An extended version of the “Green Loan Principles” (the “Principles”, available here) was published by the major international syndicated lending organisations (the LMA, APLMA and LSTA) in December 2018. The aim of the Principles is to provide a high-level framework of market standards and guidelines with a view to maintaining the integrity of the green loan market as it evolves.
What are the Principles?
The green loan market aims to facilitate and support environmentally sustainable economic activity. With this in mind, the Principles require any green loan to satisfy the following four principal criteria:
- Use of Proceeds: The use of the loan proceeds is the most fundamental determinant of whether a loan can be characterised as green or not. The Principles expressly recognise that the following broad categories relate to green activities: addressing climate change, natural resources depletion, loss of biodiversity, and air, water and soil pollution. The Principles also provide a helpful non-exhaustive list of particular projects that should ordinarily qualify as green.
- Process for Project Evaluation and Selection: The borrower should clearly communicate to the lenders (i) its green objectives, (ii) its process for determining that the project to be funded is green (by reference to the Principles), and (iii) its related criteria for determining whether a particular proposed use of loan proceeds will be green or not. The borrower is encouraged to provide this project-specific information in the context of its overall business and environmental strategy and to inform the lenders of any green standards or certificate requirements that it is seeking to meet.
- Management of Proceeds: Transparency of the use of the loan proceeds is also critical. Consequently, the borrower should ensure (particularly where a loan facility includes both green and non-green tranches) that green loan proceeds are kept segregated from other monies and can be tracked and audited appropriately.
- Reporting: The borrower should keep a list of green projects, the amount of green loan proceeds allocated to them and each project’s expected impact. Where confidentiality or scale preclude detailed information being provided, generic or aggregated information is acceptable. However, transparency and clarity of information are still very important and borrowers are encouraged to use measurable indicators (eg greenhouse gas emissions reduced/avoided, green electricity generated). In a syndicated loan facility where only some of the lenders are participating in the green loan, reporting is only required to be made to the participating lenders.
The Principles are closely based on ICMA’s “Green Bond Principles” with a view to retaining consistency across financial markets. The Principles expressly note that updates to the ICMA principles (including the list of typical green projects) should be taken into account when reading the Principles.
Review: self-certification or external review?
With a view to protecting the integrity of the green loan market and avoiding concerns about “green-washing”, the Principles also encourage review of the alignment of green loans with the Principles. Such a review may be partial (focusing only on points where alignment with the Principles is not easily apparent) or full.
Taking into account the relationship-based nature of the lending market, self-certification by the borrower is recognised as an option under the Principles. However, the Principles recommend that this approach be adopted only where the borrower has demonstrably appropriate expertise and that the review process should be carefully and thoroughly documented. The Principles also suggest that the borrower make publicly available the parameters by which it assesses green projects and details of the internal expertise employed.
An alternative to self-certification is for the borrower to arrange for an external review to confirm compliance with the four core components of the Principles. The Principles do not prescribe what an external review must involve but do suggest that it could include (i) review by a recognised consultant expert; (ii) verification by qualified parties such as auditors or appropriate rating providers; (iii) certification against prescribed standards; and/or (iv) obtaining ratings from specialised research providers, rating agencies or other qualified third parties.
The Principles recognise that it can be more challenging to confirm that the proceeds of a revolving loan facility, as opposed to a term loan, are being applied in a “green” manner in accordance with the Principles. A new appendix to the Principles specifically relating to revolving facilities does, however, confirm that the Principles are intended to cover a wide variety of loan instruments, including revolving facilities. While not prescribing any specific requirements, the appendix notes that the borrower should be able to provide satisfactory evidence of compliance with the Principles where revolving loan proceeds are being applied against green projects.
Green finance is a rapidly growing sector. Reports estimate the value of new green-bond issuances in 2018 as being in the region of USD$200 billion worldwide. While the green loan market is currently much smaller, industry analysts note that it is rapidly developing and is primed for significant growth. As borrower businesses increasingly see the attractiveness of having green credentials, lenders have noted a strong demand for more green lending options. Similarly to the bond markets, the adoption by the major international industry bodies of the extended Principles should assist with reducing confusion over what constitutes a “green” loan and allow the already-significant demand for green lending to manifest itself in deals done.