The Emerging Role of a Sustainability Coordinator in Leveraged Financial Transactions – A Brief Update | Akin Gump Strauss Hauer & Feld LLP
[co-author: Ruth Butterworth]
As we noted previously, in the context of the European Green Deal and related sustainable finance initiatives, environmental, social and governance (ESG) factors are increasingly integrated into the documentation of high yield loans and bonds. As a result, the concept of ‘sustainability coordinator’ has emerged in the area of leveraged finance, and the European Lending Market Association (LMA) has recently published introductory guidance to this relatively new role and evolving (available hoursbefore).
The responsibilities of a sustainability coordinator, as well as the way these responsibilities are documented, are described as different between transactions and lending institutions. It is suggested that a sustainability coordinator could be appointed as part of a syndicated loan transaction where the parties intend to structure all or part of the loan as a green, social and/or linked to sustainability (GSS) or when it is expected that a loan could be converted into a GSS loan at a later date.
It is expected that the coordinator will come from one of the main lenders of the transaction and, in certain cases, will also fulfill the role of arranger or agent. In addition, the coordinator is often expected to be primarily involved prior to signing a facility, and their role may include:
- Help negotiate Key Performance Indicators (KPIs) and associated Sustainability Performance Goals (SPTs).
- Liaise with third parties regarding the choice of KPIs and SPTs and help align them with market standards.
- Assist in the preparation of documents to present the GSS loan structure to lenders and help manage related dialogue between borrowers and lenders.
In some cases, for example, when a loan needs to be converted to a GSS loan after signing or when KPIs and SPTs need to be recalibrated during the life of the loan, a sustainability coordinator may have a similar function after origination .
The LMA’s introductory guidelines identify high-level principles to consider when parties intend to appoint a sustainability coordinator. For example, while the sustainability coordinator may play an important role in defining the reporting obligations that are ultimately reported at a facility and how progress against negotiated KPIs and SPTs will be measured (this which, in turn, could impact pricing), parties are often excluded from relying on any confirmation from the coordinator regarding compliance with internal benchmarks/policies. Instead, periodic reports on sustainability metrics over the life of the installation will instead be collected by the agent and verified with an independent third party. In addition, coordinators will generally expect protections against potential liability to borrowers and/or lenders. The scope of this language will depend on the particular role assumed by the coordinator, but may include arranger- or agent-type protections (for example, the coordinator may rely on any statement that it considers to be authentic, correct and duly authorized). Parties may also wish to consider whether obligors should be required to give additional representations and warranties to the sustainability coordinator, for example regarding the accuracy of the information provided, or whether there are relevant regulatory restrictions on the marketing of a loan as a GSS.
Although standard practices for appointing a sustainability coordinator are yet to come, the development and market recognition of a role dedicated to improving the integrity and viability of green finance and related to sustainability are positive. We will continue to monitor future LMA publications in this regard.