ABN AMRO supports new guidance on assessing pure play companies

The Practice Note provides a market-standard framework for assessing companies whose business activities are overwhelmingly focused on generating positive environmental or social outcomes. It aims to bring greater consistency and transparency to the growing use of "pure play" classifications by financial institutions within their Sustainable Finance Frameworks, despite the absence of a formal market definition.

To qualify as a PPC, at least 90% of a company's revenues, assets or another appropriate metric must be derived from eligible green or social activities. Companies must also demonstrate that the remainder of their activities is not incompatible with a PPC designation and that its operations do not cause significant or unmitigated harm to other environmental or social objectives.

A key feature of the framework is that the assessment is conducted at the entity level. Unlike Green Loans, which are based on a use-of-proceeds approach and require financing to be allocated to eligible projects, PPC designation assesses the sustainability profile of the business itself and does not require proceeds to be ringfenced.

While the financing can be used for general corporate purposes, PPC status differs from Sustainability-Linked Loans as it does not depend on demonstrating future sustainability improvements through KPIs. Instead, it provides a framework for assessing whether a company's existing business activities are already substantially aligned with environmental or social objectives. The Practice Note also adopts a more flexible approach to reporting and verification, allowing for a range of annual reporting methods and leaving verification requirements to be determined by the parties to the transaction.

Although PPC status does not automatically qualify a financing as a Green, Social or Sustainability-Linked Loan, it may provide lenders and investors with a clearer way to identify businesses whose activities are primarily focused on environmental or social outcomes. For qualifying borrowers, green or social PPC status can serve as an additional sustainability designation and a useful signalling tool for lenders, investors and other stakeholders. It may also offer a more proportionate route to demonstrating sustainability credentials given its comparatively flexible reporting and verification requirements.

ABN AMRO played an active role in developing the Practice Note through its participation on the LMA Sustainability Committee and working group responsible for drafting the guidance. We believe the framework represents an important step towards greater transparency and consistency in sustainable finance and can help organisations better demonstrate the sustainability characteristics of their business models.

If you would like to discuss the Practice Note, assess whether it may be relevant to your organisation, or understand the practical steps involved in undertaking a PPC assessment, please contact Caroline Barr.