Structuring ESG Provisions in Finance Transactions: Performance Targets, Key Indicators, Reporting Obligations, Remedies

Borrower Incentives, Sustainability Washing and Other Lender Concerns

Recording of a 90-minute premium CLE video webinar with Q&A


Conducted on Thursday, July 15, 2021

Recorded event now available

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Course Materials

This CLE course will discuss the incentives behind ESG-linked loans for both borrowers and lenders and examine loan provisions and documentation. The panel will discuss the drafting of key performance indicators (KPIs) and reporting obligations, address the failure to meet ESG performance targets, and identify and prevent sustainability washing.

Description

Sustainability-linked loans, commonly referred to as "ESG-linked loans," incentivize the borrower's commitment to achieving predetermined sustainability performance targets (SPTs) that are measured by using KPIs. When these KPIs are met, the borrower may receive a discount in its loan pricing or other benefits. Lenders can also benefit by building relationships with investors/funds that value ESG investing. Still, the parties must agree on the performance targets and how to measure performance.

When determining SPTs and KPIs, counsel must consider whether the KPIs can be achieved on an incremental basis and whether the KPIs should be revisited periodically to assess their suitability. Counsel must also address reporting requirements; the level of detail and frequency will be based on the SPT's nature. If multiple or complex KPIs are being used, a third-party reporter with knowledge of the complexities involved might be required.

The failure to meet a KPI will typically result in an inability to access the incentivized discount but not an event of default. To preserve ESG incentives, the borrower will want to reinstate the pricing discount at such time as the KPI is satisfied on a subsequent reporting date. Misrepresentation in the reporting related to KPI compliance may trigger an event of default, particularly where there is an element of fault on the borrower.

Sustainability washing occurs when a fund's sustainability credentials are inaccurate, misleading, or exaggerated. To avoid sustainability washing, funds and lenders should ensure that they are transparent. In particular, the SPTs are adequately ambitious and meaningful and are adequately monitored and reported.

Listen as our authoritative panel discusses the nuances of documenting and administering ESG-linked loans.

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Outline

  1. Why funds and lenders are increasingly including ESG criteria in commercial loans
  2. Setting sustainability performance targets and key performance indicators: factors to consider
  3. Determining reporting requirements and future adjustments
  4. Failure to meet a KPI and subsequent "cure" provisions
  5. Sustainability washing

Benefits

The panel will review these and other relevant issues:

  • What are the benefits to borrowers and lenders of addressing ESG considerations in a loan transaction?
  • Types of ESG targets to consider, and how to measure them
  • Who should report on KPIs? How can accuracy be verified?
  • How should the failure to meet performance targets be addressed in the loan documents?
  • What is sustainability washing, and how can it be prevented?

Faculty

McShane, Katie
Katie McShane

Attorney
Cadwalader Wickersham & Taft

Ms. McShane is an associate in Cadwalader's Finance Group, resident in the New York office. Her practice is...  |  Read More

Misson, Wesley
Wesley A. Misson

Partner
Cadwalader Wickersham & Taft

Mr. Misson is a partner in the firm’s Finance Group. His practice focuses on fund finance, and he has represented...  |  Read More

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