It is this link between the cost of financing and the achievement of sustainability targets that distinguishes SLLs from other market instruments. Unlike Green Loans, funds obtained through a Sustainability-Linked Loan do not need to be earmarked for a specific sustainability project. What matters most is that the borrower achieves agreed-upon ESG targets, measured using carefully selected key performance indicators (KPIs). This mechanism requires the borrower not only to set ambitious goals but also to ensure a transparent method for measuring and verifying the results achieved.
In practice, this means that a company using SLL financing must answer three key questions:
- what does it want to achieve?
- how will it measure progress?
- who will independently verify that the declared result has actually been achieved?
The financial market’s response to the need for credibility in these instruments includes guidelines developed by the Loan Market Association (LMA), which define the principles for structuring, reporting, and verifying Sustainability-Linked Loans.
The role of the Loan Market Association (LMA)
One of the most important entities shaping standards in the sustainable finance market is the Loan Market Association (LMA) —an organization representing participants in the debt finance market, including banks, financial institutions, and advisors. It has developed the Sustainability-Linked Loan Principles (SLLP), which define the fundamental criteria for qualifying financing as an SLL. While this document is not a legal regulation, it serves as a global market standard, increasing the transparency and credibility of ESG-linked financial instruments.
One of the primary goals of the SLLP is to mitigate the risk of greenwashing—a situation where a company’s actions are presented as more sustainable than their actual impact suggests.
Core elements of the SLLP
According to LMA guidelines, the credibility of SLL financing is based on five key elements:
- KPI selection,
- calibration of Sustainability Performance Targets (SPT),
- loan characteristics,
- reporting,
- verification.
Properly defined KPIs should be material to the company's operations, strategically linked to its key ESG challenges, measurable, benchmarkable, and subject to independent verification.
SPT targets should be ambitious and go beyond the company's "Business as Usual" operations and applicable regulatory requirements. They should reflect a real improvement in the organization's performance and be comparable against relevant industry benchmarks or targets derived from recognized ESG standards. There is also an increasing expectation that the level of ambition for SPTs remains consistent with the company's long-term sustainability strategy and sector-specific transition pathways.
A key element in the structure of an SLL is the financial consequence associated with meeting or failing to meet the agreed-upon targets. Depending on the terms of the loan agreement, achieving the agreed SPTs may result in a reduction in the loan margin, while failure to achieve them – maintaining the existing terms or inincreased cost of financing. This mechanism creates a direct economic incentive to meet ESG commitments.
Our KPI verification services for SLL
We will perform KPI verification for your Sustainability-Linked Loan (SLL)
Independent verification - a key challenge for businesses
One of the most important requirements is independent, external verification of SPT achievement linked to specific KPIs. This stage is often the greatest challenge for companies. Simply setting ambitious ESG goals is not enough. An organization must have properly prepared data and the ability to demonstrate how reported results were achieved. The verification process includes not only an assessment of the final indicator value, but also an analysis of:
- data sources,
- calculation methodologies,
- assumptions made,
- baseline values,
- data consistency,
- documentation confirming the results achieved.
In practice, companies often struggle with a lack of a unified approach to calculating ESG indicators, insufficient audit trails, or difficulties in assigning data responsibility across different departments. Verification requires that ESG data be prepared with the same diligence as financial data – with transparency, repeatability, and the ability to be independently verified.
In line with market practice and the Sustainability-Linked Loan Principles, the achievement of SPTs should be subject to regular, independent external verification conducted by entities with the appropriate expertise. This role can be fulfilled by, among others, statutory auditors, specialized verification firms, or independent ESG advisors. Before securing financing, companies are also increasingly utilizing independent ex anteassessments, known as Second Party Opinions (SPO), which allow for the evaluation of the adequacy of the selected KPIs and the ambition of the set SPTs. This approach further strengthens the credibility of the entire financing structure.
Summary
Sustainability-Linked Loans are an important part of the sustainable finance market, enabling companies to link financing terms to actual ESG performance. A key element of SLL credibility is the independent verification of results achieved and the assurance of data quality used to assess compliance with commitments made to financial institutions.
At VIVERNO, we support companies in the KPI verification process for Sustainability-Linked Loans. We assess data, verify methodologies, and review documentation to reliably confirm the achievement of set targets in accordance with LMA requirements.
