Sustainability Coordinators: A Transatlantic Comparison

On April 24, 2024, the Loan Market Association (the “LMA”) published its Sustainability Coordinator Letter (the “LMA Letter”). According to the LMA, the LMA Letter is “intended to provide a starting point for a sustainability coordinator letter” in the context of the appointment of a sustainability coordinator in the ESG loan market. The publication of the LMA Letter follows the Loan Syndication and Trading Association’s (the “LSTA”) February 2023 publication of its own Sustainability Structuring Agent Engagement Agreement Inserts (the “LSTA Engagement Agreement Inserts”).

This Legal Update contains a comparative analysis of the LMA Letter and the LSTA Engagement Agreement Inserts, notes key similarities and differences between the two documents, and provides some key takeaways for ESG loan market participants—borrowers, lenders and Sustainability Coordinators alike—when negotiating the engagement of a Sustainability Coordinator.¹

The Sustainability Coordinator Role: An Overview

As the market for green-, social- and/or sustainability-linked loans has grown, so too has the number of advisory roles available to financial institutions and other more specialized ESG advisors. Borrowers in the ESG loan market need to be sure that they are setting robust and ambitious performance targets and key performance indicators for themselves, or are selecting appropriate ESG-related projects for a use-of-proceeds investment. They must also ensure that a monitoring and reporting infrastructure is in place which is sufficient to track and analyze ESG-related performance metrics and projects and to report on the same to lenders, shareholders and stakeholders more generally.

The LMA notes that a Sustainability Coordinator usually plays its role in the negotiation stage of an ESG loan.² The Sustainability Coordinator helps to bridge the gap between the borrower and the lenders’ expertise in, and experience of, the ESG loan market. Per the LMA, a Sustainability Coordinator’s high-level functions are likely to include:

• “assist[ing] the borrower and the lenders in negotiating the relevant key performance indicators (KPIs) and the related sustainability performance targets (SPTs)”;
• “assist[ing] the borrower and the lenders in identifying the relevant green/social project(s) to be financed under the relevant use of proceeds instrument”;
• “liais[ing] with external reviewers in relation to the choice of the KPIs and the calibration of the SPTs or project selection”;
• “dealing with the preparation of materials for presentation of the sustainability-linked structure to the syndicate”; and
• “assist[ing] the parties with ensuring that the transaction is aligned to relevant market standards, such as the Green, Social or Sustainability-Linked Loan Principles”.³

Major banks and financial institutions now often have specific “ESG desks” staffed with personnel who work exclusively in the ESG debt market. It is these dedicated teams who will typically carry out the Sustainability Coordinator’s functions once an institution is appointed to the role. The role of Sustainability Coordinator is important for banks, but not without risk. This makes the process and terms of the Sustainability Coordinator’s appointment all the more important. The LMA and LSTA have each sought to assist with this appointment process via the LMA Letter and the LSTA Engagement Agreement Inserts, respectively.

The LMA Letter and the LSTA Engagement Agreement Inserts: A Comparison of Key Terms

Form

The LMA Letter is drafted as a self-contained document whereas the LSTA Engagement Agreement Inserts are drafted in a rider format which expressly contemplates its language being inserted into a more traditional engagement or fee letter.⁴

Exclusivity

Paragraph 2 of the LMA Letter states expressly that the Sustainability Coordinator’s appointment is on an exclusive basis and contemplates a prohibition on the awarding of any further sustainability-related appointments or titles. Optional language is included which would allow the Sustainability Coordinator to consent to such appointments or titles.

Section 1 of the LSTA Engagement Agreement Inserts also envisages the appointment of a Sustainability Coordinator on a “sole and exclusive” basis and further that “no other Sustainability [Coordinator] or sustainability-linked agents or coordinators will be appointed [and] no other sustainability titles will be awarded”. However, the drafting notes to the LSTA Engagement Agreement Inserts do indicate more clearly than the LMA Letter that ESG loan borrowers may choose to appoint multiple Sustainability Coordinators.⁵

It is important to remember that both the LMA Letter and the LSTA Engagement Agreement Inserts are suggested precedents which need not be adhered to word-for-word. ESG loan market participants can negotiate and agree to the appointment of multiple Sustainability Coordinators, but careful drafting will be required to adapt the LMA and LSTA’s standard wording accordingly.

Services

Neither the LMA Letter nor the LSTA Engagement Agreement Inserts provide an exhaustive list of services that the Sustainability Coordinator will be expected to perform once appointed. The roles and functions required will be transaction-specific, and ESG loan market participants should expect the scope of the Sustainability Coordinator’s appointment to be one of—if not the—most heavily negotiated portions of the LMA Letter or LSTA Engagement Agreement Inserts, as applicable.

The Schedule to the LMA Letter lists five initial duties that the Sustainability Coordinator would ordinarily be expected to carry out and leaves placeholders for further duties which the parties might agree to include. The LMA Letter leaves open the question as to whether the Sustainability Coordinator’s obligations should be subject to a reasonableness qualifier. The five initially suggested duties are:

• assisting the Company⁶ in applying the Company’s sustainability strategy (including sustainability-related initiatives and commitments and relevant non-financial disclosure and reporting frameworks), for the purposes of agreeing the SLL Terms;
• assisting the Company with the process of:
• selecting one or more key performance indicators in connection with the Facility/ies; and
• calibrating sustainability performance targets for each key performance indicator;
• assisting the Company in:
• responding to any questions from the Mandated Lead Arrangers, the Agent, the Lenders and any potential Lenders with respect to the proposed SLL Terms; and
• coordinating and providing any Sustainability Information⁷ requested by the Mandated Lead Arrangers, the Agent, the Lenders and any potential Lenders.

The LSTA Engagement Agreement Inserts do not provide a specific section within which the parties can delineate a scope of services for the Sustainability Coordinator. Rather, the LSTA Engagement Agreement Inserts merely say that the appointment of the Sustainability Coordinator shall be “upon the terms and subject to the conditions set forth or referred to” therein.⁸ The drafting notes to the LSTA Engagement Agreement Inserts do provide a list of services which a Sustainability Coordinator may agree to provide.⁹ This list includes suggestions broadly equivalent to the LMA Letter’s Schedule quoted herein above and goes on to add that a Sustainability Coordinator might also be required to:

• “provide market color on sustainability performance pricing margin and fee adjustments [in] credit facilities to assist the Company¹⁰ in its selection of performance pricing margin and fee adjustments under the Credit Facility based on meeting or not meeting the SPTs”;
• “provide the Company with a copy of the Sustainability Linked Loan Principles¹¹ […]”;
• “provide the Company with a list and introductions to sustainability assurance providers or other external reviewers (where relevant) with respect to the sustainability performance data to be reported under the Credit Facility”; and
• “review and discuss with the Company draft sustainability portions of the legal documentation for the Credit Facility, including sustainability performance pricing margin and fee adjustments.”

ESG loan market participants using the LMA Letter as their basis for a Sustainability Coordinator’s appointment should be aware of the LSTA’s list of potential Sustainability Coordinator duties. This list may be helpful in shaping the drafting of the Schedule to the LMA Letter and defining the scope of the Sustainability Coordinator’s obligations. Conversely, those using the LSTA Engagement Agreement Inserts as their starting point may be well advised to take the LMA’s lead and include a schedule of duties or some other definitive statement of the Sustainability Coordinator’s obligations. Doing so helps to ensure that all parties have clarity over one another’s responsibilities and reduces the chances of later dispute on this issue.

Fees and Expenses

The LMA Letter envisages that a separate Sustainability Coordinator fee letter will be entered into setting out the Sustainability Coordinator’s fees and the time for their payment.¹² The LSTA Engagement Agreement Inserts contain, at Section 2, more fulsome provisions regarding what it calls the “Sustainability Structuring Fee”.
Both documents provide language to the effect that the borrower will be responsible for expenses reasonably incurred by the Sustainability Coordinator in carrying out its duties over and above the Sustainability Coordinator’s agreed fee(s).

Whilst the LSTA has provided draft language providing that any fees will be payable to the Sustainability Coordinator at the close of the facility, this point is ultimately left open for negotiation. Regardless of the documentation used, ESG loan parties may wish to consider whether any fees should be tied to specific milestones achieved by the Sustainability Coordinator, should be subject to conditions precedent, or should otherwise be tied to the final terms of the financing documentation with regards to either or both of the fee amount and the time for payment.

As noted, the LSTA Engagement Agreement Inserts presupposes that its draft terms will be incorporated into a more traditional fee or engagement letter. In this scenario, parties should ensure that the ESG-related fees are clearly demarcated vis-à-vis fees that are otherwise payable to the Sustainability Coordinator’s organization in any other roles that it holds in connection with the ESG loan transaction. As an already self-contained document, however, users of the LMA Letter may wish to incorporate more full-form fee provisions into the LMA Letter. Doing so has the benefit of increasing transactional efficiency by decreasing the amount of documents that parties need to draft, track and have signed; but, if taking this approach, careful consideration should be given as to whether the entire LMA Letter, only the fee provisions of the LMA Letter, or none of the LMA Letter should be included within the credit agreement’s definition of “Finance Documents”. This discussion, as well as a discussion as to whether the Sustainability Coordinator is to be included within the definition of “Finance Party” and will thereby be entitled to the rights and protections afforded to Finance Parties in LMA-style credit agreements, is likely to arise each time the appointment of a Sustainability Coordinator is contemplated. There is no right or wrong conclusion to either discussion and much will depend on the relative bargaining power of the parties and the scope of the services the Sustainability Coordinator is asked to provide, as well as other unique transaction-specific considerations.

Information

The LMA Letter and the LSTA Engagement Agreement Inserts provide broadly similar information and cooperation provisions at Paragraph 7 and Section 3, respectively. These provisions are essentially an “ESG-ification” of information and cooperation provisions that will be familiar to traditional syndicated and leveraged finance market participants and, at a high level, they oblige the borrower to:

• Provide reasonable assistance to the Sustainability Coordinator;¹³
• Provide such information to the Sustainability Coordinator as it shall reasonably request;¹⁴
• Represent and warrant (which representation and warranty is repeated daily) that information and material provided to the Sustainability Coordinator is true and accurate in all material respects;¹⁵
• Notify the Sustainability Coordinator of any changes in circumstances that make the information previously provided to the Sustainability Coordinator untrue or misleading and supplement/correct such information as necessary;¹⁶
• Authorize the Sustainability Coordinator to discuss the ESG-related information provided to it with current or potential financing parties (with the corollary of this obligation being that the Sustainability Coordinator is not to disclose such ESG-related information to any party which is not a current or potential financing party without express consent to do so);¹⁷ and
• Acknowledge that the Sustainability Coordinator has no obligation to conduct any independent verification of such information and is entitled to rely on the information’s accuracy and completeness.¹⁸

A well-advised borrower will review the information and cooperation obligations of either document carefully when appointing a Sustainability Coordinator. Care should be taken to ensure that a borrower is not agreeing to provide assistance or information that it does not have the operational capability to collate and provide in a timely fashion. Sustainability Coordinators should make certain that the terms on which it goes on to provide the ESG-related information to any financing parties are at least as restrictive with regards to confidentiality and use of the information as are the obligations to which it is subject per its agreements with the borrower. Parties may also wish to include further specificity as to the types of information and assistance which will be required from the borrower. Additional materiality, reasonableness or timing qualifiers might be included here also.

Publicity / Announcements / Advertising 

The standard wording in Paragraph 11 of the LMA Letter provides that the credit facility may not be marketed “as “sustainability-linked” without the prior written consent of the Sustainability Coordinator, the Mandated Lead Arrangers, Agent and the Lenders.”¹⁹ Furthermore, optional language is provided to the effect that the Sustainability Coordinator’s role cannot be publicly disclosed without its prior written consent.

The LSTA Engagement Agreement Inserts also provide optional language stating that the Sustainability Coordinator’s role cannot be disclosed without its prior written consent.²⁰ However, with regards to advertisement as a sustainability-linked instrument, the LSTA Engagement Agreement Inserts are not as precisely drafted as the LMA Letter. The LSTA Engagement Agreement

Inserts say:

The Company agrees that it shall not, without prior consultation with the Sustainability [Coordinator], make any public representations or descriptions, or private representations or descriptions to any third party, of the Credit Facility as a sustainability-linked loan.²¹

Parties using the LSTA Engagement Agreement Inserts language may wish to consider amending the “consultation” language to provide a more definitive touchstone for when a facility may be marketed as sustainability-linked (for example, by requiring prior “approval”).

Section 6 of the LSTA Engagement Agreement Inserts goes on to provide optional language to the effect that, should the borrower be permitted to make any public statements, it takes sole responsibility for the contents of said statements. Drafting is also provided which reserves to the Sustainability Coordinator the right to refuse to be quoted or referred to in any public statements made by the borrower. Finally, it is important to note that the standard LSTA Engagement Agreement Inserts drafting on announcements is not reciprocal as between borrowers and

Sustainability Coordinators. Sustainability Coordinators can make public statements without the borrower’s consent while the same, as discussed herein, is not true in reverse:

Following closing of the Credit Facility, the Sustainability [Coordinator] shall have the right to place advertisements in financial and other newspapers and journals at its own expense describing its services to the Company hereunder without the prior approval of the Company.²²

The publication of a company’s sustainability credentials is an increasingly important aspect of its marketing strategy. Furthermore, as the Sustainability Coordinator role continues to evolve and various organizations vie for these positions, they too will likely be keen to ensure that their previous projects are highlighted and available in the public domain. Parties may wish to consider amendments to the LMA Letter or LSTA Engagement Agreement Inserts’ publicity provisions to ensure that the approach to advertisements and announcements is mutually beneficial and provides all parties with an appropriate level of oversight regarding the ability to make announcements and the contents of any such announcements. It is important that all parties are comfortable with the contents of any publicity as certain sustainability-linked loans have been subject to negative publicity and accusations of “greenwashing”. There is, of course, nothing stopping a borrower and a Sustainability Coordinator from agreeing at the time of engagement that the drafting and publication of mutually acceptable public announcements will be part of the Sustainability Coordinator’s role and is something that the borrower is expected to assist with.

There are, then, many important considerations when appointing a Sustainability Coordinator. Particular thought should be given to the duties owed by the Sustainability Coordinator and the fees (and fee structure) owed by the borrower. Both the LMA Letter and LSTA Engagement Agreement Inserts aim to provide helpful framework for the negotiation of a Sustainability Coordinator’s appointment. While there are important differences between them, the LMA Letter and LSTA Engagement Agreement Inserts address important topics for ESG loan market participants to consider in any given ESG loan transaction.

¹ This Legal Update uses the term “Sustainability Coordinator” consistently throughout. The LMA Letter refers to a “Sustainability Coordinator” while the LSTA Engagement Agreement Inserts refers to a “Sustainability Structuring Agent”. This is a difference in form and not substance. Whether titled a “Sustainability Coordinator,” “Sustainability Structuring Agent,” “ESG Structuring Agent,” “Sustainability Arranger,” “Green / Social / Sustainability-Linked Loan Coordinator,” or some such similar title, the institution will be performing the same role. It is this role which is discussed herein and a difference in title should not be assumed to give rise to a difference in role or function.

² “An Introduction to the Sustainability Coordinator Role”, available here.

³ Id, page 2.

⁴ LSTA Engagement Agreement Inserts, page 1 footnote A.

⁵ For example, LSTA Engagement Agreement Inserts, page 3 footnote F: “If multiple Sustainability Structuring Agents are appointed, fees may be moved to separate fee letters” (emphasis added in italics).

⁶ “Company” in this context refers to the borrowing entity who is engaging the Sustainability Coordinator in connection with an ESG loan.

⁷ The LMA’s pro forma definition for this term (available here) is:

“Sustainability Information” means all information (including sustainability performance projections and forecasts) which has been:

(a) provided by or on behalf of a member of the Group to a Finance Party [and/or to the Sustainability Coordinator]; or

(b) approved by any member of the Group,

solely in connection with, and to the extent it relates to, any Sustainability Compliance Certificate, any Sustainability Report, any Verification Report, a KPI, a SPT, a Calculation Methodology or a Baseline.

⁸ LSTA Engagement Agreement Inserts, page 1.

⁹ Id, page 1 footnote D.

¹⁰ “Company” in this context refers to the borrowing entity who is engaging the Sustainability Coordinator in connection with an ESG loan.

¹¹ Available here.

¹² The LMA Letter, page 4 footnote 13.

¹³ The LMA Letter, page 5 Paragraph 7.1 / LSTA Engagement Agreement Inserts, page 4 Section 3.

¹⁴ Id.

¹⁵ The LMA Letter, page 5 Paragraph 7.2 / LSTA Engagement Agreement Inserts, page 4 Section 3.

¹⁶ The LMA Letter, page 5 Paragraph 7.4 / LSTA Engagement Agreement Inserts, page 4 Section 3.

¹⁷ The LMA Letter, page 5 Paragraph 7.5 / LSTA Engagement Agreement Inserts, page 4 Section 3.

¹⁸ The LMA Letter, page 5 Paragraph 7.5 and 7.6 / LSTA Engagement Agreement Inserts, page 4 Section 3.

¹⁹ The LMA Letter, page 8 Paragraph 11.

²⁰ LSTA Engagement Agreement Inserts, page 7 Section 6.

²¹ Id, emphasis added.

²² LSTA Engagement Agreement Inserts, page 8 Section 6 (emphasis added).