight over ESG loans. For now, corporate borrowers shouldn’t be required to arrange one of these.
  • Verification. The most common external review at present in the investment grade ESG loan market. Verification is a “requirement” for a sustainability-linked loan. It is sometimes used in social and green loans, though is not compulsory. Borrowers should therefore expect to need to engage an external reviewer to verify the KPIs. The external reviewer should be in place throughout the loan term (though the borrower may be able to appoint an alternative independent appropriately qualified third-party reviewer).
  • Certification. Certification is common practice in the ESG bond market, where certification against a recognised standard can help with marketing the bond to a wide investor base. Conversely, in the investment grade loan market, with an investor base focused on traditional bank lenders, external certification is less common (although some green loans are certified against the Climate Bonds Standard). We may see more certification in the future, particularly for loans (likely outside the investment grade market) marketed to a wider investor base, or where lenders want an additional check of the verification of the KPIs. For now, lenders are unlikely to push corporate borrowers for this in corporate loans.
  • Ratings/scores. ESG scores/ratings can be an alternative to KPIs in a loan. Whilst we have seen these used in some loans, in our experience these are currently less common  in the investment grade market as many borrowers want to include KPIs specific to their business and which they may already be reporting.

Our thoughts on the guidance 

The trend for ESG loans is set to continue and the market is evolving to be more transparent. These new publications are an essential development for the market to support the integrity of these loans.

The external review principles are intended to be a best-practice guide for borrowers, lenders and external reviewers. We think these will be helpful in standardising external reviews – which are an increasingly important part of any ESG loan, as lenders and borrowers look for consistency in the market. It is possible that over time we will see regulation of external reviewers.

If you would like to discuss any matters related to the new and/or existing guidance on green, social and sustainability-linked loans, please get in touch with your usual Freshfields contact.


sustainable finance, financial institutions, financing and capital markets, global financial investors