Get up to speed with green loans

Nisha Minhas is an associate solicitor in the property team at Irwin Mitchell

In April 2021, the Loan Market Association, together with the Asia Pacific Loan Market Association and the Loan Syndications and Trading Association, published updated versions of the Green Loan Principles refining and tightening the core components of green loans, and setting four components to be met with a view to promoting the development and integrity of the green loan product. This updated version now includes social risks as one of the categories to consider during project evaluation.

What are green loans?

A loan to facilitate and support environmentally sustainable economic activity, enabling borrowers to use the proceeds to fund projects that make a substantial contribution to an environmental objective, with 100% of the proceeds being used for green activities and being structured in alignment with the four principles set out below.

Green loan principles

1. Use of proceeds.

The key principle of a green loan is that it is used solely for the purpose of funding a green project (including related and supporting expenditure, such as research and development) and should be described as such in all finance documents. All designated green projects should provide clear environmental benefits and should be assessed, measured, and reported on by the borrower.

Where funds are to be used in whole or part for refinancing, the borrower should provide an estimate of the share of the loan being used for finance versus refinancing.

A green loan may also be one tranche in a loan facility containing multiple tranches. Where this is the case, the “green” tranche should be separated from the rest of the facility, with the proceeds credited to a different account or tracked in an appropriate manner. 

2. Process for project evaluation and selection.

The borrower of a green loan should clearly communicate to its lenders: its environmental sustainability objectives, the process used to determine the eligibility of its projects and the criteria used to assess this. In addition, the borrower should confirm how it will manage the environmental and social risks of eligible projects.

The LMA principles set out a non-exhaustive list of projects that might be eligible for green funding. From a real estate perspective, examples might include:

• refurbishment or development of a new building with green credentials – this might involve obligations to secure an A-rated EPC, a BREEAM “very good” or “excellent” rating;
• achieving an agreed percentage use of renewable power or increasing renewably-sourced energy by a specified percentage;
• installing smart meters, LED lighting or solar panels; 
• installation of cycle parking spaces;
• waste recycling, and energy/emission-efficient waste to energy; and
• environmentally sustainable management of land use including environmentally sustainable agriculture and preservation or restoration of natural landscapes.

3. Management of proceeds. 

The proceeds of green loans should be credited to a dedicated account or tracked by the borrower to maintain transparency and promote the integrity of the product. Borrowers are also encouraged to establish internal processes to track the allocation of funds towards green projects. 

4. Reporting.

Borrowers should keep up-to-date records of what the proceeds of the green loans have gone towards readily available. This information should be renewed annually until the loan has been fully drawn. The information should include a list of the green projects with a breakdown of how the funds have been allocated and their expected impact. 

External review process

The Green Loan Principles also recommend an external review process, which might include:

1. Consultant review:

whereby a borrower can seek advice from a third party with recognised expertise in environmental sustainability.

2. Verification:

a borrower can have its green loan independently verified by a qualified party or auditor, who will verify the internal standards and claims made by the borrower. 

3. Certification:

a borrower may have its green loan certified against an external standard. The Green Loan Principles allow self-certification by a borrower, if they have the technical expertise to confirm alignment of the green loan with the key Green Loan Principles.

4. Rating:

a borrower may have its green loan rated by qualified third parties, such as specialised ratings agencies. 

What happens if a loan stops being green?

Where a green loan has been applied for initially, but subsequently cannot be considered green, the parties can agree to declassify the green loan and agree to the loss of any favourable interest rates or other benefit on the loan that would have been given. 

Who can borrow under a green loan?

Any entity may borrow a green loan, subject to the four principles set out above being met. 

Given the current climate and the attention on sustainability and environmental impact, the green agenda will continue to dominate as we go forward. 

Further guidance

The LMA has published guidance documents which answer some of the most frequently asked questions on the application of Green Loan Principles to real estate finance. There are two guidance documents: one focusing on funding for green buildings, and another focusing on funding for the retrofit of existing buildings. These are available on the LMA website.

This article first appeared in Estates Gazette