On 23 February 2023, the Loan Market Association (LMA) announced the publication of updated Green Loan Principles (GLPs), together with supporting guidance documents, produced in collaboration with the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA). The intention behind the updated GLPs is to ensure that they reflect recent market developments across global sustainable finance markets so that the GLPs may continue to provide a relevant framework that promotes the development and integrity of sustainable finance products.
The latest developments in respect of the GLPs
We set out below a few noteworthy developments and/or clarifications that have been incorporated into the updated GLPs:
- The choice between a Green Loan and a Social Loan: it is recognised that the use of a particular loan may have both an environmental and a social benefit and therefore could be classified as either a green loan or a social loan. The LMA’s recommendation to borrowers and lenders in their classification of such a loan is that the borrower’s primary intention for the loan should be considered as the determinant. Where the borrower’s primary intention behind the project that is being financed is to meet environmental objectives, the loan should be designated a green loan rather than a social loan.
- Future Green Projects: where a borrower is seeking a Green loan but an eligible Green Project is not yet in existence or a specific eligible Green Project has not yet been selected, it may be possible to designate the loan as a Green provided that the borrower and lender have agreed on the eligible categories of Green projects for which the loan proceeds may be utilised. However, the qualification framework for these projects must ensure that the financing to be provided and the terms there-of will satisfy all four core components of the GLP once a potential project is in existence or a specific project has been selected.
- Eligible Green Projects: while the GLPs do not prescribe an exhaustive list of projects that would be eligible Green Projects, the list provided in the GLPs is a helpful guide to borrowers and lenders. This list has been updated to include green technologies (such as carbon extraction technologies and energy storage systems), circular economy adapted products, production technologies and processes, and green buildings that meet regional, national or internationally recognised standards or certifications for environmental performance. Furthermore, the LMA recognises that in addition to the GLPs, there are a number of current international and national initiatives to produce taxonomies and nomenclatures to assist with identifying which projects qualify as “green”. Borrowers should report to lenders the extent to which their projects align with official or market-based taxonomies and disclose any Green standards or certifications with which their project complies.
- Temporary placement of any unallocated loan proceeds: in order to comply with the GLPs, the proceeds of the loan must be exclusively applied to finance or refinance eligible Green Projects. However, it is recognised by the GLPs that there may be a requirement for temporary placements of unallocated proceeds. Borrowers must disclose the intended types of temporary placement for any unallocated loan proceeds pending their application to eligible Green Projects and in order to maintain the integrity of the Green loan market, should ideally make use of types of temporary placement that are consistent with and do not contradict the objectives of the GLPs.
- Review: external review is not mandatory to ensure compliance with the updated GLPs. Self-certification by a borrower is acceptable provided that a borrower has appropriate expertise and capacity internally which is thoroughly documented and disclosed. Where external assessment of compliance with the GLPs is used, parties are encouraged to consider the Guidelines for Green, Social and Sustainability-Linked Loans External Reviews (Guidelines for External Reviews) which provide information and guidance on external review processes.
Application of the GLPs to previous Green Loan transactions
The LMA has advised that all transactions completed prior to 9 March 2023 will be exempt from compliance with the updated GLPs. Instead, they should be assessed within the framework of the GLPs in circulation at the time of origination, extension or refinancing of the loan (as applicable). However, it is critical that parties to Green Loan transactions, currently under way, consider the updated GLPs to ensure that they remain compliant.
This article is part of a short series of articles to be published by the firm on green financing.