Pillsbury Winthrop Shaw Pittman LLP

The LMA and ELFA have jointly published guidance to provide clarity in the market regarding ESG disclosures.


  • The publication of guidance reflects the growing interest in ESG factors and their importance in leveraged finance credit analyses.
  • The Guide sets out practical advice that includes drafting considerations and an ESG roadmap to assist companies with their ESG disclosures in an offering memorandum.
  • Whilst details are given on current applicable regulations, this is a fast-moving area and there will likely be additional regulatory developments in the near future.

On 19 January 2021, the Loan Market Association (LMA) and the European Leveraged Finance Association (ELFA) jointly published an environmental, social and governance (ESG) disclosure guide for leveraged finance transactions (the Guide). The Guide recognises the dichotomy between the increasing importance of ESG factors in leveraged finance credit analyses and inconsistencies between ESG disclosures.

The themes in the Guide reflect the general market shift to address ESG factors. The Guide sets out three key reasons as to why greater levels of ESG disclosure in this area are required. These are:

  1. ESG integration is additive to the investment process.
  2. Growing regulatory requirements from governments and regulators.
  3. Demand from investors and society at large for ESG considerations.

In terms of practical advice, the Guide provides details on integrating ESG into a company’s offering documentation to permit wider access and transparency, and ongoing reporting requirements.

Diligence Practices

Chapter 3 of the Guide highlights some key areas for consideration in relation to ESG diligence. These broadly include the following:

  • Legal Requirements: businesses are increasingly finding themselves bound by regulatory requirements in relation to ESG. Chapter 2 of the Guide sets out some of the key regulatory considerations for borrowers. However, the level of disclosure required by investors is often more burdensome than that required pursuant to current regulations.
  • Materiality and Thresholds: the concept of disclosing an issue that would be considered “material” to a reasonable investor can be contentious in the context of a leveraged finance transaction. This applies both with regard to early-stage disclosures (e.g., an offering memorandum or prospectus) and to ongoing reporting obligations. In general terms, issues that might affect “the financial condition or operating performance of a company” would be considered material to most investors. There is currently no uniform approach as to how this applies to ESG disclosures.

Investors are placing increasing weight on the value of ESG considerations as an indicator of the long-term financial stability of a company (e.g., issues such as reputation, market competitiveness, etc.). This might distort the traditional concept of “materiality.” There is increasing data which allows for ESG metrics to be assessed on a quantitative basis. Developments in this respect are an area to watch. However, in the meantime, the materiality of ESG factors must be considered on a case-by-case basis.

  • Stakeholder Due Diligence: many investors are already requiring companies to complete ESG questionnaires. The approach to this diligence will evolve over time, and it is unclear whether ESG factors should be dealt with in isolation or whether ESG should be interwoven throughout a diligence questionnaire. In any event, it is vital that this process is harmonised.

Drafting Considerations and ESG Roadmap

Chapter 4 of the Guide establishes a roadmap for ESG disclosures in offering materials. Many of the themes follow on from the previous chapters, with specific guidance on considerations for the offering memorandum. As mentioned above, a holistic approach is recommended, such that ESG factors are interwoven with the wider business disclosures. Specifically:

  • Business: Companies should use this section to highlight that ESG considerations are integral to their business model. This is a good area to include voluntary disclosures in addition to those required by law.
  • Risk Factors: ESG risks should also be disclosed, including any projected regulatory risks as this area develops. The level of materiality of these risk factors will likely be sector dependent.
  • Management’s Discussion and Analysis of Financial Condition and Results of Operations: This section reflects upon how a company’s ESG strategy may impact its financial position. Due to the evolution of the ESG space, companies should be prepared to show that they are sufficiently flexible to adapt to regulatory and industry developments.
  • Management: The management disclosures should be used to showcase both the effective management of the company’s ESG strategy, and specific issues such as board diversity, etc.
  • Financial Statements: Again, companies should seek opportunities to present the positive impacts of ESG matters on their financial position. Any investments in sustainable products or other similar steps should be highlighted.

Chapter 4 also explores the importance of consistent data metrics. Guidance is given as to other methods that can be used to disclose specific elements of an ESG strategy, such as external certifications, standards, verifications and ratings. However, the key takeaway is that data metrics and KPIs need to be harmonised across industries so that they are of value to investors.


Industry research reveals that clarity is demanded from all sides. Investors want to ensure they have transparency with regard to company disclosures and that robust company reporting systems are in place. Whilst companies are looking to strengthen their ESG profiles, they are being hindered by inconsistencies regarding exactly what investors need to see, and how and when this information should be disclosed. There is a significant challenge as to how this can be harmonised across industries and sectors. However, the burgeoning popularity of ESG considerations demands attention in this area to reduce the scope for ESG-washing.

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