Performance Targets

The nature of the sustainability performance targets which trigger a margin adjustment are hugely varied. Over a quarter of these however indicated that it is desirable for these to include environmental performance targets.

AG Insight: Lenders should ensure that the targets are material, stretching and measurable.

This is considered further here in our article 'Is Green the New Red?'

Amendments & Publicity

• Recalibration of performance targets mechanics is not included at all in some facility documentation.
• However, the response overall to whether in not these mechanics are included to adjust the performance targets over the life of the loan was mixed. Some were seeing this and where this was the case, majority or unanimous lender consent was required.

AG Insight: Review and recalibration of targets over the term of the loan may be appropriate for longer term facilities but in periods where no targets apply, it is prudent to preclude the borrower from holding itself out as having the benefit of a Sustainability Linked Loan to mitigate the risks of greenwashing.

Pricing Incentives

• Downwards only margin rachets are only slightly more prevalent than two-way rachets.
• Including restrictions on how a borrower applies any margin saving is not favoured, with 63.6% of respondents citing its potential to negate the intended incentive to outperform plan.
• To date, lender retention of any margin uplift has been the most common approach.

AG Insight: Lenders need to remain mindful of the potential risks associated with perceived profiteering. If the borrower fails to meet targets, triggering an increase in the margin, the resulting benefit should not be retained by the lender but should either be channelled into other sustainability projects or ring-fenced for application in furtherance of the borrower's own sustainability targets.

Independent Verification

• Fewer than half of those surveyed said that they use pre-completion independent opinions.
• The use of Sustainability Coordinators varied depending on the deal size, syndicate size and number and nature of the targets.

AG Insight: There is a broad range of expertise in the sustainability field and establishing a panel of experts with different capabilities verified by the lender would be a sensible step.