Recommendation to the LMA and ICMA: standardise wording to implement for green loans or sustainability-linked loans

To date, the LMA nor ICMA has published template wording for green or sustainability-linked real estate (development) loans arguing that green or sustainability-linked real estate (development) financing is too transaction specific. ESG is obviously a hot topic, and most lenders have developed their own template wording to standardise their finance documents and consistently apply their green and/or sustainability-linked principles. Although we encourage this initiative of individual lenders, a set of template ESG-provisions from the LMA and ICMA benefit standardisation and make implementation of green or sustainability linked loan principles easier for the parties involved and will therefore probably lead to an increase of application of such principles. 

For green loans, extend ESG-reporting obligations to the entire term of the green facility and update eligibility criteria regularly

Application of a green loan for its green purpose will be tested on the utilisation date for such loan meaning there is only one test date for a green term facility utilised by one drawdown. However, a green building on the first utilisation date may not be as green within a few years from drawdown as ESG-requirements develop overtime. Hence, we recommend extending ESG-reporting and built in flexibility to amend the green eligibility criteria during the term of the loan. Such approach will lower the risk of greenwashing. For sustainability-linked loans this recommendation is irrelevant as reporting and evaluation is already part of the sustainable nature of the facility. 

Introduce ESG-obligations for the occupant of the real property in the green or sustainability-linked credit agreement

Currently we often see a reasonable efforts obligation of the owner as landlord of the financed real property to include (and enforce) ESG-obligations for its tenant in the relevant lease documents. Depending on the transaction specifics a lender may wish to require hard (and not reasonable efforts) ESG-lease obligations from a borrower’s lessees. For example, in case of a single-tenant building it may be easier for the borrower to commit to entering into a green lease with its tenant based on the ROZ green lease-template wording. 

Intensify financial consequences of a green or sustainability breach under the green or sustainability-linked credit agreement

Pursuant to the LMA sustainability-linked loan principles non-compliance with so-called sustainability performance targets should result in financial consequences for the borrowers. In practice such non-compliance results in an increase of the margin. However, this increase is currently very minimal (between 0.05 and 0.10%) and therefore does not have a material financial consequence for the borrower. In our view, a green or sustainability breach may be linked to the default interest rate (normally between 1 and 2%). Following the LMA green loan principles, a green breach is not (directly) linked to a financial consequence. In addition, a green or sustainability breach should (in deviation of current practice, where such a breach only leads to a loss of green / sustainability-linked nature of a loan) be an event of default under the green or sustainability-linked credit agreement with a remedy period to cure such breach and possibly pre-agreed measures to remedy such breach.

Inform borrowers regarding the necessity of ESG-reporting obligations for lenders

Borrowers do not always have sympathy for ESG-reporting obligations, especially not if ESG-requirements come in the form of hard information undertakings and property undertakings in the green or sustainability-linked credit agreement and there is no financial incentive as consideration. In our view that is due to the fact that borrowers are not (fully) aware of the reporting obligations lenders often have under European legislation. Hence, it is important to inform them about the lenders’ own reporting requirements. 

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For more information, please contact one of the members of our team or read the full article in Dutch here.