Green finance and sustainable finance are trending topics. After green bonds becoming an increasingly common financing instrument, there is a growing demand by borrowers for green loans. For lenders on the other hand, also in view of various recent initiatives of the European Union in respect of sustainability, participation in (syndicated) green loans is expected to become more important within the investment criteria of a financial institution.
As a response thereto, the Loan Market Association (LMA), together with the Asian Pacific Loan Market Association (APLMA) introduced the so-called 'Green Loan Principles' (GLP) in March.
The International Capital Markets Association (ICMA) supported the LMA and the APLMA with the development of the GLP. Other parties that assisted with the development of the GLP include the Association of Corporate Treasurers, the European Banking Federation as well as financial institutions that are active in the green loan market.
In its press release the LMA stated that the GLP aim to create a high level framework of market standards and guidelines, providing a consistent methodology for use across the wholesale green loan market, whilst allowing the loan product to retain its flexibility, and preserving the integrity of the green loan market while it develops.
The GLP define green loans as "any type of loan instrument made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible Green Projects." The GLP add that green loans must align with the four core components of the GLP, as set out below. Furthermore, the GLP determine that green loans should not be considered interchangeable with loans that are not aligned with the four core components of the GLP.
An indication of what the GLP consider to be 'Green Projects' can be found in Appendix 1 to the GLP. Based on the categories provided in the GBP of 2017, the appendix consists of a non-exhaustive list of categories of eligibility for Green Projects, including clean transportation, renewable energy, pollution prevention and control.
The GLP consist of the same four core components as the GBP:
- Use of Proceeds: key is that a loan (or tranche) is utilized for a Green Project and that this is sufficiently laid down in the finance documentation;
- Process for Project Evaluation and Selection: a borrower is expected to give the lenders a clear insight of, among other things, its environmental sustainability objectives and how it reaches the conclusion that his projects fall within the scope of Green Projects;
- Management of Proceeds: in view of transparency, a borrower is also expected to have a system in place that procures that the proceeds of a loan can be tracked to being utilized for the purpose of a Green Project; and
- Reporting: To further enhance transparency, the borrower should keep the lenders informed on the use of proceeds on an annual basis, until a loan is fully drawn, and if necessary, thereafter.
Similar to the GBP, the GLP recommend borrowers to obtain a partial or full external review, for example by obtaining a consultant review, verification, certification or rating by a specialised agency. However, by mentioning "when appropriate" as well as the possibility of self-certification, the GLP recognise that in the (green) loan market lenders tend to have broad working knowledge of a borrower and its activities.
As is the case with the GBP, the GLP are "voluntary recommended guidelines, to be applied by market participants on a deal-by-deal basis depending on the underlying characteristics of the transaction, that seek to promote integrity in the development of the green loan market by clarifying the instances in which a loan may be categorized as 'green'."
We welcome the introduction of the GLP and the fact that it contains a definition of green loans. The GLP are expected to contribute to more consistency, integrity and transparency in the green loan market. By achieving this, the GLP may also contribute to an increase in the volume of (syndicated) green loan-transactions in addition to bond issuances that comply with the GBP.
Aside from the green loans that comply with the GLP, in the market there are also other types of financing that are considered as 'green loans', for example (syndicated) loans that are extended for general corporate purposes and that are linked to the borrower's sustainability performance and rating. These loans do not fall within the scope of the GLP.