Sustainable finance which incorporates the environmental, social and governance criteria into investment decision making processes is showing no signs of slowing down – to the contrary it continues to pick up at pace.
Recently, the Loan Market Association (LMA), together with the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) published its Social Loan Principles (SLPs), with the "aim to create a high-level framework of market standards and guidelines, providing a consistent methodology for use across the social loan market."
For those familiar with the Social Bond Principles (SBPs), which is one of the most internationally recognised frameworks in promoting transparency, disclosure and reporting in the social bond market, the SLPs are complementary to that as it seeks to promote the same objectives but in the social loan market context. This makes the publication of the SLPs a significant step in promoting consistency across the debt markets through the use of these frameworks.
The SLPs consist of a set of voluntary recommended guidelines to be considered by market participants on a deal-by-deal basis.
The characterising feature of a social loan is the utilisation of the loan proceeds. The proceeds of a social loan must be used for a “social” purpose and the LMA’s principles set out a non-exhaustive list of Social Projects (set out in Appendix 1) that are deemed eligible.
As a result of the COVID-19 pandemic the “Social” aspect of ESG has come firmly into focus. These principles provide a welcome framework to market participants who are considering lending or borrowing for a social purpose.
Evaluation and selection of social projects will be a significant focus of those utilising social financial products like the SLPs as they will naturally be fearful of any suggestion of “social washing” (the social equivalent to “green washing”). Initially at least it is expected that lenders will want to stick closely to the non-exhaustive list of social purposes laid out in the SLPs. However, this will develop over time as the social loan market matures. It is of course much more difficult to measure the success of the social aspects of a debt product than the financial returns of such product, however these principles (and other guidance that may follow) will assist in setting some standards across the industry.
It is understood that the LMA, APLMA and the LSTA will each issue further guidance on the SLPs, which should be given due consideration by lenders and borrowers alike who actively seek both a financial and social return on their investments.
As a result of the COVID-19 pandemic the “Social” aspect of ESG has come firmly into focus.