Sustainable drafting for sustainability-linked loans?

On 4 May 2023 the Loan Market Association (LMA) published model provisions for those borrowing, lending and arranging sustainability-linked loans (SLLs). Whilst the market has been assisted by the Sustainability-Linked Loan Principles (SLLPs) and various – official and unofficial – guidance surrounding them, the LMA has not, until now, offered SLL drafting for inserting into LMA framework loan facility documentation.

Given the LMA’s leading role in sustainable loan finance, the broad adoption of its recommended forms of facility documentation in Europe and the desire for documentary consensus for SLLs having grown with the popularity of the product, the model provisions are likely to have strong take-up in syndicated loan documentation (they are drafted for the LMA's "core" facilities agreement for leveraged acquisition finance transactions). And at least some of the provisions may well permeate significantly beyond their primary use case, as parties to all sorts of debt finance and other contracts consider linking relevant economic characteristics to sustainability performance objectives.

Common to the LMA’s suite of documentation, the provisions require tailoring to the particular needs of parties and transactions, but the helpful starting point they are expected to provide should not be underplayed. The LMA notes that market practice in SLLs is still evolving and it is intended that the model provisions will be adapted, improved and refined over time. This flexibility and market-led approach is important; as is any greater focus that standard drafting can bring to the materiality of key performance indicators (KPIs) and ambition of sustainability performance targets (SPTs) – crucial for the integrity and impact of SLLs.

The model provisions and the extensive accompanying drafting notes reflect familiar concepts, drawn both from the SLLPs and guidance and from developing market practice:

• emphasis on the benchmarking of KPIs against industry standards and inclusion of clear calculation methodologies; 
• external verification of performance against SPTs set in respect of those KPIs;
• a margin ratchet based on the number of SPTs which are met (it is assumed that loans made under every available facility are sustainability-linked);
• a "rendez-vous clause" to cater for permitted or required updates to KPIs and/or SPTs so as to maintain alignment with the borrower’s business and sustainability commitments over the life of the facilities;
• specified events the occurrence of which would declassify the facilities (and loans made under them) as sustainability-linked – an anti-greenwashing feature which, based on our experience, we imagine may generate considerable negotiation in its triggers and consequences; and 
• failure to comply with the SLL provisions not being an event of default.