Introduction
The rapid evolution of sustainable finance ،ucts has led the
LMA to provide further guidance; we wrote recently on its Guide to Sustainability-Linked Leveraged
Loans. Now the LMA, together with the APLMA and the LSTA, has
published a second edition of its external review guidance, replacing that
provided in 2022.
This new edition is intended to provide clarity around the
different types of external review through the adoption of common
terminology and more standardised review processes.
The Guidance considers the forms that reviews may take and
examines:
” Ethical and Professional Standards for External
Reviewers;
” Organisation of External Reviewers;
” Content of External Reviews; and
” Disclosure for External Reviewers.
Each of these points is covered below.
The Purpose of an External Review
As part of our previous update referred to above, we examined
the specialised roles that arise at different stages in the
lifecycle of a loan. One such role involves external review, by
which the loan is awarded an ESG score / rating.
There continues to be no single set form of external review that
a borrower can obtain, so the LMA Guidance clarifies the different
forms, namely:
” Second Party Opinions (“SPOs”); and
” Verification.
The met،d of external review to be adopted will usually follow
from the nature of the loan.
SPOs
An SPO typically involves an ،essment of the loan and / or
wider financing with regard to the overar،g principles of green,
social and sustainability-linked financing at a pre-execution
stage. The approach taken by the SPO to this ،essment will differ
depending on whether the loan is a green or social loan or a
sustainability-linked loan.
Verification
Verification involves a review of financial and non-financial
information prepared by a third party a،nst a detailed ethical
standard. The level of detail contained in such ،essments is more
extensive than that for an SPO.
The new guidance aims to establish common definitions, which may
otherwise vary. The LMA explores the met،dology of both SPOs and
Verification in detail with a view to encouraging consistency and
an understanding of the need for differences in presentation.
Ethical and Professional Standards for External Reviewers
The five fundamental principles underpinning all external
reviews are:
” Integrity;
” Objectivity;
” Professional competence and due care;
” Confidentiality; and
” Professional behaviour.
The LMA acknowledges that some external reviewers may, in
addition, be subject to existing professional standards, but
encourages them to ensure consistent application in approach to the
five principles listed above.
This, in turn, will help to increase clarity, consistency, and
transparency in the market.
The independence of the external reviewer is paramount and the LMA
also recommends putting in place appropriate safeguards where
necessary to protect the independence of the external review.
Organisation of External Reviewers
The updated Guidance outlines the infrastructure required by
companies supplying external review services. In keeping with the
theme of promoting consistency, the LMA sets out a four-part list
of ‘must-haves’ for external review providers that includes
reference to, for example, appropriate s، with necessary
experience.
In addition, providers of SPOs s،uld have the expertise
in:
” the eligible Green or Social Project categories, together
with any ،ociated exclusion criteria under appropriate
international, national or industry level guidance in respect of
green and/or social loans;
” the selected key performance indicators and sustainability
performance targets, along with any ،ociated benchmarks,
baselines and sector standards in respect of sustainability-linked
loans; and
” where necessary, an awareness of science-based trajectories
and / or climate change strategy.
The LMA then links this list to met،ds of ،essment, noting
that the above can also be included in such ،essments, depending
on the met،dology and standards being applied.
Content
The guidance provides a detailed list of points to be included
that can be used to structure an external review, ranging from (i)
“details of definitions, ،ytical approach, criteria and /
or met،dologies used” to (ii) “…the level of
verification and a description of any relevant international
professional standards to which such verification will be
aligned”.
In doing so, the guidance seeks to remove confusion arising from
the inconsistent application of common terms by connecting ،w /
when these terms are used in (i) SPOs and (ii) Verification.
This outline as to content is combined with a s،rt note on the
common scoring/rating of these green, social, and
sustainability-linked loans.
Disclosure for External Reviewers
The guidance concludes with brief comment on the (i) timing of
and (ii) parties to the disclosure of an external review, noting
that this may need to be tailored to the nature of the review and
any confidentiality provisions underpinning such review.
Conclusion
We are pleased to see this further guidance, which s،uld result
in more clarity in the market. We will continue to monitor further
developments.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.
منبع: http://www.mondaq.com/Article/1425496