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The rise of green loans and sustainability linked lending

Where are we now?

The pressure to put environmental, social and governance (“ESG”) issues at the heart of corporate decision-making comes not just from legal and regulatory change, but from shareholders, investors, clients, customers, suppliers and employees. Two new types of loan have developed over the last few years in response – green loans and sustainability linked loans.

Our Thought Leadership publication on the rise of green loans and sustainability linked lending charted the development of these new types of loan and identified trends in documentation and practice. This Supplement explains how market practice has changed. It also summarises various key legal, regulatory and industry-driven initiatives, including the Guidance on the Green Loan Principles and on the Sustainability Linked Loan Principles published in May 2020 by a joint working group of the Loan Market Association, the Asia Pacific Loan Market Association and the US Loan Syndications & Trading Association.

Our Supplement explores three key areas

1. Developments in green loans

We previously summarised the key characteristics of green loans as set out in the Green Loan Principles. It also considered the Equator Principles that are intended to help ensure that certain project finance transactions are undertaken in a socially responsible way and in accordance with appropriate environmental management practices.

Here we explore the new Guidance on the Green Loan Principles published in May 2020 and highlight changes to the Equator Principles applying from 1 October 2020.

"Participants in the project finance markets, where the Equator Principles have been widely adopted, are exploring how certain project finance transactions (for instance, relating to renewable energy) might also meet the requirements of the Green Loan Principles."

"Sustainability linked loans can be difficult to future-proof for changes to the borrower's wider sustainability programme or for changes to the borrower group arising from, for example, significant acquisitions or disposals."

2. Developments in sustainability linked loans

Our earlier Thought Leadership publication discussed the key characteristics of sustainability linked loans as set out in the Sustainability Linked Loan Principles and trends in how these loans were being structured in practice.

One year on, we examine the Guidance on the Sustainability Linked Loan Principles published in May 2020 and the move towards more sophisticated transaction structures using tailored Key Performance Indicators and dynamic performance targets.

3. Key legal, regulatory and other developments

We identified in our Thought Leadership publication a wide range of ESG-related legal, regulatory and other developments, which emphasised the ongoing shift to promote ESG considerations to the forefront of business decisions.

Our Supplement describes the key changes in this area, including updates on:

  • the initiatives that make up the EU Sustainable Finance Package - the new Taxonomy Regulation, the new ESG Disclosure Regulation and the new ESG Benchmarks Regulation; and
  • how ESG considerations are being embedded into the EU and UK prudential regulatory frameworks.

"The climate change stress tests demonstrate the growing commitment amongst regulators to quantify, assess and manage ESG risks."

Download - Supplement

Supplement front cover

Download - Thought Leadership Report

Sustainable Finance The rise of green loans and sustainability linked lending

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