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The trade finance industry now has another tool in its ESG toolbox with the publication of the global loan market associations’ social loan principles (SLP).

Launched jointly by the Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA), the SLP are a set of voluntary recommended guidelines for lending that mitigates social issues and challenges or achieves positive social outcomes.

The SLP are the latest in a series of ESG-related loan principles. In 2018, the LMA published the green loan principles (GLP), which clarified the instances in which a loan may be categorised as green, while in 2019, the launch of the sustainability linked loan principles gave the finance industry a definition of sustainability linked finance.

“The speed with which environmental, social and governance (ESG) issues have moved into mainstream finance is truly remarkable. At the LMA, we have already seen the power of green loans and sustainability linked loans to drive positive ESG outcomes,” says Hannah Vanstone, legal associate at the LMA.

“We were really keen to see what we could do and to find out whether something similar to the GLP or the SLLP would be helpful in the social loan market,” she tells GTR. “We were delighted by the response from our members, who have worked alongside us to produce the social loan principles to ensure consistency in the global market in terms of how these products are structured, and also help to guard against mislabelling in the market.”

In essence, the SLP outline what a social loan actually is – one in which the proceeds are used for social projects; and give guidance on the process for project evaluation and selection as well as how performance measures should be reported. In the same way as the GLP built on the green bond principles administered by the International Capital Markets Association (ICMA), the SLP refer to the Social Bond Principles (SBP), with a view to promoting consistency across financial markets.

These latest principles respond to a direct need in the market for clarity around social lending, which has grown in the wake of the Covid-19 pandemic. However, as Gemma Lawrence-Pardew, legal director at the LMA, tells GTR, the pandemic is far from the only driver.

“The Covid pandemic definitely acted as an accelerant, but it isn’t the full story,” she says. Indeed, in the same way that the green loan principles and green bond principles came out at a time when there was a growing focus on climate change, as supported by the UN’s Race to Zero campaign and the Paris Agreement, in recent years, there has been an increasing focus from society on racial inequalities as a result of the Black Lives Matter social justice movement, as well as on gender inequalities as part of the UN’s Sustainable Development Goals (SDGs).

“It’s clear there’s a growing focus on the ‘S’ in ESG; we saw it for example in the US following the murder of George Floyd, where a number of corporates expressed a wish to structure their trade finance in a way that would support minority-owned counterparties,” Natasha Condon, global head of core trade at JP Morgan tells GTR, adding that she hopes to see the social consideration become more embedded into the way corporates look at their capital stack, as is increasingly the case with green finance.

“Banks have been starting to question how they can support and finance this rise in social consciousness that is being seen throughout society, and as they do start to provide finance, is there a framework in place that will effectively help them get it right? And that’s very much where our guiding principles came into play,” says Lawrence-Pardew, who adds that the principles were developed in concert with a working party made up of representatives from major financial institutions and law firms. “The banks are asking how they can add liquidity to this market, and how they can do it in such a way that from a financing perspective it is credible and transparent.”

For its part, the trade finance industry has welcomed the launch of the SLP, and several banks are already planning to incorporate the principles into their financing solutions.

“The launch of the social loan principles is a welcome addition, with the growing need for market standards, this is a huge step in the right direction,” Clair Smith, associate director for sustainable trade finance at HSBC, tells GTR. “At HSBC we have a range of sustainable trade solutions that align with the green loan principles and the UN SDGs, and these are currently being expanded to include the SLP. This is an important step, recognising the importance of social factors in the wider sustainability topic, and giving both customers and financial institutions a clear set of principles to follow.”

Standard Chartered, which recently launched a set of sustainable trade finance solutions that embed the green and sustainability-linked loan principles into its offering, also plans to integrate the SLP as part of helping its clients to meet ESG-related sustainability objectives.

“Financial markets are innovative and they are always quick to react to a need, like the sustainable finance proposition,” Pradeep Nair, head of trade structured solutions at Standard Chartered tells GTR. “For a market to scale, a common framework is essential. The SLP is a step in the right direction and will help accelerate the movement of capital to address the social aspect of ESG issues.”

To help drive take-up of the principles, the LMA, APLMA and LSTA all say they will offer guidance and support to market participants on a global basis, and will produce separate guidance documents on the SLP in due course.