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12 April 2018

New LMA Green Loan Principles Follow Lead of ICMA Green Bond Principles

The Loan Market Association and the Asia Pacific Loan Market Association published the Green Loan Principles (GLP) in March 2018. The GLP aim to stimulate green labelled lending as a distinct financing methodology by closely following the Green Bond Principles (GBP) of the International Capital Market Association.

Green Finance
A financing incentivising or promoting environmentally responsible behaviour that is dependent on meeting environmental criteria through the use of funds can be considered "green". While commitment to the environment and to reducing CO2 emissions is the main driver for green finance, it also allows banks to get better insight into the creditworthiness of its clients by revealing more information on their underlying assets.

Green Bonds and Green Bond Principles
The main characteristic of a green bond is that its proceeds are invested in approved green projects such as renewable energy, low-carbon or sustainability-focused ventures. The GBP provide voluntary guidelines for issuers and investors and have become a market standard for green bond issuances. They are key to ensuring the integrity of this asset class.

Green bonds have been in issue since 2007 with sovereign and supranational issuers like the World Bank and the European Investment Bank EIB leading the way in the early years. The asset class has accelerated, hitting a record of USD 155.5 billion in 2017. The United States, China and France accounted for more than half of the total issuance. Switzerland was among the market entrants last year with the Canton of Geneva (green bond with tranches of CHF 420 million and CHF 200 million with Credit Suisse, UBS and Banque Cantonale de Genève as joint lead managers) and private waste collection and recycling company Helvetia Environnement Groupe SA (CHF 75 million green bond with Credit Suisse and BNP Paribas as placing banks). These Swiss bonds are listed on the SIX Swiss Exchange.

Green Loans
Green loans could follow the lead of the ever-increasing green bond market. They can operate in the same area as green bonds where the use of proceeds is restricted by "green covenants" but could also provide an alternative financing structure. For example, in cases where the borrowing amount would not reach a bond-like level (SIX Swiss Exchange requires a minimum capitalization of CHF 20 million), or if the borrower, willing to demonstrate to its stakeholders its commitment to the green issues and thereby improving its sustainability / ESG reputation, intends to abstain from complying with general public reporting standards applicable to bond issuers. A crucial element necessary to kick-start the green loan market, which was missing so far, was a credible benchmark like the GBP for the green bond market.

Green Loan Principles
The introduction of the GLP is therefore a welcome tool to encourage new green loan structures by providing market guidance on what constitutes a green loan. To this end, the GLP

1) provide a non-exhaustive list of eligible green projects (EGP), which is mirrored in the GBP's list and includes production and transmission of renewable energy, pollution prevention and control, sustainable natural resources management, biodiversity conservation, climate change adaptation and green buildings; and

2) stipulate four process-related core components requiring the borrower to

  • specify the types of EGP for which it will use the proceeds (use of proceeds for EGP and expected environmental benefits must be clearly described in the finance documents);
  • explain how it determines whether a specific project fits that description, i.e., satisfies the eligibility criteria (process for project evaluation and selection);
  • describe the use of the proceeds going to the qualified EGP (management of proceeds transparency); and
  • track the disbursement of the proceeds (reporting by providing annually updated information on the use of proceeds to the lenders).

Following the GBP's market-regulated approach, the GLP are voluntary guidelines "to be applied on a deal-by-deal basis". They allow for sufficient flexibility as the green loan market develops. The GLP recommend that the borrower's use of proceeds in line with the GLP is either self-certified by the borrower or, "[w]hen appropriate", externally reviewed by a third party consultant, verifier, certification body or a rating agency. It is noteworthy that the GLP mention that self-certification may be sufficient given the "traditionally relationship-driven" nature of the loan market – unlike the green bonds that are typically traded in a public market.

Outlook
The issuance of the GLP is a good starting point on which to base green lending, in the same way that principles were designed for the green bonds. It has set the ball rolling for green labelled lending as a separate and distinct financing mechanism with its own set of recognisable characteristics.
To develop a robust, growing green lending market, reputable banks favoring environmentally friendly finance projects will have to be visible in playing a vital role. The integrity of the lending product as such and a fully transparent process and reporting (no greenwashing scandal) are also crucial.

VISCHER, an associate member of the Loan Market Association, has relevant green financing experience in its legal practice. Our Banking & Finance Team is happy to answer any further questions you may have.

Author: Dr. Adrian Dörig

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