A Sustainability-Linked Loan With a Convenient Baseline Reset
Meridian Foods plc holds a €250m sustainability-linked revolving facility with your bank. The KPI is Scope 1 and 2 emissions intensity, targeted at a 30% reduction by 2027 against a 2022 baseline of 42.0 kgCO2e per tonne. The margin ratchet is ±12.5bp, tested annually. Current 2025 intensity is 33.1. After acquiring a business with a heavier energy profile, Meridian restates the 2022 baseline to 49.8, and notifies the bank that its target is now 34.9. The borrower's verification provider has issued a letter based on management estimates rather than limited assurance, and the restatement is described in a footnote as reflecting "changes in the reporting boundary". Sustainability-linked loan guidance requires baselines to be restated only in limited circumstances, with an explanation. The relationship team notes that the margin benefit would be €312,500 a year and that Meridian is also a €40m deposit client.
1. Do you accept the restated baseline, and how should the margin ratchet be applied at the next reset?
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Reject the restatement as presented.
The baseline exists to fix the level of ambition. A 30% target off 42.0 is 29.4; off 49.8 it is 34.9. Meridian's 2025 intensity of 33.1 already beats the restated target two years early, so a restatement would convert a genuine decarbonisation effort into an automatic margin reward. That is the definition of a target that has stopped being meaningful.
The distinction that matters: a restatement is permissible where the boundary genuinely changed and the change is applied consistently to the baseline and to all reported years, with a clear explanation and independent verification. Here, only the baseline has been restated; the 2025 figure of 33.1 appears unchanged, despite the acquired business now being inside the boundary. That is inconsistent and suggests the baseline was moved to make the KPI easier, not to improve comparability.
Therefore:
- Set the next reset at a discount only if the reported 33.1 is recomputed on the same boundary as the restated baseline. Expect that figure to rise materially.
- If Meridian insists on the boundary change, require the target to be expressed as an absolute reduction in tonnes, not intensity, so acquisitions cannot dilute it, and require prospective-only adjustment.
- Until verification is to limited assurance, no margin discount is payable. Apply the neutral margin and hold any benefit in escrow.
Relationship pressure is not a credit argument. The €40m deposit is relevant to overall return, not to whether a sustainability KPI has been met. Conceding here would also set a precedent across the SLL book.
2. What disclosure and assurance steps would you require before the next interest reset, and what would you do if the borrower refused?
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Required before reset:
- Limited assurance from an independent provider on the KPI for both the baseline year and the current year, on the same boundary. Management estimates in a footnote do not meet the standard for a margin-linked term.
- A reconciliation showing the pre- and post-acquisition boundary effect separately from organic emissions reduction, so the bank can see what the restatement actually represents.
- A methodology note confirming consistent application of the GHG Protocol, including whether the target is location- or market-based, and treatment of renewable energy certificates.
- Board-level confirmation that the restatement is not intended to accelerate the ratchet, and disclosure in the annual report of the restatement, its reason and its effect on the target.
- Contractual clarification in the SLL schedule: restatement triggers, notification timing, and an explicit right for the bank to withhold the discount where verification is qualified.
If the borrower refuses: apply the neutral margin, document the refusal, and escalate to credit committee. Do not terminate the relationship over the point, but do record the loan as an SLL with an unverified KPI and remove any sustainability-linked marketing claim from the bank's own disclosures. If the borrower continues to market the facility as sustainability-linked, consider requiring removal of that label as a condition of the next reset. The reputational exposure of the bank financing a KPI that no longer bites is greater than the €312,500 at stake, and the bank's own financed-emissions reporting depends on the data being reliable.