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Business Law Today

October 2023

Recent Movements toward a Harmonized Approach Relating to ESG across the Debt Markets

Tracey Ho


  • Recent updates by international loan industry bodies show a growing trend to standardize the loan framework with respect to sustainability-linked loans, green loans, and social loans.
  • The Loan Syndications & Trading Association, Asia Pacific Loan Market Association, and Loan Market Association updated their Sustainability-linked Loan Principles Guidance, Green Loan Principles Guidance, and Social Loan Principles Guidance in 2023. The key changes are summarized in this article.
  • A recent example in Canada demonstrates how a sustainability-linked credit facility could be tied to the borrower’s sustainability performance targets and how lenders can support their clients with achieving their sustainability goals.
Recent Movements toward a Harmonized Approach Relating to ESG across the Debt Markets

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Following the publication of a draft multicurrency facility term sheet including a sustainability-linked loan appendix by the Asia Pacific Loan Market Association (APLMA) in the last quarter of 2022, on February 17, 2023, the Loan Syndications and Trading Association (LSTA) issued drafting guidance for sustainability-linked loans, to provide drafting examples of provisions related to sustainability-linked loans for a U.S.-style syndicated credit agreement.

On February 22, 2023, the LSTA, the APLMA, and the Loan Market Association (LMA) jointly issued updated versions of the Guidance on Sustainability-Linked Loan Principles (SLLP), Guidance on Green Loan Principles (GLP), and Guidance on Social Loan Principles (SLP). Each of the Guidances should be read alongside the respective updated principles SLLP, GLP, and SLP. Although these are suggested market-standard frameworks, it is recommended by the loan bodies that loan transactions completed prior to March 9, 2023, should continue to follow the original positions under the relevant guidelines and principles relating to SLLP, GLP, and SLP and that all loans originated, extended, or refinanced after March 9, 2023, should fully align with the relevant guidelines and principles of SLLP, GLP, and SLP as amended by the 2023 updates.

The LSTA, APLMA, and LMA had previously jointly issued the latest version of Guidance for Green, Social and Sustainability-Linked Loans External Reviews in March 2022, which is a voluntary guidance on professional and ethical standards for external reviewers for circumstances where external review providers are appointed to undertake external reviews in connection with entering into and executing green loans, social loans, or sustainability-linked loans. The purpose of that update was to align with the guideline on the same topic issued by the International Capital Market Association (ICMA) in the previous year.

These regular updates by loan industry bodies covering Europe, Asia Pacific, and the United States show a growing trend toward standardizing loan terms with respect to green loans, social loans, or sustainability-linked loans by providing a harmonized recommended framework for credit market players to encourage borrowers to contribute to sustainability from an environmental, social, and governance (ESG) perspective. Alignments made with ICMA guidelines also show the intention to promote consistency across debt (bond and loan) markets.

Green Loans and Social Loans: Key Changes in 2023

The amended 2023 GLP, SLP, and SLLP and their respective guidances provide more articulation of the characteristics of green loans, social loans, and sustainability-linked loans. To distinguish between a green loan and a social loan, the fundamental determinant is the utilization of the loan proceeds for green projects or social projects. Besides the key determinant of use of proceeds, the other core criteria set out in the respective GLP or SLP principles must also be met; these criteria are generally related to project evaluation and selection, management of proceeds, and reporting.

Green loans are any type of loan instruments and/or contingent facilities (such as bonding lines, guarantee lines, or letters of credit) made available exclusively to finance, refinance, or guarantee, in whole or in part, new and/or existing eligible green projects. The key changes to the 2023 GLP include the following:

  • The loan industry bodies provided a list of examples of eligible green project categories to capture common types of projects supported by the green loan market, such as (but not limited to) renewable energy (including production, transmission, appliances, and products); energy efficiency (such as in new and refurbished buildings, energy storage, district heating, smart grids, appliances, and products); pollution prevention and control; climate change adaptation; green buildings; and clean transportation projects.
  • With respect to the process for project evaluation and selection, borrowers are encouraged to have a process in place to identify mitigants to known or potential material risks of negative project impacts.
  • With respect to management of proceeds, the borrower should attest to that in a formal internal process linked to the borrower’s lending and investment operations for green projects, and the borrower should let lenders know of any intended types of temporary placement for the balance of unallocated proceeds.

Social loans are categorized as any type of loan instruments and/or contingent facilities that are made available exclusively to finance, refinance, or guarantee, in whole or in part, new and/or existing eligible social projects and that are aligned to the core components of the SLP with respect to the use of proceeds, the process for project evaluation, and selection and reporting. It is recommended that borrowers explain the alignment of their social loan with the SLP in their legal documentation. The key changes to the 2023 SLP include the following:

  • The SLP provides nonexhaustive categories for eligible social projects and explicitly recognizes several broad categories of eligibility for social loans with the objective of addressing key social purposes, such as affordable basic infrastructure, access to essential services, and affordable housing.
  • There is emphasis on the requirement for transparency, accuracy, and integrity of disclosure of information reported by borrowers to stakeholders through the core components of the SLP.
  • Similar to project evaluation and selection of green project loans, borrowers are encouraged to have a process in place to identify mitigants to known or potential material risks of negative project impacts with respect to the process for project evaluation and selection.
  • Similar to the management of proceeds of green project loans, the borrower should attest to the management of proceeds in a formal internal process linked to the borrower’s lending and investment operations for green projects, and the borrower should let lenders know of any intended types of temporary placement for the balance of unallocated proceeds.

Sustainability-Linked Loans: Key Changes in 2023

In terms of sustainability-linked loans, one should not make a determination based on the use of proceeds to determine the sustainability-linked loan’s categorization but should rather focus on whether the loan supports a borrower in improving its sustainability performance, through meeting (or not meeting) predetermined sustainability performance targets. The amended SLLP guide provides that sustainability-linked loans are any types of loan instruments and/or contingent facilities for which the economic characteristics can vary depending on whether the borrower achieves ambitious, material, and quantifiable predetermined sustainability performance objectives. Therefore, proceeds under a sustainability-linked loan could be used to finance any kind of business activities that the borrower is pursuing—for example, it could finance a project that overlaps under a green/social loan or an acquisition transaction.

The table below summarizes examples of recommendations in the SLLP as amended in 2023:

Core Components

Selection of KPIs

Recommended Standards

Sustainability key performance indicators (KPIs) must be material to the borrower’s core sustainability and business strategy and address relevant ESG challenges of its industry sector.

The KPIs must be

  • relevant, core, and material to the borrower’s overall business, and of high strategic significance to the borrower’s current and/or future operations;
  • measurable or quantifiable on a consistent methodological basis; and
  • able to be benchmarked (it is recommended that an external reference or definitions should be used as much as possible to facilitate use of the KPI to assess the sustainability performance target’s level of ambition).

Calibration of SPTs 

Recommended Standards

The sustainability performance targets (SPTs) must be set in good faith and remain relevant as applicable and ambitious throughout the life of the loan. Furthermore, such targets should

  • represent a material improvement in the respective KPIs and be beyond both a “business as usual” trajectory and regulatory required targets;
  • be compared to a benchmark or an external reference where possible;
  • be consistent with the borrower’s overall sustainability strategy; and
  • be determined on a predefined timeline, set before or concurrently with origination of the loan.

A key change in 2023 included that an annual SPT be set per KPI for each year of the loan term. The borrower should also take competition and confidentiality considerations into account and flag any strategic information that may decisively impact the achievement of the SPTs.

Loan Characteristics

Recommended Standards

An economic outcome is linked to whether the selected predefined SPTs are met. For example, the margin under the relevant loan agreement will often be reduced where the borrower satisfies a predetermined SPT as measured by the predetermined KPIs and vice versa.

The key change for this component is with respect to cases where a strong rationale is provided; the margin ratchet may include a neutral bracket in which no margin adjustment applies.


Recommended Standards

On information covenants, besides encouragement to publicly report SPT-related information and details of SPT calculation and assumption methodologies, borrowers should provide the lenders participating in the loan with the following information at least once per annum:

  • up-to-date information sufficient to allow participating lenders to monitor the performance of the SPTs and to determine that the SPTs remain ambitious and relevant to the borrower’s business; and
  • (as a key amendment) a sustainability confirmation statement with a verification report attached, outlining the performance against the SPTs for the relevant year and the related impact, and timing of such impact, on the loan’s economic characteristics. 


Recommended Standards

To verify the performance of KPIs and SPTs, borrowers must obtain independent and external verification of their performance level against each SPT for each KPI. Such verification is an important element of the SLLP and should be conducted by a qualified external reviewer with relevant expertise, such as an auditor by way of limited or reasonable assurance, environmental consultant, and/or independent ratings agency.

A key change relating to verification obligations is that such obligations should be for any date or period relevant for assessing the SPT performance leading to a potential adjustment of the sustainability-linked loan economic characteristics, and they should continue until after the last SPT trigger event of the loan has been reached. Also, such verification of performance must be shared with lenders in a timely manner and be made publicly available where appropriate.

Recent Leading Market Example

In Canada, FortisBC Energy Inc. (FortisBC) recently announced on its company website that it incorporated SPTs to establish a market-leading sustainability-linked credit facility with the Canadian Imperial Bank of Commerce (CIBC) as administrative agent, sole book runner, sole lead arranger, and sole sustainability structuring agent. The Canadian market welcomed this news, which was shared by various media platforms on the internet, because this is reputedly the first time that a natural gas Canadian utility incorporated a customer emissions target into its credit facility with financial institutions—and, moreover, such credit facility included SPTs related to Indigenous participation on a project basis, which we understand is still highly uncommon in Canada.

According to publicly available disclosures, fees under FortisBC’s sustainability-linked credit facility were tied to and may be adjusted based upon two SPTs relating to the environment and Indigenous participation:

  • annual greenhouse gas (GHG) emissions reduced through renewable and low carbon gas displacing conventional natural gas volumes, lowering customers’ GHG emissions; and
  • increased focus on projects with meaningful and equitable Indigenous participation.

FortisBC will be able to obtain favorable pricing adjustments on its credit facility if it makes progress in these SPTs, and we look forward to following the journey of FortisBC and CIBC in their respective ESG contributing roles.


With the recent 2023 updates on green loans, social loans, and sustainability-linked loans by various loan bodies, there is an expectation in the market about the importance of leading financial institutions and their key role of encouraging borrowers to join the sustainability movement. Money is not the only metric in the funding market, and if environmental and social impact metrics are done right to allow lenders to support their clients in achieving their sustainability/ESG goals, the sustainable future that both sides are committed to pursuing may provide a longer-lasting positive impact internationally.