If you think that this is just "green" finance and that sort of money isn't relevant or available to your business – you could be wrong.

• You might be missing out on potential cost savings, not to mention, reputational enhancement with investors, customers/suppliers and future employees who are increasingly placing importance on sustainable performance in the value chain.  
• But, get it wrong and you could end up spending money on a product that provides you with minimal (if any) gain.

In this article we consider just a few of the issues that might be relevant in assessing whether a sustainability linked loan could be right for you.

NOT JUST "GREEN" FINANCE

Sustainability-linked loans (SLLs) are designed to encourage a move towards a more sustainable economy by rewarding borrowers for measurable improvements in their impact on the planet and/or people.  The reward is a reduction in pricing.  If sustainability performance targets are achieved, you pay less.  

The facility doesn't have to be used to fund "green" projects. Typically, SLLs are used for general corporate purposes and working capital.  

While Environmental matters are hugely important and there is considerable appetite for performance targets based on reduction in carbon emissions, the Social & Governance components of your business strategy also have the potential to translate into sustainable performance targets.

WHO SETS THE TARGETS?

You do!  Within reason.  This is not about banks forcing generic and irrelevant targets on you.  

Relevance and ambition of selected targets are of the upmost importance in SLLs and will be crucial to their success.  They have to have real teeth and most importantly be relevant to you and your wider business ambitions.  

If you are not yet that far ahead in your sustainability journey, now is the time to start thinking about how your business impacts the planet and society most materially and therefore where the focus of your sustainability strategy should be.  If you can articulate these as clear and measurable targets they can underpin an SLL.

SO WHAT IS THE CATCH - HOW MUCH IS THIS GOING TO COST ME?

That is a very good question.  The balance needs to be right.  There is little point shaving a few basis points off your margin if the costs of doing so outweigh the benefits.

The sustainability linked loan principles [1] require independent verification of performance against targets. Although some existing SLLs don't require independent verification of performance (due to the nature of the performance targets) we expect that independent verification will become an increasing feature of SLLs. The principles also encourage (but do not insist upon) a pre-signing external opinion as to the appropriateness of the performance targets.  On multibank deals, banks may also elect one of their number to act as a "Sustainability Coordinator".   All of this comes at a cost.  But it may not always be necessary.

Lots of ESG ratings agents and firms are popping up and offering these independent verification services.  Selecting the best provider in respect of their credentials, objectivity and their chosen methodologies, which will underly the certifications they produce, will take careful consideration.

OK, SO WHAT IS THE GAIN? 

Aside from the modest economic benefit of a margin reduction, having an SLL can demonstrate to investors, customers, suppliers and employees that you are taking sustainability seriously, potentially increasing opportunity and providing a competitive edge.  The more general advantages of having a robust sustainability strategy are considered further in our article "Sustainable Finance:  Borrower Myth Buster", available here. 

Only you can assess whether the potential value outweighs the cost in the context of your business. 

WHAT IS "GREENWASHING" AND WHY DOES IT MATTER?

"Greenwashing" or "sustainability washing" refers to situations where the reality does not back up claims made in relation to environmental or other sustainability credentials. 

This can be reputationally damaging to banks and borrowers alike.  To reap the reputational rewards of having an SLL, the ESG metrics included in it need to be both relevant to the business and ambitious.  

Lenders are acutely aware of the reputational risks for them and this drives both requirements for independent assessment of the targets and performance and controls on your ability to publicise the existence of the SLL.  Lender considerations in this regard are discussed further in our article "Is Green the New Red?", available here.

DO I NEED TO SET THE PERFORMANCE TARGETS FROM THE OUTSET?

Although the sustainability linked loan principles anticipate that the targets will be agreed when the facility is put in place, in our experience lenders are willing to be more flexible and allow you to "switch on" the relevant targets, reporting and margin reduction in the future once the details are agreed by all parties.  Similarly, if the facility runs for a long term or your business experiences material change during the life of the facility, the performance targets may need to be revisited in order to remain relevant and stretching.  Again, expect lenders to want to control your ability to publicise the existence of the SLL during periods when you are not meeting targets. 

SO DO I ACTUALLY NEED ONE OF THESE PRODUCTS?

Why not find out?  Even if an SLL does not feel right for you, conversations with people active in this area are unlikely to be a wasted effort.  Given the importance of sustainability planning generally – as considered in our previous article "Sustainable Finance:  Borrower Myth Buster" – can you really afford not to give your sustainability strategy some thought?

Even if now is not the right time for an SLL, your next refinancing date could be and - with some market participants anticipating that sustainability linked loans are likely to become the norm - now is the time to start getting ready.

[1] Voluntary recommended guidelines issued by the Loan Market Association (and similar organisations across the globe).  Whilst "voluntary", the market has generally coalesced around them.