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Sustainable Finance update: the LMA's Social Loan Principles

04/05/2021
The LMA has published its Social Loans Principles (SLP), which, "aim to create a high-level framework of market standards and guidelines, providing a consistent methodology for use across the social loan market."
 
In our previous article on the topic of sustainable finance and what it means for real estate finance, we explored the background to sustainable finance, which by definition, is any form of financial service that integrates ESG criteria – environmental, social and governance – into business or investment decisions.

The Loan Market Association (LMA), the recognised trade body for the EMEA syndicated loan market, has fully engaged with the ESG agenda, offered support in correspondence with regulators and has its own dedicated Sustainable Lending microsite.

In March we discussed the work the LMA was undertaking on new "Social Loan Principles" (SLP) in response to rapid growth in this space arising as a result of the COVID-19 pandemic. The SLP are to operate in conjunction with the "Green Loan Principles" and the "Sustainability Linked Loan Principles", to promote the development and integrity of these loan products to facilitate and support environmentally sustainable economic activity and to provide a high-level framework of market guidelines.

It is encouraging to see the LMA did not delay and published the Social Loans Principles in April. According to the LMA the SLP, "aim to create a high-level framework of market standards and guidelines, providing a consistent methodology for use across the social loan market, whilst allowing the loan product to retain its flexibility and preserving the integrity of the social loan market while it develops".

The SLP comprise voluntary recommended guidelines, to be applied by market participants on a deal-by-deal basis depending on the underlying characteristics of the transaction, based around the following four core components:-

1. Use of Proceeds
2. Process for Project Evaluation and Selection
3. Management of Proceeds
4. Reporting

The principles bring much needed clarity to lenders and borrowers and will encourage borrowers to demonstrate the clear benefits of the social programme the funding relates to. Where feasible, projects will be assessed, quantified, measured and reported by the borrower and where appropriate, the LMA recommends an external review is conducted.

As previously noted, it is becoming widely accepted that such commitments to sustainable finance are not being made just from an ideological standpoint, but because they make sense from a business perspective.

Public calls to action, governmental initiatives and investor appetite dictate that companies will need to start demonstrating that they are ‘doing their part’ in the sustainable revolution – or risk falling out of favour with customers and investors alike.
 
 
The Banking team at Fieldfisher is available to discuss the LMA's Social Loans Principles and their application.
 

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