Green Loan Principles
17 June 2019
Increasingly in recent months, the global finance markets have reported the arrangement of high profile, high value “Green Loan” facilities. In an age of sharpened focus on renewables, the importance of carbon footprints and the impact of greenhouse gases, it should come as little surprise that lenders and financial institutions the world over are stepping up efforts to deliver on commitments to sustainability and backing those leading the charge on the borrower side.
With news in the last week of additional commitments to cutting carbon emissions by the UK government and proposed revisions to legislation enacted in the Climate Change Act 2008, further progress looks to be afoot. If passed, the changes would see a “Net-Zero” carbon emissions target by 2050.This in effect means the UK will target reductions to greenhouse gas emissions over the next 30 years, with the aim of ensuring emissions should be 100% lower than 1990 baseline levels of carbon dioxide and other targeted greenhouse gas emissions. With these proposed changes in mind, we look at the prospect of further emergence of the Green Loan and consider the place of the Green Loan in the taxonomy of global sustainability efforts.
To start, it is important to bear in mind that Green Loans have arguably always been around, in the form of project finance loans, but since March 2018 we have had something slightly more tangible and discernible in the form of the Green Loan Principles (GLPs).The GLPs were first published in March 2018 by the Loan Market Association (LMA), in conjunction with the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) and further refined in December 2018.
We consider below the key features of Green Loan compliant facilities and the GLPs under which such facilities must comply and operate. This update is a follow on from our recent update on the Sustainability Linked Loan Principles (SLLPs).
The GLPs (like the SLLPs) provide a framework of standards and guidance for participants (lenders and borrowers) to consider and adopt when arranging Green Loans, which broadly mean loans and other financial instruments made available to finance eligible “Green Projects”.
The GLPs set out a list (non-exhaustive) of categories of eligible Green Projects; a project may straddle more than one area, and can include:
- renewable energy projects;
- energy efficiency projects;
- pollution prevention and control;
- environmentally sustainable agriculture, fishery, forestry;
- preservation or restoration of natural landscapes;
- clean transportation, including electric, public, rail and infrastructure;
- sustainable water and waste management;
- climate change adaptation;
- green buildings.
As we can see from the above, the scope of the projects that may fall within the ambit of the GLPs is extremely broad. To continue with the jargon-busting, the list above has been adopted by the GLPs based on the “Green Bond Principles” (GBPs) designed by the International Capital Markets Association (ICMA) for use in the “Green Bond” market.
The GLPs are made up of four core components, or characteristics:
1. Use of Proceeds – Green Projects
This is the basis of all Green Loans, the proceeds must be utilised and applied for Green Projects (including supporting, ancillary activities).This purpose should be captured appropriately in the relevant loan document or facility. A Green Loan may form one or more tranches of a particular facility, in which case appropriate segregation should occur with the proceeds of the “green tranche” going to its own separate designated account. The Green Project should provide clear and assessable environmental benefits.
2. Project Evaluation and Selection
Borrower’s to whom facilities are made available under the GLPs should communicate to the relevant lender:
a) sustainability objects of the borrower;
b) the borrower’s processes to determine that its projects are Green Projects; and
c) any exclusion criteria to manage potentially material environmental risks associated with a given project.
3. Management of Proceeds
As noted above, a borrower must ensure the Green Loan proceeds are credited to a specific account to ensure transparency, or track the proceeds in some other justifiable manner. This will also extend to segregation of Green Loan “tranches” within a wider facility, where applicable. Borrowers should establish internal processes to ensure compliance.
4. Borrower Reporting
Information on the use of Green Loan proceeds should be kept updated and subject to annual review. This information is key to the general objective of transparency in connection with Green Loans and would include:
a) list(s) of Green Projects to which proceeds have been applied;
b) descriptions of such projects;
c) relevant amounts allocated such projects; and
d) the expected impact of such projects.
Where confidentiality concerns arise, generic terms and aggregation can be adopted to maintain Borrower discretion. Information will be provided to lenders only, which may include syndicates. In reporting project performance, qualitative and quantitative data should be provided, for example emissions reductions or energy generation metrics.
External review of Borrower performance is also recommended, which may include expert review, verification, certification, or other assessment by external third parties, to determine alignment of the Green Loan with the GLPs four core components.
In some cases depending on the relationship between borrower and lender under a Green Loan, a lender may accept borrower self-certification of the alignment with the GLPs.
Revolving Credit Facilities
The GLPs have clarified that Green Loans can include revolving credit facilities (RCFs), despite the potential for more uncertainty over the application of proceeds, which may not be present in, for example a term loan.
Provided the facilities under an RCF are applied for Green Projects throughout the life of the facility and appropriate checks and balances are in place between the lender and the borrower to monitor that flow of funds, an RCF can also fall within the GLPs. External review may be a more prevalent concern in this case.
The GLPs may be useful to borrowers with specific sustainability goals, for example, a green office space may be financed under a facility operating under the GLPs. Note however, the GLPs alone do not strictly concern themselves with reduced margins or more favourable terms, in the manner which is envisaged under the SLLPs. That said, borrowers with funding requirements geared towards Green Projects may prove attractive to lenders who wish to commit their capital to specific sustainability projects. Therefore, improved margins or other favourable loan terms may flow from the commercial discussions.
Borrowers and lenders alike are becoming further attuned to the importance of their green profile, in particular, from a CSR perspective. The GLPs, together with the SLLPs and GBPs, have a clear place in the global sustainability nexus and there appears to be an inevitability about the continued growth of the Green Loan market.