Treasury Essentials

Compliance with the various requirements discussed below will allow issuers to use the label “European Green Bond” or “EU GB” in their green bond prospectus, provided that the prospectus is published pursuant to the EU Prospectus Regulation.

EU GBS requirements

1. Taxonomy alignment. The proceeds of the bond should be allocated to projects aligned with the EU Taxonomy (subject to a 15 per cent. flexibility pocket for when there is no technical screening criteria available at the time of issue and certain other activities).
2. Factsheet and reporting. The EU GBS requires an issuer to publish a green bond “factsheet” prior to issue as well as comply with various pre- and post-issuance reporting requirements. External reviewers must provide a pre-issuance review of the factsheet as well as post-issuance review of the allocation reports.

3. External review. All EU GBS bonds must be checked by an external reviewer to ensure compliance with the EU GBS and that funded projects are aligned with the EU Taxonomy.

4. Supervision of external reviewers. The EU GBS sets out detailed rules for external reviewers including registration with, and supervision by, the European Securities and Markets Authority.

5. Voluntary disclosure requirements for the wider market. The EU GBS also separately includes voluntary sustainability disclosure requirements for bonds “marketed as environmentally sustainable” (i.e. use of proceeds green bonds and sustainability-linked bonds with environmental key performance indicators and targets). These voluntary disclosure templates can be used by issuers even if they do not intend to use the EU GBS label and are intended to facilitate comparison of green bonds and sustainability-linked bonds for investors in the wider market as well as addressing greenwashing concerns. The full detail is expected to be set out by the Commission in due course.

Sanctions

Competent authorities have wide-ranging powers to ensure compliance including the ability to require publication of factsheets or reports in line with the EU GBS, impose fines, suspend trading and also make public the fact that the issuer is not in compliance with its obligations and require the issuer to publish that information on its website.

Future of the label

There is no doubt that the EU GBS is an ambitious standard and goes well beyond existing guidelines and labels in the green bond market. The co-legislators have made it clear that their intention is for the standard to be for high quality green bonds, integrating European green bonds within the wider remit of the EU sustainable finance regulatory framework and tackling greenwashing concerns.

This raises the question of which issuers are in a position to use the standard. At the outset at least, the EU GBS is likely to be used by EU institutions as well as “pure play” issuers. The key concern around take up of the label more broadly is linked to usability of the EU Taxonomy. Take up will further depend on investor demand, pricing advantages and if issuers can be otherwise incentivised to move away from an existing well-functioning market based on voluntary best practice. 

For further details on the EU GBS, please see our full briefing here.

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SLLs are the most popular sustainable loan product by some measure. The volume of SLLs now far surpasses the volume of “use of proceeds” loans.

The popularity of SLLs lies in their breadth of application – they have much wider reach than use of proceeds loans. Green and social loans are only available to borrowers requiring funding for specific green and/or social projects. SLLs, on the other hand, carry no restriction on the use of the proceeds and are therefore available to all borrowers seeking to amplify their sustainability strategy by embedding it in their financing terms.

The rise in SLL volumes has brought with it increased focus on the structure and terms of SLLs, in particular, whether they are sufficiently robust to withstand accusations of greenwashing. SLL terms have tightened and become more sophisticated over time (particularly contractual protections for lenders), but there is still quite wide variation both in form and content. Although SLLs remain unregulated, concerns about whether best practices are being upheld in all cases has also recently attracted regulatory attention, with the FCA raising various concerns following its review of the SLL market earlier this year. 

The Loan Market Association’s (LMA) February 2023 updates to its Sustainability-Linked Loan Principles (SLLP), voluntary recommended guidelines published jointly by the LMA and its sister trade associations which specify the key features of an SLL, were heavily focused on protecting the integrity of the SLL product (discussed in further detail in our briefing here).  

The SLLP, being high level principles, do not however address how their key features should be fleshed out and reflected in loan documentation.

The LMA’s draft provisions for sustainability-linked loans (the Draft Provisions), published in May 2023 and designed to align with the updated SLLP, provide a framework for a more consistent approach to the documentation of SLLs (discussed in further detail in our briefing here).  

While the Draft Provisions are now regularly used as a reference point on transactions (including refinancings), they are, and indeed are intended to be, just that – a reference point requiring a fair amount of case-specific customisation and negotiation.

Against this backdrop, our Borrower’s Guide to Sustainability-Linked Loan Terms aims to equip borrowers with an in-depth understanding of key SLL documentation terms, how they are evolving and some of the discussion points to anticipate. The Guide includes an overview of the key features of the SLLP followed by a clause-by-clause commentary on key SLL documentation terms, by reference to the Draft Provisions. It builds on the introductory commentary on SLLs in our ACT Borrower’s Guide to the LMA’s Investment Grade Agreements published in November 2022.

For more sustainability-related updates, please subscribe to our Sustainable Matters blog here. The blog covers a wide range of issues from climate change and the energy transition to social impact considerations and human rights, exploring what it means for corporates and the market.

The exemption

Subject to certain exclusions, under section 479A CA 2006 a company is eligible for exemption from the audit of individual accounts, if that company’s parent is established in the UK and:

• all members of the subsidiary agree to the exemption;
• the parent gives a guarantee of the subsidiary’s outstanding liabilities; and
• the subsidiary is included in the consolidated accounts drawn up by the parent.

The parent company guarantee

This statutory guarantee (the section 479 guarantee) takes the form of a statement given by the parent (which is signed by the parent and the subsidiary) and filed with Companies House. No separate parent guarantee document is required nor any solvency declaration.

As noted above, the members of the subsidiary must agree to the exemption. There is no prescribed form for this (other than the agreement must show the subsidiary company’s name and registered number in a prominent place on the document), but would likely take the form of a shareholder resolution.

The effect of the section 479 guarantee is wide-ranging. The parent company will guarantee all outstanding liabilities of the subsidiary that exist at the end of the financial year to which the guarantee relates. “Outstanding liabilities” for this purpose is construed broadly and is generally understood to include all contingent and prospective liabilities to which the subsidiary is subject. 

The guarantee is enforceable against the parent by any person to whom the subsidiary company is liable in respect of those liabilities, so the parent potentially becomes liable to a wide range of third parties.

A key point to note is that once the statutory guarantee has been made, it cannot be revoked. The parent company’s liability in respect of the subsidiary will only cease on satisfaction in full of the liabilities covered by the guarantee, irrespective of whether or not such liabilities extend beyond the end of the financial year in which the guarantee was granted. Even if the subsidiary returns to audited status in any subsequent year, this has no effect on the section 479 guarantee previously provided.

Practical considerations

Careful thought is therefore needed before entering into such a statutory guarantee which the directors of both corporate entities will need to work through. For example, subsidiary directors may wish to consider the implications for raising finance in the absence of audited accounts while the parent company directors will need to weigh up the risks and practical considerations associated with giving the section 479 guarantee and becoming liable for the subsidiary’s ongoing liabilities.

Any financing arrangements applicable to both the parent and subsidiary should also be considered prior to the granting of the section 479 guarantee to ensure that, for example:

• the granting of the section 479 guarantee is not prohibited under the terms of the arrangements;
• the failure to provide financial statements of the subsidiary would not breach any ongoing financial information undertakings; and
• any other knock-on effects of the grant of such a guarantee are understood.

There may well be other commercial implications in granting a section 479 guarantee and whether the exemption will be suitable for a particular group will need to be carefully considered.