What distinguishes a ‘green loan’ from a typical ‘loan’? A green loan is a form of financing that seeks to enable businesses to finance projects which have a distinct environmental impact, or rather, are directed towards financing ‘green projects’, such as those projects seeking to address climate change, the depletion of natural resources, the loss of biodiversity, as well as combatting pollution.
However, the concept is even broader by encapsulating a green-oriented methodology across the entire process of selection, structuring, utilisation, monitoring and reporting of loans over their entire duration.
Although various standards exist, the litmus test for identifying a green loan is represented by the criteria set out in the ‘Green Loan Principles’ (‘GLPs’), published in 2018 by the London-based Loan Market Association. The GLPs aim to create a high-level framework of market standards and guidelines, setting out four defining criteria:
Use of proceeds: funds are advanced to exclusively finance or refinance green projects, with the GLPs setting out a non-exhaustive list of eligible projects.
Green project evaluation and selection: the assessment should be an objective and balanced one, highlighting the potential material environmental risks associated with the proposed green project, as well as underlining any green standards or certifications the prospective borrower will strive to attain in order to counterbalance such risks.
Management and monitoring of use of proceeds: the borrower’s management of the actual use of proceeds, by way of self-certification or independent third-party monitoring and review.
Reporting: the GLPs promote transparency in reporting by recommending that borrowers report on the utilisation of proceeds and actual allocation of proceeds towards green projects, as well as information on the environmental impact thereof, through a mix of quantitative and qualitative performance indicators. So one may ask, why go green?
The green loan market has gone from strength-to-strength
While the over-arching motivation is the attainment of sustainable projects that have a positive environmental impact and seek to pursue the wider common good in addition to profit-driven goods, green loans offer wider benefits through enhanced corporate governance and relations with shareholders and other stakeholders.
Furthermore, green loans allow borrowers to gain access to a deeper and more diverse pool of investors, particularly those seeking investment with a positive environmental, social and governance (‘ESG’) focus.
From a purely financial perspective, the general market trend observed is for lenders to charge lower interest rates to finance green projects, or the easing of financial or other restrictive covenants, incentivising uptake.
With a burgeoning environment-first conscious, the green loan market has gone from strength-to-strength, enjoying year-on-year growth and attracting an ever-widening pool of banks and other financial institutions to the green loan market. In more recent months, we have witnessed a gradual evolution in the concept of green lending, with green loans spawning into more complex loan instruments, better known as ‘sustainability-linked loans’ or ‘SLLs’. SLLs will form the subject of our next publication in this Sustainable Finance series.
This piece forms part of Camilleri Preziosi’s ‘Sustainable Finance’ series, in which members of the firm’s Capital Markets and Finance practice groups explore and evaluate the emerging trends and opportunities in the sustainable finance economy. For further information, contact malcolm.falzon@camilleripreziosi.com.