Impact finance: social loans and principles powering positive change

Eligible Finance Products for SLP categorisation

• The SLP now clearly apply to contingent loan instruments, with bonding lines, guarantee lines and letters of credit specifically referenced. This also extends to revolving credit facilities.
• The SLP also provide that a social loan may take the form of one or more tranches within a loan facility.

• This change reflects developments in the markets, where major banks have been wanting to label trade finance products as social.
• A facility cannot be labelled as wholly social if it includes both social and non-social tranches. The social label will only apply to the tranche that aligns with the four core components of the SLP.

Clarification that ‘use of proceeds’ includes assets and related expenditures

• Social Projects now include assets, investment and other related and supporting expenditures such as R&D.
• The categories of eligible Social Projects have been expanded.

This tackles a concern that parties have had for some time.

Process for project evaluation’ and selection improved

• Borrowers are now more clearly encouraged to provide full information on processes to identify and manage perceived, potential or actual environmental and social risks associated with the project.
• Also requires borrowers to provide information on how its project aligns with different taxonomies, external standards and certifications.
• Borrowers now need to communicate both the social objective and the target population of their Social Projects.

This reflects the direction of travel for green taxonomies currently being developed by regulators such as the EU Taxonomy and the EU’s Non-Financial Reporting Directive.

Management of proceeds for mixed purpose facilities

• Where a loan facility has one or more tranches (i.e. one tranche that is applicable to the Social Project), that tranche must be clearly labelled as social, with proceeds of the social tranche credited to a separate account or otherwise tracked in an appropriate manner.

The proceeds can be managed per loan or on an aggregated portfolio approach.

Additional documentary considerations

Added the following as important considerations for drafting social loans:

• disclosure;
• conditions precedent;
• no communication;
• social loan coordinator; and
• declassification.

Discussed in more detail below.

Affordable basic infrastructure (e.g. clean drinking water, sanitation, transport, energy)

Access to essential services (e.g. education and vocational training, public healthcare, financing and financial services)

Affordable housing

Employment generation and programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises

Food security and sustainable food systems (e.g. physical, social and economic access to safe, nutritious and sufficient food, resilient agricultural practices, reduction of food loss and waste, and improved productivity of small-scale producers)

Socioeconomic advancement and empowerment (e.g. equitable access to and control over assets, services, resources and opportunities, equitable participation and integration into the market and society, including reduction of income inequality)

The social objectives and the target population of the Social Project

Purpose/use of proceeds provisions  – These provisions should clearly set out the eligible Social Project categories.

Information undertakings/covenants – Undertakings/covenants relevant to the Social Project should be clearly identifiable in the loan or facility agreement.

Representations – The borrower should be under an obligation to represent the accuracy of any reporting.

Disclosure – Given the increasing regulatory requirements on financial institutions to make ESG disclosures and subject to any confidentiality requirements, lenders may wish to obtain express consent from the borrower for the lenders to disclose the existence and the details for any social transaction for both internal reporting and external disclosure purposes.

Conditions precedent – Details of any conditions precedents required to confirm alignment of the social loan with the SLPs and/or any other social conditions precedents should be included in the loan or facility agreement.

No communication – Loans and facility agreements should include provisions providing that the parties should hold the communication of the loan or facility as a social loan until such time agreed between the parties. Additionally, where there is a breach of the covenants under the loan or facility agreement, the borrower should cease to refer to the loan or facility as a social loan in any future communications.

Social loan coordinator – the roles and responsibilities of the social loan coordinator (SLC) will likely vary significantly between transactions. As such, there is no market practice on how the role is documented. However, a few questions to consider when drafting provisions relating to the appointment and role of the SLC include:¹

• What will the role and responsibilities of the SLC be? Will it be limited to a pre-signing role, or will they continue to be involved post-signing as well?
• What level of cooperation is required from the other parties for the SLC to carry out their role effectively?
• Will any fees and/or expenses be payable by the borrower or lenders to the SLC? How much and when will they be payable?
• What protections (e.g. limitations on liability, indemnities, arranger/agent-style protections, disclaimers, disclosure, termination provisions, confidentiality provisions) does the SLC require?
• Should the borrower be required to give any representations and warranties to the SLC?
• What is the appropriate way to handle any potential conflicts of interest that the SLC may face?

Declassification –the inclusion of provisions that deal with when the loan should no longer be declassified as a social loan.