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Shearman & Sterling LLP 51 | Sustainability-Linked Loans: Key Considerations in Setting Key Performance Indicators 2. Pricing adjustments. The borrower's performance on these KPIs then leads to an increase or decrease in loan pricing according to a sustainability pricing grid, typically less than 0.05%. Some SLLs provide for only a pricing reduction if the borrower achieves certain performance targets, whereas others also "punish" the borrower for underperforming by imposing a pricing premium. 3. Verification and Reporting. The borrower reports its KPI performance by delivering an annual sustainability certificate to a sustainability agent. The certificate typically includes the calculation of the pricing adjustment based on KPI performance, data supporting the borrower's reported KPI performance and attachment of a report provided by a sustainability metric auditor. The selection and reporting of KPIs vary significantly within these broad categories. The KPI could be as simple as a self-reported number or as complicated as a mathematical formula that requires support of a third party to calculate. For example, a revolving credit facility issued in April 2023 contains KPIs including the total square footage of LEED-certified buildings and the onsite solar generation and storage in megawatts at the buildings in the companies' managed portfolio, both of which are simply data reported by the borrower. By contrast, in a term loan facility issued in March 2023, the KPIs include the carbon efficiency of collateral vessels, which is calculated by a sustainability coordinator based on a formula, with components including the carbon factor of each type of fuel set out in a guideline provided by an industry organization. KPIs could also be based on assessments made solely by a third party borrower. A revolving credit facility issued in April 2023 determines loan pricing by referring to the Borrower's ESG scores assigned by S&P Global Inc. and MSCI ESG Research LLC. In terms of reporting, most SLLs require the annual delivery of a sustainability certificate (sometimes called a pricing certificate), which typically sets forth the calculation of pricing adjustment based on KPI performance, data supporting the KPI performance calculation (either in the form of data or by reference to a public website) and attachment of a report provided by a sustainability metric auditor. Most SLLs do not specify the identity of the sustainability metric auditor and simply require that they have relevant expertise and are approved by the administrative agent and the required lenders. The SLLs that do specify the sustainability metric auditors tend to select specialized ESG consultants or accountants. But these are by no means uniform practices. In one SLL credit agreement we reviewed, for example, which uses S&P- and MSCI- assigned ESG scores as KPIs, the certificates are only required to be delivered if there is a downgrade or discontinuation of the ESG scores, and no sustainability audit is to be required. RECOMMENDATIONS While market practice for SLLs is still evolving, regulators, investors and the general public have identified certain design features that increase SLLs' greenwashing risks. KPI targets should be relevant and material, as illustrated in the examples described above. In addition, SLLs that only provide a pricing discount to reward the borrower's ESG achievements but not a pricing premium to punish the borrower's lack of progress, which represent a sizable portion of current SLLs, have been criticized for greenwashing in the European Banking Authority's May 2023 greenwashing progress report. 3 3 See European Banking Authority EBA "Progress Report on Greenwashing Monitoring and Supervision," https://www.eba.europa. eu/sites/default/documents/files/document_library/Publications/ Reports/2023/1055934/EBA%20progress%20report%20on%20 greewnwashing.pdf (May 31, 2023).