Practical guide to sustainability-linked leveraged loans

By ESG Clarity

A best practice guide to sustainability-linked leveraged loans has been published by the European Leveraged Finance Association (ELFA) and Loan Market Association (LMA).

The guide aims to provide practical tips for applying sustainability criteria to leveraged loans, and sets out what borrowers, finance parties and their advisers should consider when looking to integrate sustainability factors into their facility agreements.

It looks at terminology – a source of confusion in many parts of the sustainability industry – creating a glossary of terms for sustainably lending products. It also looks to explain the number of new ESG roles cropping up in the space, such as ESG ratings providers and consultants, as well as what ESG information should be provided to lenders before transactions are made.

“Importantly, a borrower should not rush to structure a sustainability linked loan until it is ready to do so,” said Sabrina Fox (pictured), CEO of the ELFA.

“This guide provides a common starting point, bringing legitimacy and helping to ensure proposals are robust and ambitious enough to guarantee the integrity of the product and limit greenwashing risks.”

See also: – Video: ELFA’s Sabrina Fox on improving ESG disclosure

As with all areas of ESG, measurement and reporting is key, and guidance for borrowers on staying up to date, including information about external ratings, and get independent and external verification at least once a year. “There is currently no template wording available for use in sustainability linked loan documentation due to the varied and precedent-based nature of this market and, as such, a case-by-case approach will be required,” the guide reads.

Gemma Lawrence-Pardew, director – legal at LMA, said: “Our guide with the ELFA provides a transparent and standardised ESG approach from the beginning, allowing market participants to have a resilient model to follow in the leveraged finance market. This is supported by the already uniquely positioned market, which offers close relationships between borrowers and lenders and investors already accustomed to performing ‘deep dives’ into borrowers’ businesses.”