Corporates of all sizes (and their key stakeholders) are asking how they should respond to an ever growing list of environmental, social and governance (ESG) concerns, in a way that both delivers positive outcomes for society as a whole, but also for their business, clients, management, employees and investors. What has become clear over the past 12 months is that paying “lip-service” to ESG concerns is no longer enough – and in fact can be a dangerous game for corporates to play if their public policies and statements are not supported by corporate conduct and investment decisions which produce measurable ESG benefits. Corporates that get this wrong are often slugged with the dreaded “greenwasher” tag, causing material reputational damage, and even leading to potential liability for those corporates and their directors.

This same dynamic is also increasingly relevant in the rapidly growing Australian Sustainability Linked Loan (SLL) market, with triumphant press releases celebrating landmark SLL transactions from the parties involved one day, being publicly called in to question the next for not being sufficiently ambitious or impactful in the minds of other market observers. As in all things, perception is reality in the eye of the beholder (or the public press!) and such accusations (even if unfounded) can be just as damaging for the reputation of a borrower (and its SLL lenders) as well supported ones. Such reputational damage could mean that a borrower on the receiving end of “greenwashing” charges finds itself jumping through additional ESG reporting and external review hoops in their SLL documents for relatively limited reputational benefit during the term of their SLL financing (not to mention that they may have difficulty refinancing with another SLL package at maturity).

So, how does a corporate borrower (or its sustainability coordinating banks and other advisors) avoid the accusations of “greenwashing” on their exciting new SLL transaction? The answer to that question is to pre-empt, and structure around, the factors that drive such criticism in the context of a SLL. To assist borrowers, lenders and advisors in this regard, we have set out below some key considerations and suggestions for borrowers to take into account when considering and structuring a SLL.

  • SLL KPIs should be specific to the ESG concerns of the business – the selection of SLL KPIs that do not bear a sufficient relationship to the key ESG concerns relevant to the business or industry in question are likely to attract criticism. Successful SLLs will include KPIs that align with a robust and well considered corporate ESG policy or strategy that is prepared and in place before SLL KPIs are formulated. Such a policy can take several months to properly formulate. As such, borrowers that are considering entering into the SLL market in the short to medium term should be looking to develop and refine such internal ESG policies and functions now.
  • SLL KPIs should be “worthy” ESG considerations – a variation of the above, the KPIs selected in a SLL should steer clear of ESG issues (or purported solutions to them) which are seen to be of questionable ESG benefit, or which a borrower should be satisfying in the ordinary course. For example a carbon neutrality KPI which can be met through the purchase of low quality carbon offsets, or a KPI which merely requires the business to comply with laws and regulations already binding on it, or to meet basic standards of corporate conduct. Observers will view such KPIs harshly in assessing a SLL package.
  • SLL KPI targets should be “ambitious” – the requirement for “ambitious” targets is expressly included in the APLMA SLL principles, so this is really a baseline requirement for SLLs, however even where the SLL KPIs selected are the “right ones” for the business a borrower may face criticism if the KPI targets are not set at a level that is seen by observers as sufficiently impactful. It is  not enough for a borrower to simply continue along its existing achievement trajectory in relation to a particular SLL KPI. Market observers will expect that KPI targets are a “stretch” which require positive steps to meet.
  • Borrowers from “brown” sectors need to work harder – in our experience, borrowers from “brown” sectors (eg, mining, oil and gas, non-green energy, transport etc.) seeking to implement a SLL structure will be judged more harshly than corporate borrowers in other “greener” sectors. Fair or not (and in fact, ESG improvement in “brown” borrowers provides the greatest potential for ESG impact), it is a reality that stakeholders and market observers will pay much closer attention to any steps, and public statements, of such borrowers on ESG (and particularly environmental) matters. All we can say about this is that borrowers in the “brown” sectors need to work harder to structure their SLL financing so that they are beyond reproach, particularly on the three points above. Our other suggestion for these borrowers is to be measured in their publicity regarding their new SLLs, as bold, celebratory statements in the press can often invite closer scrutiny, and (sometimes unjustified) criticism, from stakeholders and other market observers with axes to grind.

A prescient Kermit the Frog once pointed out, “it’s not easy being green” and it isn’t any easier for corporates to respond to the ESG challenges many are currently confronted with. Whilst SLLs are an exciting and powerful tool to incentivise positive ESG outcomes, borrowers must ensure that they do not create more ESG headaches for themselves by becoming known as a “greenwasher”. The above provides a few thought bubbles for borrowers on how to avoid these pitfalls, but to ensure your SLL is successfully structured, we recommend a prospective SLL borrowers engage early and fully with their internal sustainability compliance functions, as well as with their external advisors, including, sustainability consultants, external reviewers, sustainability coordinating banks and legal advisors.


Authors: Stuart Cormack (Partner), Travers Morony (Lawyer) and Justin Sprogis (Knowledge Lawyer).

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