S in ESG poised for a breakout year in 2022 – Natural Self Esteem

If last year was any indication, 2022 could be another record year for the sustainable syndicated lending market. According to financial data provider Refinitiv, new issuance of sustainability-linked loans (“SLLs”) grew to $717 billion in 2021, a year-over-year increase of more than 300 percent from 2020. As the appetite for sustainability-linked lending facilities grows, lenders should also look forward to it be prepared to accommodate the changing needs of borrowers in this market. Traditionally, SLLs have been more focused on the environmental component of a borrower’s ESG (Environmental, Social, Governance, ESG) strategy; However, as borrowers allow more room for non-environmental goals in their ESG strategies, SLLs are now increasingly incorporating social goals, either on a stand-alone basis or in addition to environmental (and/or governance) goals.

For the uninitiated, sustainability-linked loans are a type of lending instrument designed to incentivize borrowers to meet specific pre-determined environmentally and/or socially sustainable goals. A distinctive feature of an SLL is that a specific economic outcome, typically a reduction (or increase) in loan prices, is made conditional on the borrower meeting (or failing to meet) sustainability performance targets (SPTs) that correspond to certain predetermined performance metrics ( KPIs). Unlike green loans, the loan proceeds from SLLs do not have to be used for a green or sustainability-related project and can be used to fund any general corporate purpose.

Borrowers’ growing interest in the social aspects of ESG is as Diversity and Inclusion (D&I) initiatives have gained wider acceptance and workers are increasingly returning to the office, making employee health and safety a business priority once again. Partially reflecting this trend, in April 2021 private equity firm Blackrock amended its $4.4 billion revolving credit facility, introducing a sustainability-related pricing mechanism that references three separate KPIs, two of which (employment of Black, African American, Hispanic, and Latino). Rate and Female Leadership Rate) are socially oriented. In the months that followed, we have also seen more and more borrowers, including the following, integrate one or more social KPIs into their SLLs:

  • The Southern Company (Various supplier editions);

  • American Campus Communities Operating Partnership LP (Diversity Employment Rate, Diversity Director Rate);

  • HP Inc. (Percentage of Black and African American among US-based executives);

  • Autodesk, Inc. (women in technical roles); and

  • Enerplus (3-year average lost time accident frequency rate).

Select KPIs

When socially oriented KPIs are incorporated into an SLL, lenders and borrowers will generally set KPIs that are tailored to the borrower. This approach provides additional flexibility for lenders and borrowers to ensure the loan’s sustainability provisions closely align with the Sustainability Linked Loan Principles (SLLP).1 KPIs closest to SLLP are both core to the borrower’s business, relevant to the sustainability challenges faced by the borrower’s industry, and benchmarkable.

Importantly, the loan’s KPIs should also be linked in some way to the borrower’s or its parent’s ESG strategy. A review of an organization’s ESG materiality rating can provide a basis for lenders to assess which sustainability issues (whether environmental, social or governance) are most important to a borrower’s business and its stakeholders. Lenders should be wary of setting KPIs that have not previously been documented by the borrower or otherwise identified as an internal priority. An SLL that includes KPIs that have no demonstrable connection to a borrower’s business or policies can raise issues of so-called “sustainability washing,” which poses reputational risk to all parties to the loan.

Alternatively, lenders and borrowers can opt for a KPI that references a sustainability rating issued by an independent ESG rating agency such as MSCI, Sustainalytics or VE (formerly known as Vigeo Eiris). Using their own internal methodologies, ESG rating agencies calculate a borrower’s sustainability performance relative to that of their industry peers. Using such a rating agency can also have the benefit of adding an extra aura of credibility to a company’s ESG reporting, as ESG rating agencies normalize ratings within a specific sector and provide additional context to investors.

Calibrating SPTs

In accordance with the SLLP, borrowers should make a significant contribution to the development of the SPTs, which must remain ambitious throughout the life of the loan. SPTs, including social KPIs, may be based on one or more benchmarking approaches, including an assessment of the borrower’s own performance over a period of time, a comparison of a borrower’s performance to that of its peers, or by reference to other systematic procedures, science-based proxies, including targets that may already have been set at national, regional or international level. SPTs should not be set at a lower level or on a slower path than any other related targets that the borrower may already have set in internal strategies or elsewhere.

Generally, SPTs are structured to aim to improve a borrower’s own performance under the relevant metrics. To ensure these SPTs remain ambitious, lenders and borrowers may choose to incorporate a moving baseline. Using this methodology, each year the borrower’s performance from the previous year is incorporated into the SPT and requires a certain improvement over this previous year’s baseline to meet the SPT.


Pursuant to the May 2021 SLLP release, lenders and borrowers are now required to have a borrower’s performance against all SPTs verified by an independent and third-party auditor. This review needs to be done at least once a year and is often performed by the borrower’s auditor, but any qualified external auditor with the requisite experience, e.g. B. an external consultant or an ESG rating agency, can carry out the review. The appraiser’s endorsement typically takes the form of an independent assurance or endorsement statement that is provided when the borrower reports its performance, often in its financial statements or ESG reporting documents.


As the SLL market continues to mature, it is likely that further changes in market standards await borrowers and lenders. As borrowers continue to refine their ESG strategies to incorporate more social and governance issues, they will likely look to reap the reputational benefits by including more KPIs related to these issues in their SLL packages. Additionally, with the growing number of SLL issuances, sustainability washing will remain an ongoing issue in the market. The May 2021 revisions to the SLLP fixed the verification requirement in part to prevent “sustainability washing” and preserve the integrity of the SLL product. Given these risks, lenders and borrowers would be well advised to include additional flexibility in their loan documents, particularly with regard to the rights to change and adjust SDGs, as well as reporting and verification requirements.


1. The Sustainability Linked Loan Principles are a set of high-level market standards to promote the development of sustainable credit, published by the Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) .

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