![Blockchain law: Beyond our borders](https://www.nortonrosefulbright.com/-/media/images/nrf/nrfweb/knowledge/publications/blockchain-law---redressing-cryptocurrency-losses-through-negligence-claims/blockchain-law-beyond-our-borders.jpg?w=265&revision=bbb8762c-1e55-4c6d-8b3c-b686d8bbb009&revision=5250211908627387904&hash=28EBB24CD24E8F2A7A594093138B1CE7)
Publication
Blockchain law: Beyond our borders
Legal developments concerning blockchain and digital assets are not limited to the English-speaking world or to common-law jurisdictions.
Global | Publication | February 2024
Following the release of its sustainability-linked loan term sheet provisions in October 2023, the Loan Market Association (the LMA) published updated guidance (the Guidance) outlining best practice for the external review limbs of, among others, the Sustainability-Linked Loan Principles (the SLLP) toolkit on 25 January 2024.
The Guidance is intended to work alongside the Green Loan Principles and the Social Loan Principles. However, this article will focus on its applicability to the SLLP specifically.
The external review has a central role in ensuring credibility for third parties in sustainable lending transactions. 1
Due to the variety of available types of external review in both scope and underlying methodology, the Guidance looks at the three following overlapping forms of review, in turn:
Second Party Opinion (SPO)
An SPO will most commonly be provided prior to execution, although in rare instances it may be requested post-execution.
Pre-execution
The SPO should be transaction-specific but will usually involve an assessment prior to execution which establishes how closely the project’s sustainability-linked loan framework aligns with the SLLP. To assess alignment, the SPO may look to borrower-specific information like long-term sustainability targets and/or any specified taxonomy.
For sustainability-linked loans, SPO providers may, amongst other things, assess:
a. the “relevance, materiality, robustness and reliability” of key performance indicators (the KPIs) that have been chosen for the transaction both from a sector and/or borrower perspective;
b. the “rationale and level of ambition” of the sustainability performance targets (SPTs) chosen for the transaction; and/or
c. the “relevance and reliability” of the benchmarks and baselines chosen to measure the KPIs and SPTs. This would also assess the “credibility” of the framework for achieving these objectives through analysis and assessment against external references.
Post-execution
Exceptionally, an SPO may be provided following execution of the transaction, as a “condition subsequent” to drawdown. Here, the sustainability-linked loan classification would only be granted subject to the post-execution SPO being provided.
Verification
This process involves a high-level review by an independent third party using a detailed set of external criteria. This is usually seen as more detailed than an SPO and differs in that it uses a specified external standard.
In sustainability-linked transactions, independent and external verification of the borrower’s performance against the respective SPT for each KPI is mandatory (at least once per year) until the point of the last SPT trigger event as set out in the loan documentation.
The Guidance discusses three types of verification as market standard:
Assurance
The LMA cites two levels of assurance used for sustainable lending transactions:
Assurance will often, but not always, contribute towards an audit report.
Attestation
The Guidance discusses attestation or assertion-based engagement as an additional verification option. Here the external reviewer would provide an assurance conclusion in the form of an assertion which is founded on the evaluation of the subject matter. This is not common for sustainability-linked loans but can be used for green and social loans.
Certification
The borrower may decide to have one or several of the following aspects certified against the selected criteria:
Certification would produce a score or label that would, in turn, facilitate greater comparison for third parties. The score/label may also be linked to the definition of specific KPIs in sustainability-linked loan transactions.
Sustainability-Linked Loan Scoring/Rating
Following the external review, a rating or score may be provided based on the sustainability-linked loan. The subject of this rating/scoring may be:
Any rating provider should explain their methodology clearly to the borrower. It is integral to the robustness of the rating that it is assessed by a recognised third party.
The LMA has suggested five central ethical and professional principles that should underpin the work of the various bodies tasked with an external review:
The reviewers must be independent from the borrower’s adviser for the sustainability-linked loan framework and should not be an affiliate.2 The external reviewer may already be subject to their own internal professional standards that coalesce with the LMA’s suggestions.3
The LMA suggest the following pre-requisites for any external reviewer – it should:
Where an SPO is required for a sustainability-linked loan, the external reviewer should have expertise in the chosen KPIs, SPTs and other relevant SLLP architecture for the sustainability-linked loan transaction. It may also be important to have expertise in any relevant climate change strategies or governance and science-based methodologies for review.
The LMA establishes a set of points that external reviews should, at a minimum, include:
Second Party Opinion
If an SPO is included, the LMA recommends outlining the scope of the SPO clearly. Within the scope, the SPO should indicate whether it is complete (assessing alignment of the loan’s framework with the key aspects of the SLLP) or partial (assessing alignment with a selection of the key aspects of the SLLP).
Verification
Any verification report should include as a minimum:
Where information has already been verified for an alternative audit or regulatory process, it is unlikely that this will need to be re-verified for the SLLP.
Sustainability-Linked Loan Scoring/Rating
The report may produce a score or rating that is linked to a specific benchmark. This should be distinct from credit-rating used for the transaction.
The LMA suggests that the external review should be released to all finance parties in accordance with the terms of the loan documentation, the SLLP and guidance documents. The release of a publicly available external review is encouraged, where appropriate, but any disclosure should be sensitive to confidentiality and competition points within the transaction.
The update to its external review guidelines evidences the LMA’s continued efforts to create a shared and consistent language between the relevant players in sustainability-linked loans. However, flexibility remains central to the LMA’s advice, as evidenced by the variety of standards and frameworks mentioned in the Guidance. As a result of this flexibility, lenders should think clearly about the requirements of their deal and tailor the scope of the external review appropriately. As sustainability-linked and green loans continue to proliferate in global markets, it is possible that external reviews, and even the loans themselves, may become subject to regulation. In the meantime, the Guidance provides a useful reference guide for the market on external reviews.
Where this is the case, the LMA encourages the external reviewer to consider the relevance of the following standards that are deemed to be industry-wide in scope:
Publication
Legal developments concerning blockchain and digital assets are not limited to the English-speaking world or to common-law jurisdictions.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023