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Freshfields Sustainability

| 4 minutes read

LMA, LSTA and APLMA joint updates: a maturing sustainable loan market

The green, social and sustainability-linked loans market continues to grow and with that growth there are continued signs of a maturing market, including the stabilisation and standardisation of loan terms. In joint publications, several market associations issued updated guidance for green, social and sustainability-linked loans.

On 24 February 2023, the Loan Market Association (LMA), the Loan Syndications & Trading Association (LSTA) and the Asia Pacific Loan Market Association (APLMA) published updated versions of their Green Loan Principles and Guidance, Social Loan Principles and Guidance and Sustainability-Linked Loan Principles and Guidance (the 2023 Updates). The 2023 Updates bolster a growing trend in the standardisation of loan terms such as:

  • margin ratchets or coupon step-ups linked to KPIs;
  • margin ratchets or coupon step-ups linked to third-party ESG scores;
  • reductions in pricing linked to reductions in certain greenhouse gas emissions; and
  • proceeds being earmarked to finance or refinance new or existing green or social projects, assets or activities.

One of the key themes behind the 2023 Updates is that as these products develop, the LMA, LSTA and APLMA want to provide greater clarity, certainty and detail of the form and content to be included in finance documents. This approach is likely to be driven by a desire to protect the integrity of the products by guarding against greenwashing and the reputational risk that goes with it. It also recognises the benefit to corporate borrowers, investors and interested stakeholders that more transparency and tracking brings.

We have included below a quick recap of the story so far for green, social and sustainable financings, together with a summary of the key points in the 2023 Updates indicating the above trends.

The story so far

  • The three underlying financial products (green loans, social loans and sustainability-linked loans) have some key differences in purpose and structure:

Green LoansSocial LoansSustainability-Linked Loans
Any type of loan instrument and/or contingent facilities where:
the proceeds must be used to finance, refinance or guarantee a green project (broad categories of eligible green projects are listed for guidance)
the proceeds must be used to finance, refinance or guarantee a social project (broad categories of eligible social projects are listed for guidance)
the economic characteristics can vary depending on whether the borrower achieves ambitious, material and quantifiable predetermined sustainability performance objectives
Structured through satisfaction of:
four key components linked to use of proceeds, process of evaluation and selection, management of proceeds and reporting
four key components linked to use of proceeds, process of evaluation and selection, management of proceeds and reporting
five key components linked to key performance indicators (KPIs), sustainability performance targets (SPTs), loan characteristics, reporting and verification

  • The 2023 updates were released just under a year after the principles and guidance were last updated. Our blog on the 2022 updates and in particular the external review and third party verification of the sustainability metrics can be found here.
  • Through June and July 2022, a series of articles and thought pieces were published by industry guiding bodies.  You can access our blog (released in July 2022) on how to negotiate sustainability-linked loans here.

Key points in the 2023 Updates

  • Strengthening the link to the borrower’s core sustainability and business strategy: The 2023 Updates in relation to sustainability-linked loans provides that KPIs must be material to the borrower’s core sustainability and business strategy and address relevant ESG challenges of its industry sector. More detail on the notion of “materiality” is also provided in the updated Sustainability-Linked Loan Guidance.
  • Emphasising the need for greater communication with lenders: In relation to green and social loans, the 2023 Updates emphasise the need for borrowers to clearly communicate the objectives and eligibility of the relevant loan with their lenders, together with increased clarity around tracking proceeds of the relevant loan. Enhanced tracking provides for greater clarity on the project’s impact. Further, the 2023 Updates point, in a few places, to a responsibility on lenders to properly assess the information put to them, in line with the goal of maintaining integrity of the product and proper verification.
  • Legal documentation: The APLMA has now published a draft multicurrency facility term sheet with a sustainability-linked loan appendix, which requires the selection of KPIs and calibration of SPTs in the early stages of the deal. This entrenchment of the basic sustainable debt principles in legal documentation is further encouragement from the guiding bodies towards certainty and early focus on these terms.
  • New recommendation for green and social Loans: to establish a process to identify mitigants to known or potential material risks of negative social and / or environmental impacts from the relevant project.
  • New recommendation for sustainability-linked loans: the setting of an annual SPT per KPI for each year of the loan term.
  • New Reporting and verification requirement for sustainability-linked loans: an obligation on the borrower to provide an annual confirmation statement with verification report outlining its performance against its SPT for each KPI and the related impact, and timing of such impact, on the loan’s characteristics.

One practical point about the applicability of the 2023 Updates is that all loans completed prior to 9 March 2023 will continue to follow the original position under the relevant principles. All loans originated, extended or refinanced after 9 March 2023, should fully align with the relevant principles as amended by the 2023 Updates.

The LMA are currently undertaking a drafting project in relation to these three sustainable debt products so we can expect further updates and projects in the future.


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