Engaging on KPI Selection for a Sustainability-Linked Loan
The Global Private Finance team created their first sustainability-linked loan.
Initial loan agreement: In July 2022, Barings signed a new financing agreement with the borrower, which was a ‘sleeping’ sustainability-linked loan. The borrower and the private equity sponsor had six months from the closing date to engage a third-party ESG consultant and establish a baseline position for the company off which to set sustainability performance targets which would activate financial incentives under the loan agreement (downward margin ratchet) if achieved.
How we engaged: Barings had an initial call with the private equity sponsor and management in November 2022 to discuss next steps and agree on appointment of their ESG consultant. In December 2022, the consultant shared their initial report which highlighted six relevant ESG themes for the borrower and proposed five KPIs on which to base the sustainability performance targets. Barings rejected one of the KPIs on the basis that the corresponding target was not sufficiently ambitious. The borrower agreed to having only four KPIs and lawyers drafted the sustainability supplement to amend the financing documents.
Finalizing targets: In January 2023 Barings reviewed the draft sustainability supplement and pushed back on how one of the sustainability performance targets was defined. Barings requested changes to the documentation which ensured it would be measured on a like-for-like basis and introduced a materiality threshold to ensure measurement would be an accurate representation of the business as a whole. The borrower agreed, the sustainability supplement was signed and the loan is now an active sustainability-linked loan.
