Treasury Today Country Profiles in association with Citi

Loan Market Association establishes framework for green loans

Solar panels in the foreground of business buildings

The LMA’s newly-released Green Loan Principles provide a standardised reference point for the budding wholesale green loan market.

Treasurers tasked with obtaining green finance to drive their company’s sustainability efforts may have new cause to consider green loans. The Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) issued guidelines late last month, creating a high-level framework to support the development of this nascent market.

The Green Loan Principles (GLP), created by the LMA in partnership with a range of financial institutions active in the green loan market, build on the International Capital Market Association’s (ICMA) Green Bond Principles (GBP) to promote consistency across financial markets.

“The green loan market is young and holds lots of promise,” says Clare Dawson, Chief Executive at the LMA. “It is therefore an important first step to put in place principles that give investors and borrowers a reference point when building green loan structures. This will ultimately bring more confidence to the market and support its long-term development.”

Guidelines in focus

In brief, the GLPs state that qualifying loans must be utilised to finance or refinance “green projects”. This is the “fundamental determinant of a green loan” says the LMA. These projects can range from harnessing renewable energy to building offices that meet regionally, nationally or internationally recognised standards or certifications.

The principles also state that borrowers should clearly communicate environmental sustainability objectives to lenders and outline how they determine their projects as green. Borrowers should also highlight any other related eligibility criteria, including any potential material environmental risks associated with the projects it is financing.

As is the case with green bonds, the proceeds of green loans “should be credited to a dedicated account” or “otherwise tracked by the borrower in an appropriate manner”. If a loan has multiple tranches, each green tranche must be clearly designated, with proceeds of the green tranche(s) credited to a separate account or tracked by the borrower.

When it comes to reporting, the GLPs diverge slightly from the GBPs. This is to reflect the fact that the loan market is private, explains Dawson. The principles reflect this, saying that information around the specific use of proceeds only needs to be provided to those institutions participating in the loan. This is unlike the green bond market where this information must be made public.

The private nature of the market also means that green loans do not necessarily require external verification, says Dawson. Lenders already have in-depth knowledge of their clients’ activities, although certification can give extra credibility to the deal.

“The GLPs will bring further consistency and credibility to the market,” comments Karl Nolson, Head of Global Lending Group at Barclays Corporate Banking. “Given minimum size constraints in the green bond market, the introduction of GLPs opens use-of-proceeds financing to a larger pool of corporate clients, allowing green financing across the continuum.”

A market on the rise

Green loans have existed in some shape or form since 2014, when UK retailer, Sainsbury’s, issued the first green loan. And while it has taken some time for the market to pick up, 2017 proved to be a watershed year, with more corporates using the product.

“Green and environmental issues are global concerns and a wide variety of corporates are increasingly looking at the potential to take advantage of green loans,” explains Barclays’ Nolson. “At present, European blue chips have secured sustainability-linked financing, with corporates in the UK looking to use-of-proceeds green financings such as green loans for LED lighting or green asset finance for purchase of more efficient operating assets.

Reports indicate that in Europe, the total volume of green loans syndicated is roughly €15bn. Notable deals include Iberdrola’s €5.3bn green loan and Philips’ €1bn revolving credit facility arranged by ING.

There is also increased activity in Asia. This year has seen Olam secure a US$500m green revolving credit facility, whilst Beijing Jingneng Clean Energy launched a US$220m green loan into syndication last month.

“For corporate issuers, green loans offer clear benefits,” says Matt Rhys-Evans, Director, Syndicated Finance at ING. “This is because sustainability is an important topic for all businesses and green loans are another way for a company to highlight their efforts in this space.”

Rhys-Evans notes that there can be further advantages for corporates, such as pricing, if the interest rate of the loan is aligned with sustainability metrics. For example, in the case of Philips, the interest rate of the loan is dependent on the company’s year-on-year sustainability performance improvement.

More to come

Given the increased and broader interest in green financing, it is expected that the market will continue to grow over the coming years, this being boosted by the GLPs.

However, the LMA’s Dawson notes that it is important that the market continues to evolve and differentiate itself from other forms of green financing. “We are currently exploring ways to extend the GLPs and build mechanisms that accommodate general purpose loan facilities in addition to specific project financing. This will broaden the green loan market considerably.”