External Review
Cutting through the noise
By Hannah Vanstone, Sustainable Finance Regulation Lead, LMA
The world of sustainable finance provides a veritable feast of acronyms, where terms are sometimes used interchangeably – or even to mean entirely different things.
For sustainable finance professionals, it can at times be challenging to keep afloat in this alphabet soup. For those who are looking to set out on their sustainable finance journey, it may even be enough to make you lose your appetite for sustainable finance altogether.
Based on the feedback we received over recent years, one area more than others seems to cause considerable confusion for market participants – the use of external reviews. Indeed, a project that started as a simple update to the ‘External Review Guidance’ (the Guidance) on account of the updates to the Green, Social and Sustainability-Linked Loan Principles in 2023 quickly turned into an extensive re-write following initial discussions with our dedicated working party.
There were many reasons why such an extensive re-write was required, including:
- the market for external reviews has developed significantly in recent years, with market conventions still evolving rapidly;
- sustainable finance products themselves have developed at pace, including the addition of the mandatory verification requirement to the Sustainability-Linked Loan Principles in 2021; and
- a changing environment over recent years in which scrutiny from a range of stakeholders in relation to sustainability claims has increased considerably.
The updated Guidance seeks to cut through some of the noise in this area, to try to bring clarity to the meaning and content of the different types of external reviews (including second party opinions, verification and ratings/scores), whilst recognising that there are still some grey areas in between where market practice is still developing.
The Guidance also highlights industry standards and industry-wide codes of conduct which may apply to external reviews, as well as best practice on the disclosure of external reviews in relation to sustainable lending transactions.
We expect the external review market to continue to develop at pace.
“Market participants have highlighted a number of challenges in obtaining external reviews in relation to sustainable finance transactions. This is a fast-moving area where market practices are developing rapidly and new regulation, including the proposed ESG Ratings Regulation recently agreed by the Council and the European Parliament, is already having an impact. We expect to see external review practices continue to mature to meet the demands of the market and increased regulation over the next few years.”
Gemma Lawrence-Pardew, Head of Sustainability, LMA.
For those who are able to navigate the alphabet soup, external reviews can unlock many opportunities, improving access to sustainable finance products such as sustainability-linked loans and helping to ensure the credibility and transparency of these transactions.
We would like to thank the LSTA and the APLMA, as well as our dedicated working party and ESG Committee for their support and assistance in preparing the updated Guidance.