The Credit Markets Association, the recognized trade organization for the syndicated loan market in EMEA, recently published its Social Credit Principles (SLP). Similar to the Green Lending Principles (GLP), SLPs have been drafted with the aim of creating a high-level framework for market standards and guidelines, while providing a consistent methodology for use in the social loan market, allowing the loan product to remain flexible and maintain the integrity of the social loan market in the process of its development.
Who are they?
The SLP is a set of voluntary guidelines that are recommended for syndicated loan market participants, depending on the underlying characteristics of the transaction. The SLP is based on transparency and disclosure, which aims to ensure integrity in the development of the social loan market by clarifying cases in which a loan can be categorized as “for social purposes”. It is assumed that SLPs are used by the market to provide a framework in which the flexibility of a loan product can be maintained. The social loan product should be regularly reviewed in the light of the development and growth of social loans. SLPs are designed to provide the information needed to increase capital allocation for social financing.
What is Social Loan?
The number of registered social loans has increased over the past five years, but there has been a surge in activity following the Covid-19 pandemic as banks and financial companies sought to help their clients with capital needs, including layoffs. payments and operating expenses of businesses struggling with lockdown restrictions.
Social loans are defined as any type of loan instrument that is provided solely to finance or refinance, in whole or in part, new and / or existing eligible “social projects”. Social projects may fall under the non-exhaustive indicative eligibility categories listed below:
Basic infrastructure available (e.g. clean drinking water, sewerage, sewerage, transportation, energy, basic telecommunications). Access to essential services (e.g. education and training, public health / health, energy to respond to public health emergencies (including electricity), finance and financial services, other government agencies serving selected populations (and / or low / middle income countries) Affordable housing Job creation and programs designed to prevent and / or reduce unemployment caused by socioeconomic crises, including through the potential impact of small and medium-sized enterprise finance and microfinance. and sustainable food systems (e.g. physical, social and economic access to safe, nutritious and sufficient food to meet dietary needs and requirements; sustainable agricultural practices; reducing losses and waste food; and increasing productivity of small producers). Socioeconomic progress and empowerment (e.g. equal access to control over assets, services, resources and opportunities; equitable participation and integration into the market and society, including reducing income inequality).
In many cases, social projects will differ and may fall under more than one suitable project category, as outlined above, but social loans must also meet the four main components of SLPs, as outlined below. Social loans should not be considered interchangeable with loans that do not meet the four main components of SLP.
Main components of SLP
SLP provides a clear and transparent framework with the aim of providing credit market participants with an understanding of the characteristics of social credit based on the following four key components:
1. Use of proceeds
The main determinant of social lending is the use of loan funds for social projects – this should be adequately described in financial documents and any marketing materials used for financing.
Social projects must provide clear social benefits that the borrower will assess, quantify, measure and report on. If funds are to be used for refinancing, it is recommended that borrowers provide an estimate of the proportion of financing versus refinancing. This non-exhaustive list of social projects is intended to cover the most common types of projects supported and expected to be supported by the social credit market. Social projects are directly aimed at solving / mitigating a specific social problem and / or achieving positive social results, especially, but not exclusively, for the target group (s) of the population.
2. The process of evaluating and selecting projects.
The process here requires the borrower to clearly communicate the following to its lenders:
social goal (s); the process by which the borrower determines to what extent the funded projects meet the criteria for eligible social project categories; and relevant eligibility criteria, including any exclusion criteria or any other process used to identify / manage potentially significant social and environmental risks associated with proposed projects.
Borrowers are encouraged to post this information in the context of their overall sustainability objectives, strategy, policies and / or processes. Borrowers are also encouraged to disclose any social standards / certifications mentioned when selecting a project.
3. Management of receipts
Social loan proceeds must be credited to a special account or tracked by the borrower as appropriate. The management of the proceeds must be validated by the borrower through a formal internal process related to the borrower’s lending / investment transactions for social projects. This is necessary to maintain transparency and ensure product integrity. If the social loan is provided in tranches, each tranche must be clearly identified by the proceeds from that tranche, credited to a separate account / tracked by the borrower as appropriate. Borrowers are encouraged to establish an internal management process by which they can track disbursements for social projects.
Borrowers should continually update the available updated information on the use of proceeds, which should be updated annually until the social loan is fully utilized, and as necessary thereafter in case of significant developments. This should include:
- a list of social projects for which the funds of the social loan were directed;
- brief description of projects; as well as
- amounts allocated and their expected impact.
If confidentiality agreements, competitive considerations, or a large number of baseline projects limit the amount of detail that can be provided, SLP recommends that information be presented in general terms or based on an aggregated portfolio of projects. Please note that this information is provided only to institutions participating in the social loan.
Transparency is particularly important in communicating the expected impact of projects, and accordingly SLP recommends the use of qualitative performance indicators and, where possible, quantitative performance indicators, including disclosure of the key underlying methodology and / or assumptions used in any quantification. Borrowers who are able to track the impacts achieved are encouraged to include them in regular reports.
There are other ways that a borrower can assess its compliance with the SLP, including external reviews, the results of which can be made available to lenders. An external review can be partial or complete to assess compliance with all 4 main components of the SLP and should be available upon request to all institutions involved in the social loan. When appropriate, and taking confidentiality and competition considerations into account, borrowers should make an external review or related resume publicly available through their website or otherwise.
Here are some examples of external reviews:
- Consultant reviews – i.e. when a borrower can seek advice from a consultant with recognized experience in their field.
- Check – the social loan of the borrower can be reviewed by independent qualified parties such as auditors or independent rating agencies ESG1. The check can be aimed at compliance with internal standards or requirements imposed by the borrower.
- Certification – the borrower’s social credit can be certified according to an external assessment standard. The assessment standard defines the criteria and compliance with such criteria and is verified by qualified third parties / certification bodies.
- Rating or scoring – the borrower’s social loan can be assessed by qualified third parties such as specialized research organizations or rating agencies.
Self-certification is also possible for a borrower when the borrower has demonstrated or developed internal expertise to confirm that a social loan meets the SLP’s key characteristics.
The idea behind the SLP was to benefit the syndicated loan market as a whole. The aim of the LMA is to provide a recognized basis for recognizing loans from lenders as social and / or green loans in order to develop the market in the best possible way in a world affected by climate change. The LMA intends to conduct further analysis of the impact and use of SLP and GLP later this year to measure and update market practices.
As a result, it is increasingly important and widely recognized that a commitment to sustainable lending is not just a passing trend. New and existing lenders and borrowers in the syndicated loan market need to be able to demonstrate that they take this issue seriously and that it actively forms a key component of their business. If they don’t, they risk being left behind competitively and financially in a booming industry where they can’t catch up.