GBRW designed a Sustainability-Linked Loans (SLL) framework for the SME clients of a large European commercial bank.
The bank wished to offer this innovative product to its predominantly medium-sized clients but needed a way to simplify and standardise the approach, so that it could be seen as user-friendly for loan officers and clients alike. Under the framework, SMEs willing to participate would be offered loans which terms were linked to the achievement of certain ESG performance targets. Key Performance Indicators (KPIs) are selected and Sustainability Performance Targets (SPT) set, which achievement allows to ratchet up or down the interest rate and other terms. GBRW (i) developed a questionnaire to assess the ESG-readiness of SME clients, (ii) proposed a selection of KPIs and sustainability performance targets suitable for SMEs, (iii) designed the key features and terms of the Loans, and the incentives to be offered in case the targets were met. The challenge consisted in designing criteria which were relevant to SMEs and acceptable by them. This product was destined to become a flagship product, not only for existing but prospect clients.
The detailed deliverables included:
An ESG questionnaire made of 40 questions following the European Sustainability Reporting Standard (ESRS) and Taxonomy divided between environmental, social and governance topics, namely: pollution, water consumption, resources use and recycling, biodiversity, climate change mitigation, own staff policies, local community impact, consumers and end users, and business conduct. The questionnaire was accompanied with a narrative providing background and explanations on each question and proposing KPIs and SPTs, verification documents and referencing relevant frameworks, standards and legislations. The questionnaire also proposed a way to handle the existence or absence of corporate policies in those areas.
The Sustainability-Linked Loans framework itself was a 25 pages comprehensive guide about how to design and implement SLL. It included:
– The identification of KPIs
– The setting of SPTs
– The monitoring and verification of performance
– Financial incentives
– Specific Sustainability Provisions in loan documentation
