The International Swaps and Derivatives Association (ISDA) has launched a clause library for sustainability-linked derivatives (SLDs), designed to provide standardized drafting options for market participants to use when negotiating SLD transactions with counterparties.
SLDs embed a sustainability-linked cashflow in a derivatives structure and use key performance indicators (KPIs) to monitor compliance with environmental, social and governance (ESG) targets, incentivizing parties to meet their sustainability objectives. While the market is still in its infancy and is highly bespoke, a survey conducted by ISDA in 2022 showed that there is demand for standardized terms and clauses in specific areas to support the development of this product.
The ISDA SLD Clause Library provides standard-form drafting options in several key areas, including provisions stipulating what evidence of sustainability performance must be delivered and when, mechanisms to adjust cashflows depending on whether relevant ESG targets have been met, and options available to counterparties following disruption and review events.
“By their nature, SLDs are highly bespoke transactions, but the language that describes the terms and the objectives doesn’t have to be. The ISDA SLD Clause Library is designed to eliminate unnecessary differences and bring greater standardization to this market. This will bring more efficiency to the negotiation process and reduce risks, setting the foundations for this market to develop further,” said Scott O’Malia, ISDA’s chief executive, in a statement.