Precision English for Remedies and Negotiation: What to say if KPI is missed—step-up explanation and fallback mechanics

Precision English for Remedies and Negotiation: What to say if a KPI is missed—step-up explanation and fallback mechanics

This lesson equips you with the exact language and logical structure to describe consequences when a Sustainability Performance Target (SPT) or Key Performance Indicator (KPI) is missed in a sustainability-linked loan or bond. The goal is to write and negotiate with precision: define the miss, tie it to timing and assurance, describe the pricing remedy (step-up) in a way that is enforceable, and position fallback mechanics and negotiation levers to minimize disputes. We will also flag common drafting pitfalls so you can avoid ambiguous or incomplete clauses.

Key terms you must master

• Cure period: A defined window after a miss or after an observation date during which the borrower can remedy, verify, or deliver missing information before the remedy applies.
• Step-up / step-down: A pricing adjustment. Step-up usually means an increase in interest margin or coupon when the KPI is missed. Step-down is a decrease when the KPI is met or exceeded.
• Fallback mechanics: Pre-agreed alternative procedures when data is missing, disputed, or methodologies change. The structure should be hierarchical to prevent conflict between alternatives.
• Waiver: A creditor consent that the remedy will not apply for a specific period or event, usually documented formally.
• Deferral: A time-based postponement of applying the remedy, often until verification is completed or an agreed date.
• Make-good: A compensatory measure by the borrower (e.g., additional reporting, contributions, or temporary margin) to address a shortfall without changing the core KPI framework.
• Reset: A negotiated adjustment to KPI levels or timelines, often after methodology changes or significant business changes, to keep targets relevant and credible.
• Event of default vs. pricing remedy only: Clarifies that missing an SPT triggers a pricing change (e.g., step-up) rather than a default under the financing—unless explicitly drafted otherwise.
• Disclosure/verification triggers: The requirements and dates for reporting KPI results and third-party assurance, which determine when the trigger is tested and when the remedy applies.

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Step 1: Establish the baseline—define the miss, the trigger timeline, and the assurance link

Start by anchoring your drafting in clear definitions and time anchors. The most frequent disputes come from unclear observation periods and verification timing, not from the level of the step-up itself. Your text must specify precisely what constitutes a miss, when the miss is deemed to occur, and how assurance interacts with that determination.

• Define the observation date: State the exact calendar date or period end when the KPI is measured (e.g., “as of the last day of the fiscal year”). Avoid vague references like “annually” without a specified anchor. Tie the observation date to the financial reporting cycle if the KPI is dependent on audited financials.

• Define the verification date: Specify when third-party assurance is due and whether preliminary internal calculations can trigger the remedy. Clarify whether independent assurance is a condition precedent to applying any step-up. If assurance is required, state the format (limited vs. reasonable assurance), the scope (specific KPI metrics), and the acceptable assurance provider standards.

• Link the miss to evidence: State explicitly what evidence determines a miss. For example, your clause should state that the KPI is deemed missed if the verified metric is below the stated SPT threshold on the observation date. If there is a cure period for reporting or methodology clarification, specify that the determination is final only after the cure period expires.

• Activate the disclosure trigger: Specify when the borrower must notify creditors of a miss (or a likely miss). Require prompt written notice, referencing the observation date and providing calculations. Establish whether failure to deliver notice is itself a breach of reporting undertakings even if the miss is later verified.

• Clarify remedy type: Confirm that a miss triggers a pricing remedy only, not an event of default, unless a separate covenant breach occurs. This separation reduces the risk of unintended acceleration and keeps the instrument within sustainability-linked norms.

A strong baseline section reads like a timeline: observation date → internal calculation → assurance (if required) → notice → cure period (if any) → final determination. If you miss any of these links, the rest of your remedy mechanics can become unenforceable or ambiguous.

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Step 2: Draft the step-up explanation—quantum, effective date, accrual mechanics, duration, and reversion

The heart of the remedy is the pricing change. Your language must specify who pays what, from when, for how long, and under what conditions it returns to the original pricing. Use concise, numeric, and time-bound phrasing.

• Quantum: Define the precise increment. State the unit (basis points), the instrument component (margin or coupon), and whether it compounds. Avoid ranges; use a single figure or a tiered schedule clearly tied to specific outcomes (e.g., one KPI miss vs. multiple KPI misses). If multiple KPIs apply, specify whether increments are cumulative and the cap if any.

• Effective date: State when the step-up begins to accrue. Common anchors are the day after the verification date, the next interest period following a miss, or a fixed calendar date after the observation date. Always connect the effective date to the existence or completion of assurance to avoid retroactive disputes.

• Accrual mechanics: Explain how the step-up is accrued and paid. For loans, link it to interest periods and payment dates. For bonds, tie it to the coupon period. Clarify whether the step-up accrues from the effective date regardless of settlement cycles, and whether any accrued step-up is payable even if the KPI is later met mid-period.

• Duration: State the length of time the step-up remains in effect. Options include: for a single interest period, until the next scheduled observation date, or for a set number of periods. Be explicit if the step-up continues until reversion conditions are satisfied, to prevent automatic expiration disputes.

• Reversion conditions: Define exactly how the pricing returns to baseline or steps down. State that reversion occurs only upon (i) achievement of the KPI at the next observation date and (ii) delivery of verification by the assurance date. If interim remediation is allowed (e.g., a make-good), specify whether it triggers partial or full reversion. If you use a one-way ratchet (step-ups persist, no step-down), say so directly to avoid expectations of symmetry.

• Interaction with other remedies: If your document also contains step-downs or fees, specify whether the step-up is exclusive or additive. If caps apply (e.g., total adjustments capped at X bps), state the cap and the order of application.

Write the step-up clause in short, numbered sentences. Use defined terms for “Observation Date,” “Verification Date,” “Step-Up Margin,” “Effective Date,” “Reversion Date,” and “Cure Period.” This structure ensures consistent interpretation across the term sheet, facility agreement, and disclosure materials.

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Step 3: Build the fallback mechanics—what happens if data is unavailable, disputed, or methodology changes

Fallback mechanics prevent deadlock. They ensure the instrument behaves predictably when reality diverges from plan. Draft them as a hierarchy and assign each level a clear outcome, so you do not run two fallbacks in conflict.

• (1) KPI verification failure: If the borrower fails to obtain assurance by the Verification Date, specify a default outcome. A common approach is that failure to verify is deemed a miss for pricing purposes until verification is delivered, with a cure period for late assurance. Clarify whether late verification reverses or only prospectively stops further accrual. Include a requirement to notify creditors of the verification failure promptly.

• (2) Temporary data gaps: If underlying data is incomplete due to system outages or third-party delays, provide a temporary proxy method. For example, use the latest verified period as a placeholder or an independently validated estimate. State the maximum duration of proxy use, after which the clause escalates to the verification failure outcome. Define who covers the cost of independent validation.

• (3) Methodology change or KPI retirement: If the KPI becomes non-comparable due to changes in accounting rules, standards, or business structure, require a good-faith methodology adjustment agreed by both parties, often with an independent expert. Specify that the adjustment aims at outcome equivalence (i.e., preserves ambition level). If the KPI is retired, specify a pre-agreed substitute KPI and how its baseline and SPT are set. Include a reset mechanism with a clear timetable and verification requirement to avoid prolonged uncertainty.

• (4) Force majeure: For events beyond the borrower’s control (e.g., natural disasters) that materially affect KPI measurement or performance, state a temporary suspension or deferral of testing, with a requirement to resume normal testing as soon as practicable. Define the scope narrowly to prevent overuse and specify that force majeure does not waive reporting unless expressly stated. Consider whether a temporary pricing deferral applies or whether pricing continues with a later true-up.

Each fallback layer should include: triggers, required notices, temporary rules, timelines, and the pricing effect during the fallback. State the priority: verification failure overrides temporary data gaps; methodology change/retirement is addressed before claiming force majeure if both could apply; and force majeure is the last resort. This priority avoids competing interpretations.

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Step 4: Negotiate remedies smartly—offer/seek alternatives, set thresholds, and lock in communication language

Negotiation is about balancing credibility with flexibility. You want clear triggers and meaningful remedies while preventing disproportionate costs for trivial misses. Use structured levers.

• Proportionality: Introduce materiality thresholds and de minimis rules. A materiality threshold ties the remedy to a significant deviation (e.g., miss by at least a certain percentage point). A de minimis rule can ignore immaterial variance due to rounding or measurement noise. Clearly define both numerically and state that they apply per KPI per period.

• Timing levers: Calibrate observation dates and verification dates to match reporting capacity. Include realistic grace/cure windows for late assurance or data delivery. Align the Effective Date with verification to reduce retroactive adjustments. If needed, use a short deferral for the first year to allow systems to mature, but ensure the deferral is time-limited and disclosed.

• Scope levers: Specify which KPIs trigger which remedies. If multiple KPIs exist, define whether each has an independent step-up, whether multiple misses are cumulative, and any aggregate cap. If only specific KPIs are strategic, consider weighting or a tiered step-up that reflects importance.

• Creditor protections: Require transparent verification and consistent reporting standards. If relevant, include use-of-proceeds ringfencing for any sustainability-related spend claimed as part of make-good commitments, together with audit rights. State the consequences for failure to provide reports on time (e.g., deemed miss for pricing until cured).

• Alternatives to immediate step-up: In some situations, you can negotiate waiver, deferral, or make-good. A waiver is a one-time consent not to apply the step-up for a defined period, typically in exchange for enhanced reporting. A deferral postpones the effective date until verification completes or a short grace period ends. A make-good allows the borrower to take compensatory actions that justify avoiding or scaling back the pricing remedy. For any of these, require written agreement, specify the duration, and state whether they affect future periods.

• Reset mechanics: When business changes materially (acquisition, divestiture, baseline recalculation), negotiate a reset that preserves ambition and credibility. Define who proposes the reset, the approval thresholds, the verification standard, and the date from which the reset applies. Avoid open-ended negotiation by setting a fallback if no agreement is reached (e.g., provisional pricing adjustment until reset is finalized).

• Stakeholder communication language: Lock in standard disclosures for term sheets, covenants, and emails. Use consistent definitions and avoid qualitative language that suggests subjectivity. Commit to timely updates to investors and lenders whenever a miss, waiver, deferral, or reset occurs. This reduces reputational risk and aligns market expectations.

A disciplined negotiation approach turns potential conflict into a controlled, predictable process. It also reassures internal and external stakeholders that sustainability-linked features are fair, verifiable, and enforceable.

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Common drafting pitfalls to avoid

• Ambiguous observation period: Do not say “tested annually” without specifying the exact date or period end. Link observation to a precise calendar anchor.
• Unclear persistence of step-up: State exactly how long the step-up lasts and what must happen for it to revert. Do not leave persistence implied.
• Missing reversion language: Always include a reversion clause tied to achievement and verification. Without it, parties may disagree on whether pricing normalizes.
• No tie to assurance timing: If verification is required, link the effective date of the remedy to completion of assurance or clearly state that lack of assurance is a deemed miss. Partial ties produce disputes.
• Undefined fallback priorities: A list of fallbacks without an order invites conflict. Set a clear hierarchy and logic for how one fallback escalates to the next.
• Vague thresholds: If you use materiality or de minimis, quantify them. Vague thresholds are hard to enforce and invite negotiation at every observation date.
• Overbroad force majeure: Keep the definition narrow and time-limited, with prompt notice and evidence requirements. Broad clauses risk undermining KPI credibility.
• Inconsistent terms across documents: Ensure the term sheet, covenant definitions, and disclosure language use identical defined terms. Minor inconsistencies are common sources of litigation.

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How to communicate “what to say if KPI is missed” in clear, precise English

When writing term sheets, covenants, or negotiation emails, be concise, numeric, and time-anchored. Use short sentences and defined terms. State: the trigger, the timing, the pricing change, the duration, and the reversion. Include the assurance link and the fallback hierarchy. Avoid rhetorical or qualitative phrasing. Replace generic words like “significant” with defined thresholds.

Your goal is disciplined clarity: a reader should understand what happens, when it happens, and how it ends—without guessing or inferring. When you draft and negotiate in this structured way, you reduce friction, improve enforceability, and support credible sustainability outcomes while maintaining financial predictability.