What Does External Verification Mean in a Sustainability-Linked Loan?
By Audelya Editorial Team · Published
External verification in a Sustainability-Linked Loan means that a party independent of the borrower checks the reported performance of each KPI against its SPT for a reporting period, using the methodology agreed in the facility, and issues a written conclusion. That conclusion is what lenders rely on to apply the loan's pricing consequences.
What is external verification in an SLL?
"External" means performed outside the borrower, by a reviewer that is independent and qualified. "Verification" means testing a reported claim against evidence. Under the SLLP, borrowers should obtain independent and external verification of their performance level against each SPT for each KPI at least once a year. The facility agreement sets the details.
See also: SLL verification: the complete guide
What is being verified?
External verification typically covers:
- KPI performance: the reported value of each KPI for the period
- SPT achievement: whether that value meets the SPT for the period
- Underlying evidence: the source records behind the reported value
- Calculation methodology: whether the agreed method, factors and boundary were applied
- Reporting period: whether the data relates to the correct period
- Baseline adjustments: where relevant, whether any recalculation follows the facility rules
Reporting periods and baseline adjustments
The facility agreement defines each reporting period and the date by which the verified report must be delivered. If the borrower's structure changes materially (acquisitions, disposals, methodology updates, data error corrections), the agreement may require or allow the baseline and SPTs to be recalculated. The SLLP guidance encourages such provisions. The verifier checks that any recalculation is applied consistently and as agreed.
How does external verification work, step by step?
A typical annual verification cycle runs as follows.
1. Scoping and engagement
The borrower appoints a verifier meeting the agreement's requirements. The engagement letter fixes the KPIs, period, standard (for example ISAE 3000) and assurance level.
2. Evidence request
The verifier issues a request list per KPI: source data, workbooks, methodology, controls and any change records.
3. Testing
The verifier traces values to source, recalculates, performs analytical review against prior periods and the baseline, and samples records.
4. Queries and gap closure
Questions and missing evidence are raised with the borrower and resolved. Corrections are documented.
5. Conclusion and report
The verifier issues a report stating, per KPI, the verified value and whether the SPT was met, with any qualifications.
6. Delivery to lenders
The borrower delivers the report with its compliance certificate to the agent or lenders, who apply the agreed consequence.
See also: How it works in Audelya
What makes an audit trail adequate?
Every conclusion should be traceable to the evidence reviewed, the tests performed and the resolution of each query. A complete audit trail supports the lenders' reliance, eases the next year's verification and helps if a margin adjustment is challenged.
Independence of the verifier
The verifier must not have prepared the data or designed the calculation it checks, and must manage any advisory relationship with the borrower. See our guide on who can verify an SLL for the detail.
What does a verification report contain?
A verification or assurance report commonly includes:
- The subject matter: KPIs, period, boundary
- The criteria: the agreed methodology and SPTs
- The standard applied and level of assurance (limited or reasonable)
- Responsibilities of the borrower and the verifier
- The conclusion per KPI, including whether the SPT was met
- Any limitations, exceptions or qualifications
Possible contractual consequences of SPT performance
Consequences are defined by contract, not by the SLLP. Common market practice is a two-way margin adjustment: a margin reduction if SPTs are met and an increase if they are not. Some facilities use one-way adjustments or apply only a reduction. If the borrower fails to deliver a verified report on time, many agreements treat the SPT as not met for pricing purposes. Facilities typically state that missing an SPT is not an event of default. Parties should always refer to their own agreement.
Sources
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