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Green Loan Principles and Guidance

AUTHORs: Alma Campion co-author(s): Aaron Leonard Services: Finance and Capital Markets DATE: 16/03/2023

1. Introduction

On 23 February 2023, a joint working group comprising of the Loan Market Association, the Loan Syndications and Trading Association and the Asia Pacific Loan Market Association published updated principles and guidelines on the Green Loan Principles (the "GLPs"), which were last updated in February 2021.  The GLPs aim to promote the development of the green loan product by providing a recommended framework of market standards and guidelines whilst allowing the loan product to retain flexibility.

1.1 Green loans are defined by the GLPs as any type of loan instruments and/or contingent facilities made available exclusively to finance, re-finance or guarantee, in whole or in part, new and/or existing eligible green projects. To this extent, the GLPs recognise non-exhaustive categories of eligibility for green projects such as: climate change mitigation and adaptation, natural resource conservation, pollution prevention and control, renewable energy, clean transportation and green buildings.

1.2 The GLPs provide a framework to assist in the understanding and application of green loans based on four core components:

  1. Use of proceeds;
  2. Process for project evaluation and selection;
  3. Management of proceeds;
  4. Reporting.

2. What's new? Updates to the Green Loan Principles

The main aim of the updates to the GLPs is to increase the emphasis on the transparency, accuracy and integrity of the information that will be disclosed and reported on by borrowers.  While the GLPs do not take a position on which technologies, standards or claims are optimal for environmentally sustainable benefits, they do now make reference to the fact that there are national and international initiatives to produce taxonomies and suggest that these might be "useful guidance" for lenders and borrowers as to what might be considered "green and eligible". However, the GLPs specifically state that "each institution will nonetheless need to determine whether they need to align their lending with these taxonomies".

We have set out below the some of the key specific updates to the GLPs:

2.1 Core component 2: Process for Project Evaluation and Selection

There is a new provision encouraging borrowers to:

2.1.1 provide information, if relevant, on the alignment of projects with official or market-based taxonomies and also disclose any green standards or certifications referenced in project selection; and

2.1.2 have a process in place to identify mitigants to known or potential material risks of negative social and/or environmental impacts from the relevant project.

2.2 Core component 3: Management of Proceeds

There is a new requirement for:

2.2.1 the management of proceeds to be attested to by the borrower in a formal internal process linked to the borrower’s lending and investment operations for green projects and

2.2.2 the borrower to make known to the lenders any intended types of temporary placement for the balance of unallocated proceeds.

It is also clarified, for the avoidance of doubt, that a facility cannot be labelled as 'green' if it includes green and non-green tranches; the green label applies only to the tranche(s) aligned to the four core components of the GLPs.

2.3 Core component 4: Reporting

There is a new requirement for the borrower's annual report on the green project to include the project's expected and, where possible, achieved impact, as well as a new clarification in the Guidelines to the GLPs that borrowers are encouraged to report throughout the life of the loan.

2.4 External Reviews

It continues to be recommended, rather than a requirement, that borrowers appoint an external reviewer at pre-origination stage to assess the alignment of their green loan with the four components of the GLPs.  It is now also recommended that, post-origination, a borrower’s management of proceeds be supplemented by the use of an external auditor, or other third party, to verify the internal tracking and the allocation of funds from the green loan proceeds. It is still acknowledged that, given the loan market is traditionally a relationship-driven market and therefore lenders are likely to have a broad working knowledge of the borrower and its activities, self-certification by a borrower, which has demonstrated or developed the internal expertise to confirm alignment of the green loan with the key features of the GLPs, may be sufficient. If that approach is being taken, then it is recommended that borrowers document thoroughly such expertise and communicate this to their lenders.

Where appropriate, and taking into account confidentiality and competitive considerations, borrowers should make the external review publicly available, or an appropriate summary, via their website or otherwise.

2.5 Green Clauses in Loan Documentation

The updated Guidelines to the GLPs include a few additional clauses in loan documentation that should be considered when drafting green loans. These additional clauses include the following, most of which, in our experience, tend to be included as a matter of course anyway:

Disclosure – given the increasing regulatory requirements on financial institutions to make ESG disclosures, lenders may wish to consider whether to include an express consent from the borrower for lenders to disclose the existence and details of any green transaction;

Conditions precedent – details of any conditions precedent required to confirm alignment of the green loan with the GLPs;

No communication – the facility agreement will typically include provisions providing that the parties should hold the communication of the loan as a green loan until such time as it is agreed between the parties; and

Declassification – provisions dealing with when the loan is declassified as a green loan.

3. When do the updated GLPs take effect?

All green loans entered into prior to 9 March 2023 are exempt from following the updated GLPs. All green loans entered into, extended or refinanced from this date must fully align with the updated principles to be classified as green loans.

4. Recommended wording

There is currently no industry standard recommended wording for use in green loans. While the LMA has indicated that it is currently undergoing a drafting project to produce recommended wording for Sustainability Linked Loans, there is no indication that a similar project for green loans is being undertaken. That said, the wording in green loan documentation has become relatively standardised over the last few years. These latest changes to the GLPs may result in subtle changes to that standardised wording, but we do not expect them to result in wholesale changes.