The Asia Pacific Loan Market Association (APLMA), the Loan Market Association and the Loan Syndication and Trading Association jointly published the Social Loan Principles (SLP) on Monday 12 April 2021. These principles have been developed with a view to promoting the development and integrity of the emerging social loan product. A social loan is any type of loan instrument made available exclusively to finance or re-finance “Social Projects”, which aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes.
Social loans vs sustainability linked loans or green loans
Social loans are different to other sustainability focused loans, such as green loans and sustainability linked loans. A green loan requires proceeds to be applied to a specific ‘green’ purpose, such as renewable energy or pollution control. Sustainability linked loans incentivise (usually through pricing relief) borrowers to achieve pre-determined sustainability objectives (but do not require specific application of proceeds to a ‘sustainable’ purpose).
The SLP build on and refer to the existing Social Bond Principles administered by the International Capital Markets Association.
What are the SLP?
The SLP aim to create a high-level framework of market standards and guidelines and provide a consistent methodology for use across the social loan market. The SLP comprise voluntary recommended guidelines, to be applied on a deal by deal basis depending on the underlying characteristics of the transaction. They recommend transparency and disclosure and seek to promote integrity in the developing social loan market.
The SLP are based on the following four core components:
- Use of proceeds: The fundamental determinant of a social loan is the utilisation of the loan proceeds for Social Projects. The SLP explicitly recognise several broad categories of eligibility for Social Projects, including affordable basic infrastructure, access to essential services and affordable housing. The list of Social Projects is not exhaustive, and we expect this to be developed by the market over time.
- Process for Project Evaluation and Selection: Borrowers should clearly communicate to lenders the social objective and the process by which the borrower determines how the project to be funded will fit within the eligible Social Project categories.
- Management of Proposals: The proceeds of a social loan should be credited to a dedicated account or otherwise tracked by the borrower in an appropriate manner. Management of proceeds should be attested to by the borrower in a formal internal process linked to the borrower’s lending and investment operations for Social Projects.
- Reporting: Borrowers should maintain up to date information on the use of the proceeds of their social loan. This should include a list of the Social Projects to which the social loan proceeds have been allocated and a brief description of the projects, the amounts allocated and their expected impact.
External review
The SLP also recommend that social loans are externally reviewed to ensure compliance with the SLP. Given the relationship-driven nature of the loan market, self-certification may be sufficient where the borrower has demonstrated or developed the internal expertise to confirm alignment of the social loan with the SLP. However, we recommend that as the market develops, external reviewers be used to safeguard market integrity.
Our view
The SLP provide a clear and accessible framework to help facilitate the growth of the social loan market and are a welcome resource for the sustainable finance market. We expect to see this area develop quickly in tandem with New Zealand’s fast-growing sustainable finance market.
