SWITZERLAND Law and Practice Contributed by: Daniel Haeberli and Simone Gloor, Homburger
Sustainability Linked Loans Sustainability is gaining significance in the Swiss loan market. The importance of sustain- able financing is set to grow as banks commit to initiatives such as the industry-led and UN- supported Net Zero Alliance. Developing a sus- tainable lending strategy is a crucial component for banks to fulfil such commitments. Several Swiss banks are currently active in the sustainability linked loan (SLL) market. SLLs are tied to sustainability targets agreed upon by both the lender and the borrower, and can be struc- tured as either bilateral or syndicated, utilising various key performance indicators (KPIs). The most common KPI is the improvement of the borrower’s existing ESG rating; other targets include enhancing energy efficiency, reducing greenhouse gas emissions and increasing the use of renewable energy, although these are less frequently used.
If the borrower meets the agreed-upon sustain- ability targets, they benefit from a lower interest rate. However, due to the additional costs asso- ciated with the extra reporting requirements, the potential interest rate reduction is often not the primary motivation for entering into an SLL. Instead, borrowers are typically driven by a gen- uine intention to transform into more sustainable businesses. Currently, SSLs are still relatively rare and there is no established market practice for their terms and conditions. Therefore, many Swiss law- governed credit agreements include a so-called rendezvous clause, which allows the parties to negotiate the specific features of a sustainability link during the term of the loan, subject to mutual agreement.
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