Selection of KPIs
Sustainability-linked loans look to improve the bor-
rower’s sustainability profile over the term of the loan. They
do so by aligning loan terms to the borrower’s performance
which is measured using one or more sustainability KPIs
that can be external and/or internal.
The credibility of the sustainability-linked loan market
will rest on the selection of the KPI(s). It is important to the
success of this instrument to avoid the proliferation of KPIs
that are not credible.
The KPIs should be material to the borrower’s core
sustainability and business strategy, and address relevant
environmental, social and/or governance (ESG) challenges
of the industry sector.
The KPIs should be:
• relevant, core and material to the borrower’s overall
business, and of high strategic significance to the
borrower’s current and/or future operations;
• measurable or quantifiable on a consistent
methodological basis; and
• able to be benchmarked, i.e. as much as possible using
an external reference or definitions to facilitate the
assessment of the SPT’s level of ambition.
A clear definition of the KPI(s) should be provided and
should include the applicable scope or parameters, as
well as the calculation methodology, a definition of a
baseline and be benchmarked against an industry
standard where feasible.
Calibration of SPTs
The process for calibration of the SPT(s) per KPI is
key to the structuring of sustainability-linked loans, since it will
be the expression of the level of ambition the borrower is
ready to commit to.
The SPTs should be set in good faith and remain relevant
(so long as they apply) throughout the life of the loan – one of
the aims of sustainability-linked loans is to encourage ambi-
tious, positive change through incentives and this should form
the basis of target setting.4
The SPTs should be ambitious, i.e.:
• represent a material improvement in the respective KPIs
and be beyond a “Business as Usual” trajectory;
• where possible be compared to a benchmark or an
external reference;
• be consistent with the borrower’s overall sustainability/
ESG strategy; and
• be determined on a predefined timeline, set before or
concurrently with the origination of the loan.
Market participants recognise that any targets should be
based on recent performance levels and be based on a
combination of benchmarking approaches::
• the borrower’s own performance over time, for which a
minimum of 3 years, where feasible, of measurement
track record on the selected KPI(s) is recommended; and
• the borrower’s peers, i.e. the SPT’s relative positioning
versus its peers’ where available (average performance,
best in class performance) and comparable, or versus
current industry or sector standards; and/or
• reference to the science, i.e. systematic reference to
science-based scenarios, or absolute levels (e.g. carbon
budgets), or to official country/regional/international
targets (Paris Agreement on Climate Change and net
zero goals, Sustainable Development Goals, etc.) or to
recognised best-available-technologies or other proxies
to determine relevant targets across ESG themes.
Disclosures on target setting should make clear reference to:
• the timelines for the target achievement, including the
target observation date(s)/period(s), the trigger event(s)
and the frequency of review of the SPTs;
• where relevant, the verified baseline or science-based
reference point selected for improvement of KPIs as well
as the rationale for that baseline or reference point to be
used (including date/period);
• where relevant, in what situations recalculations or
pro-forma adjustments of baselines will take place;
• where possible and taking competition and confidentiality
considerations into account, how the borrower intends to
reach such SPTs, e.g. by describing its ESG strategy,
supporting ESG governance and investments, and its
operating strategy, i.e. through highlighting the key levers/
type of actions that are expected to drive the performance
towards the SPTs as well as their expected respective
contribution, in quantitative terms wherever possible; and
• any other key factors beyond the borrower’s direct control
that may affect the achievement of the SPTs.
Appropriate KPIs and SPTs should be determined and set
between the borrower and lender group for each transaction.
A borrower may elect to arrange its sustainability-linked loan
product with the assistance of one or more “Sustainability
Coordinator(s)” or “Sustainability Structuring Agent(s)” and,
where appointed, they will assist with negotiating the KPIs and
calibrating the SPTs with the borrower.
It is recommended, where appropriate, that borrowers
seek input from an external party, via e.g. a pre-signing
Second Party Opinion, as to the appropriateness of their KPIs
and SPTs as a condition precedent to the relevant sustainabil-
ity-linked loan product being made available. In their pre-
signing Second Party Opinion, external reviewers should as-
sess the relevance, robustness and reliability of selected
KPIs, the rationale and level of ambition of the proposed
SPTs, the relevance and reliability of selected benchmarks
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2
Sustainability-Linked Loan Principles March 2022
4. Borrowers should also note the existing and ongoing work on environmental and
social impact metrics by the Green Bond Principles (GBP) that may help identify
relevant SPTs and calculation methodologies. Impact metrics guidance of the GBP
is available at: https://www.icmagroup.org/green-social-and-sustainability-bonds/
resource-centre/.
5. The SLLP encourage external reviewers to disclose their credentials and relevant
expertise and communicate clearly the scope of the review(s) conducted.
VIP
