Is your sustainability linked loan creating risk or value?
For private equity, sustainability linked loan (SLL) assurance should not be a compliance afterthought. It protects financial outcomes, proves credibility to lenders and Limited Partners (LPs), and turns ESG data into a strategic advantage, so it’s essential to have in your portfolio management toolkit.
In this article, Verco experts Myles Tatlock and Jing Wang explain the operational hurdles and risks PE firms face, how SLL assurance can help, and how to assess the operational maturity of your current SLL management.
What are the specific operational hurdles that distinguish a PE firm's SLL from a corporate firm's?
For General Partners (GPs), the material challenge of an SLL occurs after closing, during the performance period. The task moves from ambition to evidence: aggregating data, maintaining baselines, and providing lender-ready verification across a dynamic portfolio.
It’s harder for a PE firm to establish a controlled methodology to collect and verify KPI data. This is because they must do this for diverse portcos, each with varying systems and sector-specific metrics which make the process highly complex.
In order to ensure year-on-year comparability is meaningful, a PE firm must also define and document rules for how acquisitions, divestments and growth capital events impact fund-level KPIs.
Finally, they must navigate scenarios in which individual portcos delay or alter their decarbonisation / science-based target pathways. Despite the change this creates, the fund must still demonstrate credible progress against its SLL KPIs.
What are the risks of not having a controlled verification process?
The risks of not having a controlled verification process are:
Without independently verified data, the application of performance pricing mechanisms becomes subjective, leading to potential disputes.
Unverified ESG claims create vulnerability in LP reporting and during fundraises, where anecdotal narratives are increasingly insufficient.
The annual KPI test becomes a reactive, resource-intensive fire drill rather than an integrated review of performance data.
What benefits does a mature assurance process offer?
In a nutshell, it offers confidence, clarity, and evidence for critical decisions.
Audited data allows for credible, third-party verified communications with LPs and the board, especially during portfolio transitions or when navigating market uncertainty.
It also de-risks the financial outcome of decisions by delivering audited data for margin adjustments. This reduces the potential for disputes with the lending syndicate.
As well as this, the assurance process acts as a kind of early diagnostic system, identifying data quality and control weaknesses and allowing for proactive interventions.
How does an ongoing assurance function differ from the initial framework review?
A Second Party Opinion (SPO) assesses the design and potential alignment of the SLL framework with principles pre-issuance.
Assurance is a post-issuance function. It audits the operational controls, data integrity, and reported outcomes against the KPIs.
For lenders determining margin adjustments, it is the assurance opinion that provides the requisite evidence, not the SPO.
How does an assurance process adapt to the realities of a PE portfolio?
Verco’s methodology is designed for minimal disruption while providing maximum strategic insight.
We begin by scoping and mapping the SLL structure against your portfolio’s unique data flows to identify key dependencies and risk points. We then conduct risk-based testing, focusing on high-risk areas, and using technology for efficiency. This testing is aligned with relevant assurance standards.
The output is consolidated to highlight portfolio-wide findings, providing actionable insights for operational improvement and future SLL structuring, not just a point-in-time report.
How should a PE firm assess the operational maturity of its current SLL management?
- First, verify whether you have a single, documented methodology for aggregating KPI data from all material portfolio companies, as inconsistent calculations are a primary source of material misstatement.
- Second, confirm you have formally defined how acquisitions and divestments are treated within the SLL KPIs for the performance period, ensuring year-on-year comparability remains meaningful.
- Third, establish if there is a clear internal owner, such as Portfolio Operations, with the mandate to challenge portco data submissions before consolidation, which is the foundation of credible reporting.
Where should a PE firm begin if its current process has gaps?
We recommend using the diagnostic questions above as a framework for internal discussions.
The objective is to integrate SLL performance management into the fund’s existing financial and operational oversight rhythms.
We are happy to discuss how to structure this approach for your specific portfolio or to review a draft of your internal SLL data protocols. Simply get in touch.
Continue the conversation with Myles and Jing
In this video, Myles and Jing discuss the differences between SPOs and assurance, the benefits of ongoing assurance for GPs and more.
Listen to the full discussion as a podcast here: