Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP Sustainability-Linked Loans: Key Considerations in Setting Key Performance Indicators | 50 a laboratory company tried going to market in late 2021 with an SLL based on KPIs linked to the percentage of electric vehicles in its fleet and employee accident rates, but investor resistance forced it to remove the sustainability label from the deal, likely due to the irrelevance of these KPIs to the company's core business. A pharmaceutical company's SLL issued in late 2021, which was aligned with the SLLPs and confirmed by a second-party opinion provider and a letter from the medical non-profit organization, still drew criticism that the KPI performance targets are not ambitious enough. The company's SLL has targets relating to improving medical access in developing countries and reducing greenhouse gas emissions. However, analysts noted that progress in medical access was to be measured by the total number of regulatory submissions instead of the number of regulatory approvals in those countries, and the greenhouse gas emissions target in its SLL does not seem to be a "stretch" for the company to achieve, based on its historical emissions data. While there is no single regulatory authority over SLLs, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority have published reports on greenwashing, and on June 29, 2023, the U.K.'s Financial Conduct Authority published a letter addressed to the heads of ESG and sustainable finance at certain banks and companies raising greenwashing and other concerns over SLLs. In the United States, there is no authoritative body that has established SLL standards, but the SEC has increasingly been focused on ESG-related disclosures from its focus on human capital disclosures. The SEC is increasingly focused on ESG investing as well, and the proposed climate risk disclosure rule and the contemplated board diversity disclosure rule. Although these rules will not serve to regulate the terms of SLLs, the SEC has made it clear that the SEC will scrutinize disclosures that overstate the "ESG impact" of measures that companies take. As a result, companies that seek to tout the commitments underlying a SLL should ensure that these commitments are real and meaningful. While certain of these regulatory activities are not directly enforceable against SLLs, SLLs with vague or weak KPIs may complicate or potentially contradict the rest of the issuer's public disclosure and may end up attracting heightened regulatory and market scrutiny. If the sustainability label does not accurately reflect the borrower's sustainability profile, statements and labels related to the sustainability of a financial instrument may be considered potentially misleading to investors and therefore may be subject to enforcement or private litigation. KPI SELECTION IN RECENT SLL CREDIT AGREEMENTS Compared to non-SLL credit agreements, SLL credit agreements typically include the following additional elements. 1. KPI definitions. A typical SLL defines one or multiple KPIs against which the borrower's performance will be measured. Most SLLs issued in 2023 contain two or three KPIs. As discussed below, the data source, measurement and complexity of KPIs vary significantly.