What are Green Loans?
Green loans are loan instruments made available exclusively to finance or re-finance, wholly or partly, new or existing eligible Green Projects, according to the Loan Market Association’s Green Loan Principles (the GLPs). There are no specific qualifying criteria for a “Green Project” but indicative categories set out in the GLPs include projects that:
- make use of renewable energy
- practise energy efficiency
- implement pollution prevention and control
- ensure environmentally sustainable management of living natural resources and land use
- conserve terrestrial and aquatic biodiversity
- utilise clean transportation
- promote sustainable water and wastewater management
- contribute towards climate change adaptation
As with Green Bonds, the overarching trend is that the capital provided pursuant to a Green Loan must be invested in projects that will be beneficial for the environment. The GLPs aim to distil the defining characteristics of a Green Loan to assist borrowers and lenders alike by providing a voluntary framework within which parties can operate and lenders can develop their Green Loan offerings.
Core Components of a Green Loan
The GLPs set out four defining criteria for a Green Loan.
- Use of Proceeds: The funds advanced under a Green Loan must be used exclusively for Green Projects. Where only particular tranches of a loan will be utilised for a project that will provide clear environmental benefits, the individual tranches themselves may be considered Green, but not the loan in its entirety.
- Process for Project Evaluation and Selection: The borrower must clearly communicate to its lenders (i) its environmental sustainability objectives; (ii) the process by which the borrower determines how its projects fit within the Green Projects eligible categories; and (iii) the related eligibility criteria (including exclusion criteria, if applicable).
- Management of Proceeds: Green Loans or Green tranches must be clearly designated and credited to a separate account or tracked by the borrower. The establishment of an internal governance process through which the allocation of funds towards Green Projects can be tracked is encouraged.
- Reporting: The borrower must keep record of the allocations of the loan proceeds and the expected impact and environmental benefits of the projects to which the loan proceeds are distributed. This information must be reported to the lenders.
While the Green Loan Principles provide guidance to a loan market looking to branch out into the realm of Green Loans, the implementation and development of these principles will differ per loan, per industry and per market. Parties must engage to establish how to structure their Green Loan to maximise environmental benefits and give effect to the spirit of the GLPs, without imposing undue administrative burdens on borrowers.
This article is part of a short series of articles to be published by the firm on green financing.