Sustainability-linked loans tie the cost of borrowing to a borrower's performance against sustainability targets. Unlike green loans, the proceeds can be used for general corporate purposes. What matters is the ambition of the targets and the credibility of how performance is measured.
The Sustainability-Linked Loan Principles (SLLP), published jointly by the LMA, the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA), set out the framework for these loans. This guide walks through the five core components and what they mean in practice.
1. Selection of key performance indicators
KPIs should be relevant, core and material to the borrower's overall business, and of high strategic significance to its current or future operations. They should be measurable on a consistent methodological basis and capable of being benchmarked. A KPI that covers only a small part of the business, or that the borrower would meet anyway, will not meet market expectations.
2. Calibration of sustainability performance targets
Targets should be ambitious: going beyond business as usual and, where possible, aligned with science-based trajectories or the borrower's published sustainability strategy. They should be set for each year of the loan and benchmarked against the borrower's own past performance, its peers and relevant regulatory or industry standards.
The credibility of a sustainability-linked loan rests on the ambition of its targets and the integrity of how they are measured.
3. Loan characteristics
The economic outcome of the loan should be linked to whether the targets are met, most commonly through a margin ratchet. The SLLP do not prescribe the size of the adjustment, but the incentive should be meaningful and the mechanics clearly documented.
4. Reporting
Borrowers should provide up-to-date information on their performance against each target at least once a year, along with enough context for lenders to understand it, such as the methodology used and any material changes.
5. Verification
Independent and external verification of performance against each target, at least annually, is a necessary element of a sustainability-linked loan. Verification gives lenders, and the market more broadly, confidence that any margin adjustment reflects real performance.
What borrowers and lenders should do next
- Start with strategy. Choose KPIs that reflect the borrower's most material sustainability impacts and link to its published plans.
- Document the baseline. Agree the baseline, methodology and any recalculation triggers up front.
- Plan for verification. Engage a verifier early so that targets are set in a way that can be assured.
- Use the guidance. Our accompanying guidance notes and template provisions help parties apply the SLLP consistently.
Members can find the SLLP, the accompanying guidance and our sustainability-linked loan drafting provisions in the documentation library. Our sustainable lending training courses cover the principles in more depth.
