Green Lending - what is the loan market doing for the environment?

4 December 2019

You would have to be living under a rock not to recognise that environmental issues have become much more of a focus in recent years as ‘going green’ has become a greater priority for everyone, both at an individual level (think tote bags, keep cups and paper straws) and at a corporate level too, as many sectors and organisations make environmental, social and governance (or, “ESG”) criteria, a higher priority.  

The lending market has been no exception to this and in December 2018, the Loan Market Association (the “LMA”), together with the Asia Pacific Loan Market Association (“APLMA”) and the Loan Syndication and Trading Association (“LSTA”)) launched its guidance on ‘Green Loan’ principles. In March 2019, the LMA (together with ALPMA and LSTA) also published its ‘Sustainability Linked Loan’ principles.

This blog provides a broad overview of the differences between Green Loans and Sustainability Linked Loans, and considers the extent to which green lending may contribute to a greener planet for everyone (if at all). 

Green Loans

The key defining feature of a Green Loan is how the proceeds of the loan are to be used by the borrower.  To qualify as a Green Loan, the proceeds must be used in whole or in part for ‘Green Projects’ which provide a clear environmental benefit.

The guidance as to what constitutes a ‘Green Project’ is fairly broad, with the Green Loan principles providing wide reaching categories for eligibility purposes including projects relating to renewable energy, energy efficiency, clean transportation, sustainable water, wastewater management,   eco-efficient products and green buildings.

The way in which the proceeds of the loan are used is key to a Green Loan, but the Green Loan borrower should also provide appropriate information to the relevant finance parties in respect of its process, project evaluation and ultimate selection of its green projects. This may include providing details of its environmental sustainability objectives more generally, and the process by which it has considered that its projects fit within the Green Projects eligibility criteria.

The borrower should also manage the proceeds of the Green Loan appropriately by crediting the same into a dedicated Green Loan account and properly tracking how the proceeds are used.  If the Green Loan will only comprise one tranche of a loan, then the green tranche must be clearly designated as such, and deposited into a separate account.

Finally, the Green Loan borrower should maintain appropriate records to identify and monitor how the Green Loan (or green tranche) has been used and the expected environmental impact. Such information should then be included in the borrower’s regular reporting.

In some circumstances, it may be appropriate for a Green Loan to be reviewed and rated externally by qualified third parties such as an independent ESG rating provider.  

Sustainability Linked Loans

Sustainability Linked Loans are different to Green Loans. The key feature of a Sustainability Linked Loan is that the borrower is incentivised to meet certain pre-determined sustainability performance targets (“SPTs”), rather than being obligated to use the proceeds of the loan in a specific way. Unlike a Green Loan, the purpose of a Sustainability Linked Loan may simply be for general corporate purposes.

Examples of SPTs categories are set out in the Sustainability Linked Loan principles and include improvements in the energy efficiency of buildings or machinery, reductions in greenhouse gasses, increasing the number of affordable housing units, improving its own ESG rating and the achievement of a recognised ESG certification.

Sustainability Linked Loans will often incentivise the borrower by linking the attainment of the agreed SPTs (which the Sustainability Linked Loan principles say should be “ambitious and meaningful to the borrower’s business”), to the terms of the loan. For example, the lender(s) may be entitled to increase or reduce the interest rate margin during the term of the loan, depending on whether the pre-agreed SPTs have been met. The intention is to encourage the borrower to engage in ambitious and positive change itself, thereby contributing to environmentally and socially sustainable economic activity and growth, more widely.

Similarly to the position in relation to Green Loans, a Sustainability Linked Loan borrower should expect to provide detailed information relating to their SPTs, and report on the same at least annually to the relevant finance parties. As with a Green Loan borrower, they may also be reviewed and rated by a third party ESG rating provider.

The Green Lending market

The LMA is reporting continued growth in the green and sustainability linked loan market, which reported a volume of $99bn in 2018. This aligns with the clear social and cultural shift towards greater engagement with environmental and sustainability issues in recent years, together with the introduction of number of climate change and corporate governance initiatives on national and international levels.

The introduction of the Green Loan principles and Sustainability Linked Loan principles have helped provide this expanding market with a framework of standard guidelines which should help provide some consistency as the market continues to grow and keep any ‘green washing’ criticism, at bay (‘green washing’ is a term used to describe the process of simply utilising clever marketing and PR tactics to give the impression of an (unsubstantiated) environmentally or sustainability based approach to business activities).

Will Green Lending help create a greener planet?

The green lending market is still its relative infancy (by way of comparison, the first set of Green Bond principles were launched in January 2014) and so it is difficult to comment on whether the recent expansion in the Green Loans and Sustainability Linked Loans market will genuinely encourage more environmentally and socially sustainable economic activity.

Some may argue that, on the basis the loan market itself is setting its own guidelines and principles as to what constitutes sustainable activity, this could lead to softer ‘Green Projects’ criteria and SPTs than are really required to see any tangible change. There is also an argument that the concept of Sustainability Linked Loans may not go far enough on the basis that they only require the borrower to make improvements to its sustainable activity but could still be made available to organisations operating in an environmentally damaging sector. However, the fact that steps are now being taken to properly address sustainability and environmental issues within the loan market, is surely a step in the right direction.

About the author

Anna Shonfeld is an Associate in the Corporate and Commercial department. Anna has experience acting on a range of corporate matters including share sale and purchase transactions, advising on shareholders’ agreements and general commercial contract drafting.

 

Latest blogs and news

Lifecycle of a tech startup series: Tax reliefs

You are aware that the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two tax incentive schemes for individuals who invest in early-stage companies. What are the key considerations when determining whether a particular investment is eligible for SEIS/EIS relief?

 

The FCA proposes new listing guidance for cannabis-related businesses – a positive step for investors concerned about the Proceeds of Crime Act

In September 2020 the FCA published a statement regarding the listing of cannabis-related businesses (CRBs) in the UK. Since then several CRBs have been admitted to the London Stock Exchange (LSE) and appetite for investments in the medicinal cannabis industry continues to grow.

FCA consults on guidance for cannabis companies

The FCA has launched a consultation on a technical note setting out guidance for companies applying for listing which have cannabis-related businesses. As with all companies applying for listing, those with cannabis related businesses must be assessed for eligibility for listing under the Listing Rules.  Because of the legal complexities around cannabis businesses the FCA applies additional due diligence requirements to them.    

Death in the digital age – continuing your online life

The pandemic has changed the world – there is no doubt we are all “online” far more now than before. Social media now extends into every aspect of our lives, from those notorious repetitive baby pictures to those ‘should never have been posted university photos‘. We collect and share moments of our lives in the digital world.

Will the FCA's proposed new SPAC rules result in more SPACS being attracted to the UK?

Following the release of the Hill Report, the FCA has moved quickly to consult on proposals intended to provide an alternative route to market for larger Special Purpose Acquisition Companies (“SPACs”).  The broad proposal is that if a SPAC can meet additional investor protection requirements the FCA will not generally require that the listing of its shares be suspended once an acquisition is announced.

The discontinuation of LIBOR and phasing in of SONIA in the Sterling Markets, what do we know so far?

Global financial markets are preparing to transition away from the use of the London Interbank Offered Rate (“LIBOR”) and adopt an appropriate alternative risk free rate (“RFR”) by the end of 2021. What are the reasons for the move away from LIBOR, the progress to date in terms of identifying the Sterling Overnight Index Average (“SONIA”) as the most appropriate alternative rate in the Sterling markets, and the steps still required to be taken to ensure such markets are ready for the phasing out of LIBOR by the end of the year

FCA Moves to Deregulate SPACs

Following the release of the Hill Report at the start of last month, the FCA has announced that it is going to open a consultation into changing the Listing Rules and connected guidance with a view to encouraging the listing of Special Purpose Acquisition Vehicles (SPACs).

The Hill Report – Impact on Smaller Issuers

Lord Hill’s keenly awaited report on the UK’s listing regime was released on 3 March 2021.  Many of his recommendations focus on the premium listed segment, and much of the commentary to date has focussed on recommendations such as permitting dual class share structures.  However, the report includes a number of proposals which if implemented may make the Official List more appealing to smaller companies, which we have highlighted in this blog.

As Lockdown Ends – Updated Guidance on General Meetings During Covid

On 30 March 2021 the provisions of the Corporate Insolvency and Governance Act 2020 (“CIGA”) which allowed purely virtual general meetings will lapse, and the normal rules will apply.  ICSA have produced some useful guidance to assist companies in dealing with their general meetings in the light of this change.

ICSA’s Report on Board Evaluations – A Brief Summary

Following a request by the Department of Business, Energy and Industrial Strategy (“BEIS”) ICSA has prepared a report assessing the effectiveness of the independent board evaluation process introduced in the 2018 update of the UK Corporate Governance Code (the “UK Code”).  

One hand in the cookie jar: Fraud and directors’ duties in insolvency

What happens when a director commits fraud by misappropriating company assets?  Or what of the director who continues trading knowing that the company has no realistic prospect of paying its debts as and when they fall due? To whom does a director owe duties at that point and what recourse is there against that director? This article explores these questions.

£26 billion fraud: The other side of the Coronavirus Business Interruption Loan Schemes

We have previously examined how the Government’s Coronavirus Business Interruption Loan Schemes (the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS)(together the “Schemes”) work. A report issued by the Public Accounts Committee on 10 December 2020 highlights the darker side of the Schemes and what it is costing the UK taxpayer. 

Lifecycle of a tech startup series: Preparing to raise investment

In the last instalment we talked about the ways in which the founders of KNow Wear Limited could protect the intellectual property in their business. Since then, the business has been progressing well and our founders have been working on developing a prototype.  

Sell, sell, sell! OTS’s recommendations on the current CGT scheme

Back in July Rishi Sunak requested a review of the current capital gains tax (CGT) system. The Office of Tax Simplification (OTS) was asked by Sunak to produce a report on whether certain features of CGT distort the behaviour of individuals. 

Lifecycle of a tech startup series: Intellectual Property

In our last instalment our founders, Sarah and Chris, considered the basics in establishing their tech startup and they incorporated a company under the registered name ‘KNow Wear Limited’. 

Lifecycle of a tech startup series: The basics

Welcome back to the blog series covering the lifecycle of a tech startup, from a legal perspective.

Lifecycle of a tech startup series: Case study

Alex (tech), Andy (tech), Emer (investments) and I (investments) work alongside startups and founders day to day and thought it might to helpful to some of you out there to bring together our expertise on the legal issues that tend to arise and how we deal with them. 

COVID-19 and Covenant Breaches in Leases and Loan Facilities

As the June quarter date fast approaches and the economic impact of COVID-19 begins to be felt across all sectors, what steps should landlords be taking to vary their lease arrangements with tenants who are unable to meet their rental obligations, and could a reduction in rental income due to COVID-19 put landlords in breach of their own obligations under their loan facilities?

Gender neutral legal drafting – not why, but why not?

On sitting down to write this blog, I was a little embarrassed. When you actually take the time to think about drafting legal documents in a way that is gender neutral, it seems to me that the question isn’t why do this, but why not?

Company Succession Planning: Death of a sole director – now what?

Company succession planning is critical to ensure that a company can continue to run in the unfortunate event that a director (or shareholder) dies. If there are other surviving directors, they are able to step in and run the company, but what happens when a sole company director dies?

Share insightLinkedIn Twitter Facebook Email to a friend Print

Email this page to a friend

We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

Leave a comment

You may also be interested in:

Skip to content Home About Us Insights Services Contact Accessibility