The Race Towards Green Finance Continues – Green Loans and Sustainability-Linked Loans

EMW

11th June 2021

Despite the continuing challenges of the global pandemic, the green finance revolution is in full swing in the UK. On 3 June 2021, the Governor of the Bank of England, Andrew Bailey, published a speech on tackling climate change. Mr Bailey set out three main focus points for banks and financial institutions over the coming years: firstly, the need to improve the understanding of climate-related financial risks across the financial system; secondly, the development and embedding of climate risk management in regulated financial firms; and thirdly, how the Bank of England itself can achieve best practice through its operations as a centralised financial institution. Hoping to lead by example, the Bank is committed to reducing emissions from its physical operations so it will become net-zero by 2050 at the latest.

This speech is encouraging, as it pushes green finance ever closer to the top of financial institutions’ agendas. So, what kind of products have started to emerge in the financial markets to achieve these ambitious but necessary targets? Two increasingly popular initiatives are ‘green loans’ and ‘sustainability-linked loans’, which are already offered by the likes of financial giants such as Lloyds and Barclays. While the two loans differ in their mechanisms, they both aim to tackle the broader issue of climate change at their core.

Green Loans

While ‘green loan’ is often used as a blanket term to describe any type of lending with sustainability in mind, it is more accurately described as a type of loan where the proceeds are required to be used for a specific ‘green’ project or purpose. Unlike a sustainability-linked loan, there is no pricing adjustment mechanism in a green loan.

To qualify as a green loan, a loan must comply with the four components of the Loan Syndications and Trading Association (LSTA) Green Loan Principles (GLP), last updated in February 2021:

  • Use of proceeds – green loan proceeds must be used to finance or refinance an eligible green project which has clear environmental benefits. What constitutes a ‘green project’ is highly subjective at present in the absence of any standardisation, but indicative categories set out in the GLP include (among others) energy efficiency, pollution prevention, renewable energy and clean transportation. 
  • Process for project evaluation and selection – the borrower of a green loan must communicate its environmental sustainability objectives, how the project fits within the GLP, and the related eligibility criteria to lenders.
  • Management of proceeds – all proceeds of green loans are required to be advanced into a separate account of the borrower. This promotes transparency of how the proceeds are applied and creates integrity of the green loan product.
  • Reporting – borrowers are required to keep up to date information on the use of green loan proceeds and make this information available to lenders. Reports should include details of all the green projects to which the proceeds of the loan have been applied, including a brief description of and the amounts applied to each.

 

Find out more from Sean about our update: https://bit.ly/3xandDJ 

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