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The Green Loan Principles, Social Loan Principles and Sustainability-Linked Loan Principles (Principles) quite often require external reviews to be undertaken by external providers, to ensure that green, social or sustainability-linked loans are being used accordingly and genuinely.

As such, the LMA recently issued guidance intended to accompany the Principles to help promote best practice and a third-party perspective, which in turn provides assistance to external reviewers and the organisation.

External Reviews

Borrowers under green, social or sustainability-linked loans may obtain external reviews, which may often cover:

  • a green, social or sustainability linked loan/finance framework;
  • an individual green, social or sustainability-linked loan or a portfolio of these loans;
  • the underlying assets (in the case of specific green or social loans);
  • the reporting undertaken in relation to an individual green, social or sustainability-linked loan or a portfolio of these loans; and/or
  • the related procedures.

Its important to note that while various organisations can provide these external reviews and some providers are subject to existing professional standards already, all external reviewers should follow five ethical and professional principles – integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

The LMA outlines how external reviews are often grouped into the following but note that review providers often offer a combination of the types.

  1. Second Party Opinion (SPO)
  • This will usually entail a pre-execution assessment of the loan and/or the relevant framework with the Principles.
  • For green and social loans, some of the aspects that the SPO providers may assess include the following:
  • the environmental and/or social features of the type of projects the funding will be used for;
  • the specific environmental and/or social benefits and impact targeted by the projects;
  • any material environmental and/or social risks associated with the projects along with possible recommendations to alleviate these risks.

For sustainability-linked loans, the following may be assessed:

  • the relevance, materiality, robustness and reliability of selected key performance indicators and whether these are relevant in the borrower's sector;
  • the level of ambition of the sustainability performance targets (SPT) and whether these are attainable;
  • the credibility of the strategies proposed by the organisation to be implemented.

Where a pre-execution assessment is not obtained, a post-execution assessment will in certain circumstances be accepted. This is usually required as a condition subsequent to a transaction and the application and any publicity may not be permitted until the SPO has been obtained.

2. Verification

This type of review assesses the financial or non-financial information to a more detailed and thorough level. The contrast to an SPO is that this will follow a specific methodology and external standard.

For green and social loans, verification may include:

  • assessing the allocation of proceeds;
  • an evaluation against a designated set of use of proceeds criteria and/or impact metrics;
  • an evaluation of the environmental or social features of underlying assets against specific external criteria; and
  • alignment of impact reporting with specific external criteria.

For sustainability linked-loans, in accordance with the sustainability-linked loan provisions (SLLP), borrowers must obtain independent and external verification of the borrower’s performance level against each SPT for each key performance indicator for the relevant assessment period. This SPT assessment can lead to, where required, adjustments of the characteristics of the sustainability-linked loan, until a borrower reaches the last SPT trigger event. Post-signing verification is a mandatory requirement of the SLLP.

There are different types of verification include, Assurance (limited and reasonable), Attestation and Certification:

  • Assurance is the analysis of underlying data, procedures and methodologies.
  • Attestation is an assertion by the external review provider of the subject matter evaluated and reported on.
  • Certification is frameworks, procedures or targets that are measured against specific criteria and awarded by an external reviewer with a score/label.

3. Green, Social and Sustainability-Linked Loan Scoring/Rating

A borrower can simply have its green, social, or sustainability-linked loan rated/scored. This score can be influenced by an SPO and obtain a rating can be given in connection with the loan. It can be evaluated by third-parties such as research providers, rating agencies and consultancy firms. ESG ratings can sometimes be used as key performance indicators however this is less common.

Ultimately, it would be best practice for borrowers to ensure sufficient evidence is gathered to prove their green, social or sustainability-linked loan as genuine and for the greater good of the market. If borrowers are able to gather precise and targeted metrics including both financial and non-financial goals and objectives, then it should put them in good footing for these reviews.