We recently wrote about the social bond principles (“SBPs”) administered by the International Capital Markets Association in the context of Ireland’s ESG bond offering. Another important step in the development of social financing occurred on 13 April 2021 when the Loan Market Association (“LMA”), the Asia Pacific Loan Market Association and the Loan Syndications and Trading Association (“LSTA”) together published the Social Loan Principles (“SLPs”), voluntary recommended guidelines for social loans.
The SLPs define the social loan market as one which “aims to facilitate and support economic activity which mitigates social issues and challenges, and/or achieves positive social outcomes.” More specifically, social loans are any type of loan instrument made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible social projects. Many non-exhaustive examples of “Social Project” categories are set out in the SLPs, including:
- affordable basic infrastructure;
- access to essential services;
- affordable housing;
- employment generation;
- food security and sustainable food systems; and
- socioeconomic advancement and empowerment.
Social loans must align with the four core components of the SLPs, as set out below.
- Use of Proceeds
The loan proceeds must be used for Social Projects, the benefits of which should, where possible, be assessed, quantified, measured and reported by the borrower, and described in the finance documents and any marketing materials for the financing.
Where funds are to be used, in whole or part, for refinancing, the SLPs recommend that borrowers provide an estimate of the share of financing versus refinancing. Where appropriate, they should also clarify which investments or portfolios may be refinanced, and, to the extent relevant, the expected look-back period for refinanced Social Projects.
A social loan may take the form of one or more tranches of a loan facility, and may be made by way of a term loan or revolving credit facility. For revolving facilities, the parties will need to determine how best to evidence the flow of funds to an agreed social objective when applying the SLPs to such a loan. A revolving credit facility may include a specific social tranche but, where not possible, a borrower may seek to report to the lenders the use of any revolving borrowings and/or identify Social Projects supported by the revolving credit facility.
- Process for Project Evaluation and Selection
The borrower of a social loan should clearly communicate to its lenders:
- the social objective(s);
- the process by which the borrower determines how the project(s) to be funded fit within the eligible Social Project categories; and
- the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material social and environmental risks associated with the proposed projects.
- Management of Proceeds
The proceeds of a social loan should be credited to a dedicated account or otherwise tracked by the borrower in an appropriate manner. The borrower should maintain an internal process for Social Projects. Each tranche applicable to a Social Project must be clearly labelled and the proceeds credited to a separate account or otherwise tracked by the borrower.
- Reporting
Borrowers should make and keep readily available up to date information on the use of proceeds, such information to be renewed annually until the social loan is fully drawn. This should include a list of the Social Projects to which the social loan proceeds have been allocated and a brief description of the projects, the amounts allocated and their expected impact. Information need only be provided to those institutions participating in the relevant social loan.
Review
Where appropriate, an external review of one of the following types is recommended: consultant review; verification by qualified parties, such as auditors or independent ESG rating providers; certification by qualified third parties/certifiers; rating or scoring by qualified third parties, such as specialised research providers or rating agencies.
An external review should be made available to all institutions participating in the social loan on request. When appropriate (taking into account confidentiality and competitive considerations) borrowers should make publicly available the external review, or an appropriate summary, via their website or otherwise.
Self-certification by a borrower, which has demonstrated or developed the internal expertise to confirm alignment of the social loan with the key features of the SLPs, may be sufficient. Nonetheless, borrowers are recommended to document thoroughly such expertise, including the related internal processes and expertise of their staff. This documentation should be communicated to institutions participating in the loan on request and, taking into account confidentiality and competitive considerations, borrowers should make publicly available, via their website or otherwise, the parameters on which they assess Social Projects, and the internal expertise they have to assess such parameters.
Transaction Structures
It is expected that the SLPs may be used together with the SBPs; one example given is the raising of capital by the issuance of social bonds, followed by the use of the SLPs to provide social loans. This would require care to ensure that the principles of both the SLPs and the SBPs are consistently respected.
It is also envisaged that, particularly in the case of public or semi-public institutions, the SLPs may be used to raise an initial social loan, the proceeds of which may be utilised to provide social loans to one or more borrowers. Again, each loan would need to comply with the SLPs to be classified as a social loan.
For further information, please contact Patrick Molloy, Donal O’Donovan, David O’Mahony, Paul Carroll or your usual Matheson contact.