In our July version of REF Information and Views we started our deep dive into the Sustainability-Linked Mortgage Rules (“SLLP”) core elements (“Core Parts”).

As a reminder, the SLLP set out a framework, with the intention to allow all market individuals to obviously perceive the traits of a SLL. The framework relies across the 5 Core Parts, particularly:

1. choice of key efficiency indicators (“KPIs”),
2. calibration of sustainability efficiency targets (“SPTs”),
3. mortgage traits,
4. reporting progress towards SPTs, and
5. verification.

On this subsequent article in our Sustainability-Linked Loans Sequence, we are going to proceed our examination into the Core Competencies and have a look at mortgage traits, reporting progress towards SPTs, and verification.

Mortgage Traits

A key attribute of a SLL is that an “financial end result” is linked to the borrower’s efficiency towards its predetermined KPIs/SPTs.

In observe, the financial end result will often take the type of a margin ratchet the place the pricing of the mortgage modifications in accordance with the borrower’s ESG efficiency. In distinction to different types of ESG mortgage merchandise (akin to inexperienced loans), the main focus for a SLL is just not primarily based on the aim for which the mortgage is made obtainable.

Reporting Progress towards SPTs

The SLLPs advocate that debtors ought to report at the least as soon as per 12 months with up-to-date info ample to permit lenders to watch progress and make sure that targets stay formidable and related to the borrower’s enterprise.

Given the worth of transparency within the SLLP market, the SLLPs advocate that the place doable debtors must be inspired to publicly report the underlying calculations and methodologies (akin to in a borrower’s built-in annual report or sustainability report). To the extent that this isn’t doable, the place applicable, a borrower could select to share this info on a non-public foundation solely with lenders. Debtors are additionally inspired to offer lenders with particulars of any underlying methodology of SPT calculations and/or assumptions.

Will probably be attention-grabbing to trace evolving market observe in relation to the kind of element and data that lenders count on to obtain to allow them to precisely assess the continuing relevance of the KPIs and SPTs over the period of the mortgage.

Verification

The SLLPs encourage debtors to acquire impartial and exterior verification of their efficiency stage towards its SPT for every KPI by a “certified exterior reviewer with related experience, akin to an auditor, environmental guide and/or impartial rankings company at the least every year.” The SLLPs advocate that verification of the borrower’s efficiency towards the SPTs is made publically obtainable the place applicable, which we word is just not restricted to publicly traded corporates.

It is very important level out that transactions with out impartial exterior verification of efficiency is not going to meet the necessities of the SLLP to be categorized as a SLL.

As soon as reporting by the borrower has taken place, the lenders will be capable of assess the borrower’s efficiency towards the agreed SPTs and KPIs.

On March 3, 2022, the Mortgage Market Affiliation, Asia Pacific Mortgage Market Affiliation and Mortgage Syndications and Buying and selling Affiliation printed “Steerage for Inexperienced, Social and Sustainability-Linked Loans Exterior Evaluations.” This seeks to offer steering on finest observe on the exterior overview course of for debtors, lenders, exterior reviewers and different stakeholders within the ESG mortgage market. It’s voluntary and goals to offer info and transparency on the exterior overview processes for debtors, lenders, exterior reviewers and different stakeholders within the mortgage market.

Remaining Phrases

Within the subsequent article on this Sustainability-Linked Loans Sequence, we are going to focus on the applying of the SLLPs to actual property finance transactions.