Investors are increasingly focusing on environment, social and governance (ESG), and more and more companies are publishing these statistics. Reporting on ESG metrics is challenging because there is a lack of consistency in the marketplace on what an ESG is, how to measure how successful ESGs are, and how that success is rewarded. In debt capital markets, industry trading groups are working to provide market participants with an ESG reporting framework to consolidate these ESG reporting efforts and move towards a more uniform reporting standard. The latest proposed mechanism is the Social Credit Principles published by the Asia-Pacific Credit Market Association, the Credit Market Association and the Syndicated Loan and Trade Association.
Here are six key points to be aware of today in relation to the Social Credit Principles:
Who are they?
The Social Credit Principles (SLP) are voluntary guidelines issued in April 2021 by several prominent credit market associations to provide borrowers and lenders with a framework for identifying, measuring and reporting loans used to finance or refinance a Social Project (as described in SLP). SLP aims to ensure transparency, disclosure and accountability with the ultimate goal of stimulating the growth of lending aimed at social projects by providing investors with the means to verify that their investments are being used effectively.
Why are they important?
There is a growing demand for investments that unequivocally support positive outcomes for society as a whole, as well as marginalized demographics. The International Capital Markets Association (ICMA) has been publishing its Social Bonds Principles (SBP) for several years now. According to Bloomberg, the issuance of bonds that directly identify themselves as “social bonds” of the type defined by the SBP grew eightfold to $ 154 billion in 2020. The credit market followed the lead of the ICMA and created the SLP. The demand and reaction from industry groups are part of a widely reported trend towards greater investor attention to environmental, social and governance (ESG) issues and reporting by an increasing number of companies. The scope of what constitutes ESG and how it is measured remains a challenge for market participants. SLP is one attempt to move towards a consistent methodology for use in the social loan market.
What are the basic principles of SLP?
1. The borrower must use the funds of such a loan for the Social Project.
2. The borrower of the social loan must clearly communicate to the lenders
(a) Social goals
(b) The process of determining how the project fits into an eligible social project category, and
(c) Borrower Eligibility Criteria for Determining an Eligible Social Project
3. The borrower must deposit funds in a specific account and track them clearly and appropriately. 4. The borrower must update records of the use of proceeds and how funds are allocated for each social project. If possible, the report should include quantitative indicators of the effectiveness and impact of the social project on the target population.
What is a social project?
SLP describes social projects as projects that “directly address or mitigate a specific social problem and / or achieve positive social outcomes, especially, but not exclusively for the target group (s)”. A social problem threatens, hinders or harms the well-being of society or a specific target group. ” The SLP provides a non-exhaustive list of potential target populations and recognizes that the definition of the target population can vary and in some cases may be the general public.
Does social loan require third party verification?
The SLP recommends third-party external review where appropriate, but the borrower’s self-certification may in many cases be sufficient to confirm that the borrower’s project meets the social project requirements under the SLP. A consultant with recognized experience can check the process of choosing a social project or give his opinion on this matter. Auditors or independent providers of ESG ratings can also verify that certain projects comply with the company’s internal standards. In some cases, there may be a certification process that the borrower can go through to validate their internal processes or reporting procedures. Following other schemes that work similarly to SLPs, many participants have found that investors and lenders value (and often require) independent third-party scrutiny and public reporting on both the use of funds and the progress made towards the stated objectives.
Are there any other options if my company does not have a suitable social project or social loan?
Yes. SLPs are the latest addition to a group of structures published by debt capital markets industry groups. The SLP is structurally similar to the Green Lending Principles (February 2021) and the Sustainable Loan Principles (May 2020), which were previously published by the same industry association working group as the published SLP. If your company does not have a suitable social project under the SLP, it may have a green project or may be a candidate for setting sustainability goals that can be tied to the pricing of a sustainability loan. The SLP, the Green Loan Principles and the Sustainability Loan Principles also have parallel frameworks that can be used by bond issuers.
Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.Review of National Legislation, Volume XI, Number 196