1. Specific – KPIs should be clearly and precisely defined
The key is to ensure the KPI(s) and surrounding mechanics are documented in a clear, precise and unambiguous way. This will minimise the possibility of future disputes and ensure there is a defined process in different scenarios. For example: how do you treat the ESG component if the transaction is closed out early? Areas to consider include (but are not limited to) the KPI definition, scope, timelines, methodology and consequences for failing to meet a target.
2. Measurable – KPIs should be quantifiable, objective and within the company’s control to deliver
ISDA suggests benchmarking KPIs against publicly recognised standards whether at a global, regional or local level; for example the UN’s Sustainability Development Goals (SDGs). This benchmarking can also help with verification (see below). ISDA recognises this isn’t always possible, hence as an alternative suggests that companies could benchmark versus their own performance.
3. Verifiable – Get them checked, and check who is doing the checking
The association proposes to verify whether a KPI has been met by following this process: Use 1) an independent third party or 2) one of the counterparties to the transaction. Clearly 1) is more straightforward – it reduces the chance of moral hazard, conflicts of interest and, of course, greenwashing. However, if not practical, ISDA suggests that the verifying counterparty develops and documents robust procedures in a readable format. In this scenario, it is important to consider the seniority and subject-matter expertise of the verifier, and, again, ensure a clear dispute resolution mechanism is agreed.
4. Transparency – Share as much as you legally and realistically can
Outside of establishing a process for sharing relevant information over the life of the transaction, ISDA highlights incorporating provisions that allow relevant information to be shared publicly. They believe this can support the impact of the SLD and the development of the market overall.
5. Suitable – Make them appropriate!
Clearly any KPIs need to be relevant to the counterparty and product they reference, but ISDA also highlights the importance of the impact that the SLDs should have and the term of the observation period - too short, and the effectiveness of the SLD may be called into question.