Introduction:
A key part of structuring Sustainability Linked Loans and Bonds is selecting an appropriate baseline where the measurement of a target is measured from.
Just like the base player in most rock bands, nobody really remembers them. However, the base is crucial and works to structure the music and is fundamental.
Link to Ambition:
Whilst this seems like a relatively small issue, the selection of an appropriate baseline is extremely important.
A baseline feeds into an ambition assessment and view of any target. Essentially it’s the starting point that ambition/quantum of change is measured from.
Whilst being an important issue there is not much guidance in the market. Let’s see if we can help with this below…
6 Golden Rules for Baseline Selection:
We have provided some guidance below to ensure appropriate selection of baselines:
- Ideally a baseline is a year or a point in time which represents a ‘usual state’ for a business;
- The best option normally is to select a baseline year which is the most recent time period which represents the business in a normal BAU year;
- COVID over 2020 and 2021 was a highly unusual event hence a lot of companies have baselines for recent transactions with 2019 baseline years which has been accepted in the market;
- Baselines in the future don’t really work;
- Sometimes companies choose baselines that are somewhat old such as 2017, which can be acceptable and have been accepted in the market where that year represented when a Science Based Target Initiative target was approved or major corporate initiative started. (if an older prior period is chosen, it’s important to make sure the target is still relevant and hasn’t largely been achieved yet);
- Sometimes with asset sales/acquisitions and other M+A activities, this may necessitate a change in a baseline. Therefore, it’s best to have documentation prepared to address these potential situations.
Don’t be be Baseless:
Unless you have a good baseline you may as well use a Ukulele to structure your linked instrument.
Do not be baseless and think through the above.
As long as due consideration has been given and there are robust reasons for using a particular baseline (which considers items such as the above) – that’s music to our ears.
