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LMA’s update on GSSL principles and guidance: towards convergence with ICMA?

On Thursday 23rd February 2023, the Green Loan, Social Loan and Sustainability-Linked Loan Principles and related Guidance have been updated by the Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndication and Trading Association (LSTA)[1]. These Principles were first established in 2018 to promote the development and the integrity of the nascent market for Green Loans, followed by Sustainability-Linked Loans in 2019, and Social Loans in 2021. With these updates, the Associations wish to promote greater integrity of the sustainable labelling of products and fight against greenwashing, especially by addressing concerns around low materiality of KPIs[2], the level of ambition of SPTs[3], heterogeneity in reporting, documentation clauses and also call for external verification. The new version of these documents reinforces the coherence of Green, Social, and Sustainability-linked (GSSL) Loan Principles with their counterparts in the bond market, administered by the ICMA – especially for Use of Proceeds instruments, for which many parts of the GLP and SLP were revised to align with the language used within the Green & Social Bonds Principles[4].

Green, Social and Sustainability-Linked loans at a glance

A Green or Social Loan requires proceeds to be earmarked to projects with a specific ‘green’ or ’social’ purpose. In contrast, Sustainability-Linked Loans can be used for general corporate purposes, where the borrowers’ achievement of a pre-determined sustainability objectives is linked to an economic outcome[5].

1. Increased robustness through more formalised processes

What is new for Use of Proceeds loans

  • The Green and Social Loan Principles now recommend specifying the Lookback Period in case of refinancing. The refinancing of long-dated assets with consecutive green loans is also clearly permitted if it comes with key public disclosures (age and remaining useful life, refinanced amounts, evaluation of the continuing environmental benefits, a potential SPO…). While there are debates on the relevance of setting maximum lookback periods, what matters is that the projects are still contributing to a positive environmental or social impact. So, further details on the refinancing with public disclosure is the best way to demonstrate it.
  • The Guidance now explicitly identifies dedicated clauses that should be included in the loan documentation. While there is still no template of green/social clauses, the Guidance specifies that disclosure requirements, conditions precedent, as well as provisions relating to a green loan or social loan coordinator (where relevant) should be included, contributing to more uniformization in green and social loan documentation.

Of note, all these updates have been added with the objective to better align the Loans Principles with the ICMA Bonds Principles, as well as with the ICMA Guidance Handbook dedicated for Green, Social, Sustainability and Sustainability-Linked Bonds, both in terms of phrasing and content, thus decreasing the risk of discrepancy between both markets.

What is new for Sustainability-Linked Loans

  • The update adds a new requirement on the KPI’s evolution path: the setting of annual SPTs. This ambitious practice goes beyond what is observed on the counterpart bond market, where this frequency is not recommended by the ICMA Principles. This can be justified by the longer maturities and the structure of the economic impact on the loan’s characteristics after each observation date. The implementation of annual targets requires from the borrower a more robust monitoring of its ESG trajectory, which is appreciated from a lender point of view.
  • The Guidance is enhanced by templates for Sustainability-Linked documentation structuring, which is particularly welcomed by market participants to harmonize practices. The guides prepared by the APLMA and the LTSA, respectively a Term Sheet and a Drafting guidance, are already available to the members of these associations, the one from the LMA detailing SLL provisions is to be published in the near future.
  • The role and responsibility of the “Sustainability Coordinator” has also been clarified by the Guidance, a relevant add-on from our perspective after observing the emergence of various roles and responsibilities around ESG structuring/coordination over the last past years.

For both types of instruments, the recommendation to use a pre-issuance external review is reinforced. The Principles now refer to the Guidelines for External Reviews produced by the Associations for further guidance on the topic, in order to reach the same transparency level as required by the ICMA Principles on the bond market, while taking into account the various profiles an external verifier can have for a loan. We consider this a welcome development, adapting to the specificities of the loan market.

2. Increased transparency through more frequent and extensive reporting

What is new for Use of Proceeds loans

  • The update makes precisions on annual reporting practices on the use of proceeds, according to the type of instruments and reporting expected, clarifying in particular that reporting should be done until loan maturity for Revolving Credit Facilities, and that the reporting on allocation should be complemented by actual or estimated impact indicators of the projects financed (disclosing the scope and limitation of data presented). This update reinforces both the level of transparency required about the use of dedicated funds and the additionality of Use of Proceeds products, while promoting common practices by clearly referring to the Harmonised Framework for Impact Reporting, published by the ICMA, in the Guidance. Moreover, the updated Green and Social Loan Principles now introduces a differentiation for transitioning” actors: it requires more transparency and rationale through additional disclosures on their transition strategy, the importance of sustainability for the business and the sustainability benefits of underlying projects, especially in the event of existing controversies. This welcomed precision is an invitation to more scrutiny from lenders, and a step against greenwashing

What is new for Sustainability-Linked Loans

  • The verification report is now to be published annually by borrowers to carry out the reporting on SPTs, aligning on the frequency practices promoted on the bond market. Such reporting should be public when feasible and should outline “the performance against the SPTs for the relevant year and the related impact, and timing of such impact, on the loan’s economic characteristics”, as well as offering a description of the verification procedures. Although enforcing annual reporting and verification is valuable to achieve a higher level of transparency, we do regret that the Guidance on SLLP does not furnish further description on how the disclosure on performance against SPTs should be best carried out. We also consider that what should be mandatory in the verification report is the validation by the verifier of the SPTs’ data accuracy and reliability.

3. Increased integrity through more requirements on ambition

What is new for Use of Proceeds loans

  • While there is no template of green/social clauses, the Guidance specifies that no communication clauses (parties shouldn’t communicate on the loan until agreed) and declassification provisions (what happens when the loan is declassified as green) should be included, contributing to more uniformization in green and social loan documentation and communication about the green/social labeling of the loan.
  • Update of the Social Loan Principles emphasizes the clear communication needed from borrowers to lenders on the target populations – such as women, unemployed, and low-income populations – for the social projects as well as the social objective(s) of the loan. Even if it was included in the definition in the Use of Proceeds (UoP) pillar before, it was not explicitly requested to be communicated to lenders. This formalization is essential to demonstrate to lenders the relevance of using a social loan.

What is new for Sustainability-Linked Loans

  • Materiality is now more clearly at the core of the Sustainability-Linked Loans Principles & Guidance. Better consideration of materiality in the selection of KPIs is clearly stated, through the notion of double materiality. Indeed, materiality can and should be considered with respect to the business and with respect to the business’ impact on the environment or society. This add-on is a step forward to contribute to market integrity. This is reinforced in the Guidance document, which considers lack of materiality as a practice of greenwashing. Further details on what is expected from borrowers to prove the ambition of their SPTs has been added: these should be beyond “business as usual”, peer performance and/or internal past performance, but also beyond regulation, comparable to what is mentioned in the ICMA Q&A for Sustainability-Linked Bonds, (taking into account the geography and sector of the borrower). This is a  scale-up in the level of evidence and demonstration necessary to justify the ambitiousness of targets. It could help strengthening the integrity of sustainability-linked loans, which is necessary for such “transition” tools “to support a borrower in its transition journey as it seeks to improve its sustainability performance”[6]. However, the ICMA documentation still provides more in-depth details on SPTs best practices for the bond market, specifying for instance the cases of use of absolute and intensity-based targets for climate-change mitigation-related KPIs and SPTs.

Another update to the guidance refers to the labeling of an instrument after its issuance, and clarifies that only after both KPIs and SPTs are agreed and set and the other components of the SLLP are met can a loan be referred to and communicated as an SLL. We applaud this significant change in the conditions of access to sustainability-linked status, which puts a stop to the worrying trend of "Sleeping SLLs" (the practice of labeling a loan as an SLL before agreeing on KPIs and SPTs and including all principles in the documentation) and associated greenwashing risks. It leaves the door open for adding sustainability-linked features to a non-SLL in the twelve months following the origination, but as an exception. This deadline of twelve months appears consistent and adapted with the timing needed to adjust the structure.

Natixis observations

Those improvements are welcomed by lenders as they imply some new requirements on the formalisation of the reporting, documentation, and the verification processes but also on the setting of KPIs and SPTs, boosting the integrity and setting higher expectations from the sustainable loan market. The work is never over, as some clarifications and supplements to the documentation could still be needed, in particular for Sustainability-Linked Loans. As some borrowers want to publicly disclose its loan characteristics, we regret that there is no further guidance on communication best practices, such as comprehensive disclosures when the lender communicates publicly on its green, social or sustainability-linked loan. We would also recommend a reporting disclosure checklist as an appendix of the SLLP (before signing and yearly reporting) in an effort to bring more standardization and ensure a best practice level on the matter.

In the meantime, we are waiting to see the dedicated document on greenwashing that is being prepared by the LMA, as we expect an additional level of stringency in response to it, from borrowers, lenders and investors.

Natixis’ involvement

Natixis was actively involved in the working group comprised of Leading Banks and Law Firms active in the Green, Social and Sustainability-Linked Loan markets, which exchanged on its particularly fast development since the last few years. As a co-chair of the ICMA Sustainability-Linked Bond Principles working group, Natixis was also careful to reduce discrepancy as much as possible between the bonds and loans markets when relevant.


[1] Dedicated Principles and Guidances

 Summary of the updates by the LMA available here & here

[2] Key Performance Indicator

[3] Sustainability Performance Targets

[4] Green Bond Principles

[5] and

[6] As described in the updated version of the Guidance on Sustainability-Linked Loans Principles