When Is a Loan “Green”?

April 24, 2018

Written By Simon Grant

More than US $150 billion in “green bonds”—bonds that fund projects that provide environmental benefits according to guidelines developed by the International Capital Markets Association (ICMA)—were issued globally in 2017, according to research from the Climate Bonds Initiative. Although the proportion of all bonds that are recognized as “green” remains small relative to the total size of the worldwide bond market, the annual volume of green bond issuances in 2017 was 78 percent greater than it was in 2016.

The growth in the market for green bonds has led to demand from some borrowers and lenders for similar “green” criteria of environmental sustainability for loans. The Loan Market Association and the Asia Pacific Loan Market Association recently released a set of voluntary guidelines for green loans. The green loan principles, which were developed with the assistance of the ICMA, closely resemble the green bond principles.

According to the green loan principles, a green loan is a loan instrument that is made available exclusively to finance or refinance, in whole or in part, a new or existing “green project” that meets four key components:

1. Use of proceeds: Proceeds of the green loan must be used toward a project that provides clear environmental benefits in an area of environmental concern. Examples of such a project could include renewable energy production or transmission projects, wastewater treatment projects, clean transportation projects, soil remediation projects, greenhouse gas control projects, among others depending on local and sectoral conditions.
2. Evaluation and selection: The borrower should be able to clearly communicate the environmental sustainability objectives of the project.
3. Management of proceeds: Proceeds of the green loan should be in a dedicated account (or otherwise clearly tracked).
4. Reporting: The borrower should keep up to date information on the use of proceeds in a form that can be provided to financial institutions participating in the loan. Qualitative performance indicators are recommended, and quantitative performance indicators are recommended where feasible (for example, in an electricity generation project). An external review is generally recommended, where appropriate, but in circumstances where a borrower has sufficient expertise, self-certification by the borrower may be appropriate. The borrower should also consider making compliance information publicly accessible via their website, where appropriate.

Borrowers that are seeking financing (or refinancing) on a project that could meet these criteria for environmental sustainability may wish to consider whether the reputational value of being a green loan justifies the costs of compliance (and outweighs any possible risk of failing to comply).

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