New ESG Kid in Town: Global Lending Market Associations Launch Social Lending Principles

In addition to their guidelines for green and sustainability-related lending, the global lending market associations (LMA, LSTA and APLMA) have also jointly published the Principles for Social Lending. This expands the range of sustainable finance products that focus on the “S” component of ESG criteria.

the Principles of social lending (“SLP”) include recommended voluntary guidelines, to be applied by market participants on a case-by-case basis, which recommend transparency and disclosure and aim to promote integrity in the development of the social loan market by clarifying when a lending can be categorized as “for social purposes”.

We highlight for you the key elements of this new standard. Do not hesitate to contact one of our team members for more information.

Social lending vs sustainability lending

Social loans are any type of lending instrument made available to finance or refinance, in whole or in part, new and/or existing eligible “social projects”. Like a green loana social loan is a ‘use of proceeds’ instrument: the proceeds of the loan will be used exclusively for the financing of social projects.

A social loan is therefore different from a Sustainability Linked Loan (with a social objective) because the latter is a performance-oriented instrument. In the case of a sustainability-linked loan, the borrower is incentivized (often through a reduction in margin) to achieve measurable sustainability goals. The financing obtained can however be used for any purpose, including working capital.

Alignment with the principles of social connection

To promote coherence between financial markets, the principles of social lending are based on the Principles of the social link (“NOT”), administered by the International Capital Markets Association (“ICMA”). This is reflected both in the definition of social projects eligible for financing through a social loan and in the definition of target populations for which social projects should seek to achieve a positive social outcome, as well as in the four essential components that establish the SLP. -framework.

These similarities should allow the SLP and SBP to be applied simultaneously without causing inconsistencies or conflicts.

Four essential components of the Social Lending Principles

To be SLP compliant, a social loan must align with the four main components. The first two relate to the appropriate selection of social projects. The last two components, modeled on the Green Loan Principles, should facilitate control to ensure that the funding allocated is properly used for the targeted projects.

1. Use of funds: definition of Social Loan

The qualification of a loan as “social” is determined by the social project for which the funds are intended. For its qualification as a Social Loan, the nature of the underlying credit facility does not matter. In principle, any type of lending instrument made available exclusively to finance or refinance, in whole or in part, new and/or existing eligible social projects can align with the SLP.

No external review is required when assessing the social characterization of the Project. However, depending on the characteristics of the Projects or the internal expertise of the lender and with a view to preserving the integrity of the market, an external review such as verification, certification or rating may be recommended.

“Social”

Social projects directly aim to solve or alleviate a specific social problem and/or seek to achieve positive social outcomes, particularly but not exclusively for one or more target populations.

The SLP recognizes several broad categories of eligibility for “social projects”. In a non-exhaustive list, they explicitly recognize: affordable basic infrastructure (drinking water, sanitation, telecommunications, energy, etc.); access to essential services (education, energy, transport, financial services, etc.); affordable housing; job creation; food security and sustainable food systems and socio-economic progress and empowerment.

The SLP also provides a non-exhaustive list of “target populations” which includes among others: people living below the poverty line; People with Disabilities; immigrants; unemployed; women and/or gender minorities; and the elderly and vulnerable young people. However, it is possible that these target populations are also served by addressing the general public. An example of the latter are social loans that seek to channel capital towards positive social outcomes related to COVID-19 that affect the general public.

“To lend”

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 a revolving credit facility.

Where funds are to be used, in whole or in part, for refinancing, borrowers are recommended to provide an estimate of the share of financing versus refinancing. Where applicable, they should also specify which investments or portfolios can be refinanced and, where possible, the expected look-back period for refinanced social projects.

When applying the SLP to a revolving credit facility, the parties will need to determine how best to demonstrate the flow of funds to an agreed social goal. The revolving credit facility may include a specific social tranche, but where this is not possible a borrower may seek to report to lenders the use of any revolving borrowing and/or identify social projects supported by the revolving credit facility .

2. Project evaluation and selection process

To facilitate a proper assessment by the lender, the borrower of a Social Loan must clearly communicate:

  • what social objective(s) the project aims to achieve;
  • how the borrower determines that the project falls within the SLP categories of social projects; and
  • what eligibility or exclusion criteria are used and any other processes applied to identify and manage potentially significant social and environmental risks associated with the proposed project(s).

3. Revenue management

Similar to green loans, social loan proceeds should be credited to a dedicated account or otherwise tracked by the borrower as appropriate. Management of the funds must be attested by the borrower through a formal internal process related to the borrower’s lending and investment operations for social projects.

When a social loan takes the form of one or more tranches of a loan facility, each tranche applicable to the social project must be clearly identified, the proceeds of this or these tranches credited to a separate account or followed by the borrower in an appropriate manner. manner.

4. Reports

Borrowers must provide and keep up-to-date information on the use of funds, this information to be renewed annually until the social loan is fully used, and if necessary thereafter in the event of significant developments. This information should include:

  • a list of social projects to which social loan proceeds have been allocated;
  • a brief description of the project(s);
  • the sums allocated; and
  • their expected impact.

The information should only be provided to institutions participating in the social loan concerned.

We hope these guidelines will provide an additional tool in the ESG toolkit to effectively promote socially responsible projects and activities.

Priscilla C. Carnegie