Sustainability-linked loans provisions updated by the LMA

In an August 2026 update, the LMA outlined changes to the draft provisions it has developed for SLL products. According to the LMA, the changes follow a review undertaken by a taskforce of “active market participants”.

“While the core architecture remains unchanged, the updates seek to promote greater consistency and clarity in SLL drafting while preserving the flexibility central to the SLL product,” the LMA said. “The revisions focus on points where the template was not reflective of current market practice, required clarification or could be simplified (including by removing provisions not widely used).”

SLLs aim to facilitate and support environmentally and socially sustainable economic activity and growth, driving change beyond ‘business as usual’ over the term of the loan. An SLL incentivises the corporate borrower to improve its sustainability performance by achieving sustainability related performance targets (SPTs), as measured by key performance indicators (KPIs). Those performance targets and KPIs are often underpinned by other sustainability provisions, such as reporting obligations.

While the LMA’s original SLL provisions provide scope for “immediate recourse to declassification” in the event of serious sustainability breaches – triggering a lender vote on whether to strip the SLL label from the facility and convert it to a conventional loan – the updated provisions provide for a wider range of triggers for declassification than was the case before. This includes where sustainability breaches continue for a “prolonged period”, which is to be defined by the lender and borrower. It also includes where there are repeated failures by the borrower to deliver a sustainability compliance certificate or where the lender and borrower are unable to agree to amendments to their SLL agreement “following the occurrence of a Sustainability Amendment Event”.

Banking and finance expert Seya Rahnema at Pinsent Masons said: “The expanded declassification framework is a significant development: lenders now have a broader and more clearly defined toolkit for removing the SLL label where a borrower's sustainability performance or compliance has demonstrably broken down, whilst the requirement to define what constitutes a ‘prolonged period’ gives parties the commercial flexibility to calibrate the threshold to the specific transaction.”

In relation to sustainability amendments, while SPTs and KPIs agreed in SLLs are typically set for the duration of the loan, there are circumstances in which they can be adjusted. The LMA has updated its SLL provisions to provide for two specific triggers for renegotiation, which includes where there is an “acquisition/disposal/merger which could reasonably be expected to materially affect a KPI/SPT” or where there is “notification of any change to any KPI or to the Calculation Methodology, Baseline and/or any SPT in relation to any KPI which could reasonably be expected to materially affect a KPI/SPT”. Lenders and borrowers can agree between themselves to further triggers of sustainability amendment events.

“This amendment mechanism provides a lever for renegotiation of the SLL metrics where that has become essential, which is why the triggers include a materiality threshold,” the LMA said. “As drafted, the triggers are engaged only where there is a reasonable expectation that the relevant event will materially affect a KPI and/or SPT, or where a KPI is to be replaced entirely. In practice, the materiality threshold is sometimes further defined by reference to a financial metric, e.g. a percentage of turnover. This reflects that the amendments mechanism deals with amendments required to ensure the SLL can continue as such, rather than allowing the parties to reopen the SLL metrics at their discretion.”

The updated provisions also expressly provide that no ‘Event of Default’ will arise under the general "other obligations" or misrepresentation clauses by reason only of a breach of a sustainability provision or a misrepresentation relating to sustainability information. This is a meaningful and welcome borrower protection, according to Rahnema, who highlighted how sustainability-related failures are now expressly ring-fenced from the general events of default architecture, channeling all consequences through the dedicated margin adjustment and declassification mechanics and significantly reducing the risk that a sustainability breach inadvertently triggers cross-default or acceleration rights under related financing arrangements.

Rahnema said a further forward-thinking addition is the LMA’s introduction of an entirely new Part B to address ‘sleeping’ SLL structures – transactions where the KPIs and SPTs cannot be finalised at the point of origination.

Part B offers two options: a short form amendment mechanism, under which the SLL provisions are agreed post-origination alongside the relevant KPIs and SPTs; and a full form approach, under which the SLL provisions are incorporated at origination and become effective post-origination upon execution of an SLL activation notice once the KPIs, SPTs and any other outstanding amendments are agreed. Failure to agree the KPIs and SPTs by a longstop date constitutes a declassification event.

Rahnema said this is a welcome and overdue addition that brings much-needed standardisation to a structure that has become increasingly prevalent in the market, reducing negotiation time and providing a credible and consistent framework for deals where metrics are necessarily agreed in stages.

Pippa Whitmore, also of Pinsent Masons, said the measure goes some way towards alleviating the UK Financial Conduct Authority’s (FCA’s) concerns with SLL structures. The FCA has consistently focused on whether sustainability-related claims are fair, clear and not misleading. Whitmore said a sleeper SLL creates tension because the loan could be announced as a sustainable loan before the KPIs and SPTs, that actually make the facility sustainable, are agreed. The changes introduced by the LMA will make the process of documenting sleeper SLLs more rigorous and less susceptible to challenge, she added.

Whitmore said: “Some market participants may nevertheless remain cautious about sleeper structures, particularly where sustainability-linked features are not agreed until well after signing, on the basis that the sustainability credentials of the facility cannot be fully assessed until the KPI and SPT framework is finalised.”

Overall, however, Rahnema said the update highlights the market's growing focus on credibility and integrity in sustainable finance.

“For lenders, the revised provisions provide greater drafting certainty and a clearer framework for managing situations where sustainability commitments become difficult to measure, maintain or verify,” Rahnema said.

“For borrowers, the update confirms that sustainability-linked commitments are increasingly being treated as a structured framework with clear consequences for non-compliance, whilst still preserving flexibility where business circumstances change. The new provisions also indicate that lenders are continuing to place emphasis on: robust sustainability reporting; timely delivery of sustainability compliance certificates; appropriate recalibration mechanisms; and preserving the integrity of the SLL label,” he added.

Neelam Kaur, also of Pinsent Masons, said the amendments balance both lender interests, for example to prevent ‘greenwashing’, and borrower interests, to have flexibility where business circumstances genuinely change. She said borrowers and lenders should review their existing SLL documentation and governance processes to ensure they remain aligned with evolving market standards.

“Borrowers with existing or proposed SLL facilities should: review whether their current KPI and SPT framework would remain workable following acquisitions, disposals or strategic changes; assess the robustness of their sustainability reporting and verification processes; consider whether facility documentation adequately addresses re-calibration events and future target-setting, and; review any publicity and disclosure obligations relating to sustainability-linked financing,” Kaur said.

“Lenders should: review internal precedent documentation against the revised LMA framework; consider whether existing SLL documentation adequately addresses declassification triggers and sustainability amendment events, and; assess whether sustainability breach provisions align with current market expectations,” she added.