[co-author: Ruth Butterworth]
As we noted previously, against the backdrop of the European Green Deal and related sustainable finance initiatives, environmental, social and governance (ESG) factors are increasingly being incorporated into loan and high-yield documentation. As a result, the concept of a “sustainability coordinator” has emerged in the leveraged finance space, and the European Loan Market Association (LMA) recently published introductory guidance to this relatively new and evolving role (available here).
The responsibilities of a sustainability coordinator, as well as how such responsibilities are documented, is described as differing among transactions and lending institutions. It is suggested that a sustainability coordinator might be appointed on a syndicated loan transaction where the parties intend to structure all or part of the loan as a green, social and/or sustainability-linked (GSS) loan or where it is anticipated that a loan might be converted into a GSS loan at a later date.
It is anticipated that the coordinator will be sourced from one of the key lenders on the transaction and in some cases also will fulfill the role of arranger or agent. In addition, it is expected that the coordinator will often be primarily involved prior to signing of a facility, and their role might include:
- Assisting in negotiating key performance indicators (KPIs) and related sustainability performance targets (SPTs).
- Liaising with third parties in relation to the choice of KPIs and SPTs and assisting in aligning them with market standards.
- Assisting in the preparation of materials to present the GSS loan structure to lenders and helping to manage the related dialogue between borrowers and lenders.
In some instances—for example, where a loan is to be converted into a GSS loan post-signing or where KPIs and SPTs need to be recalibrated during the life of the loan—a sustainability coordinator might have a similar function following origination.
The LMA introductory guidance identifies high-level principles to consider when parties intend to appoint a sustainability coordinator. For instance, while the sustainability coordinator may have a substantial role in delineating information reporting obligations that are ultimately memorialized in a facility and how progress against the negotiated KPIs and SPTs will be measured (which in turn could impact pricing), parties are often excluded from relying on any confirmation from the coordinator in respect of compliance with benchmarks/internal policies. Rather, periodic reporting on sustainability metrics during the term of the facility will instead be collected by the agent and verified with an independent third party. Additionally, coordinators will generally expect protections against potential liability to the borrowers and/or lenders. The scope of this language will depend on the particular role undertaken by the coordinator but may include arranger- or agent-style protections (for example, that the coordinator may rely on any representations that are believed by it to be genuine, correct and appropriately authorized). Parties also may want to consider whether obligors should be required to give additional representations and warranties to the sustainability coordinator, such as in relation to the accuracy of information provided, or whether there are relevant regulatory restrictions on marketing a loan as GSS.
Although standard practices in relation to the appointment of a sustainability coordinator are still forthcoming, the development and market recognition of a role dedicated to enhancing the integrity and viability of green and sustainability-linked finance is a positive one. We will continue to monitor future publications from the LMA in this regard.