In March 2018, the Loan Market Association (LMA) launched a new form of Green Loan Principles (the Principles), to support the loan markets in funding projects that contribute to environmental sustainability. This article explains the reasons behind the issuance of these Principles, and looks further into the growing trend of green asset finance in the current market.
The Principles were introduced to build on and develop the Green Bond Principles that were issued initially in the Autumn of 2017, and subsequently updated in June 2018, by the International Capital Markets Association to support the debt markets in providing investment for new and existing projects with environmental benefits. It is hoped that whilst the two codes develop alongside each other, it will promote consistency across the financial markets.
The LMA has stated that the aim of the Principles is to create a high-level framework of market standards and guidelines that provide a consistent methodology for use across the wholesale green loan market, whilst allowing the loan product to retain its flexibility, and preserve the integrity of the green loan market while it grows.
The LMA has framed the Principles around four main components:
- use of proceeds;
- process for project evaluation and selection;
- management of proceeds; and
The Principles also introduce the definition of “Green Loan” stating that it is any type of loan instrument made available exclusively to finance or refinance, in whole or in part, new and/or existing eligible green projects. Appendix 1 of the Principles contains a non-exhaustive list of categories setting out what constitutes green projects, and includes climate change adaptation, clean transportation and green buildings.
Even before the Green Bond Principles and Principles were introduced, the concept of a “Green Loan” had become increasingly popular with stakeholders increasingly asking their companies to illustrate that they are socially aware. Whilst initially this lead to some companies treating sustainability simply as a reporting requirement tick box exercise in their corporate reports, others were eager to take the issue more seriously. Much of the recent drive to encourage green investment stems from the influence of national and international climate change and sustainability targets. Under the Paris Agreement, the signatories agreed to work to limit the rise in global temperature to well below 2 degrees Celsius. The UK government has subsequently set a target of seeing 15% of the UK’s energy generated from renewable sources by 2020, whilst the 2008 Climate Change Act commits the UK to reducing emissions by at least 80%, from 1990 levels, by 2050. In light of this legislation, many corporates have developed internal sustainability statements. They are keen to show that they are cutting their carbon emissions in order to enhance their organisation’s environmental credentials, as well as helping to meet their corporate social responsibility targets. For others, however, the most compelling reason to join the “green bandwagon” continues to be simply to save money as they look to become more efficient.
Types of green asset finance
With the interest of corporate borrowers growing in this sector, financial institutions have also identified green loans as a potential expanding market. BBVA, for instance, announced in February 2018 its pledge to use €100 billion by 2025 to fight climate change and drive sustainable development. In 2017, responsAbility Investments conducted a survey of green lending experts from around the developing world to provide an overview of the current state, and perceived potential, of the green lending market. The survey concluded that the main green lending opportunities are to be found in the manufacturing and agricultural sectors, with small to medium-sized businesses being the most attractive entry point for green lending.
Within this emergent sector, there are many different areas of renewable technology that may be utilised by companies wishing to improve their sustainability, and which can be financed under an asset finance structure. Some examples are:
Biomass boilers: Biomass boilers are used within the market to reduce both carbon emissions and annual fuel bills. They generate heat by burning different kinds of feedstock, such as wood chips or pellets from sustainable sources.
Light-emitting diodes (LED) lighting: LED lights help to reduce maintenance costs as they are up to 80% more energy-efficient than normal fluorescent or incandescent bulbs, and last up to six times longer.
Solar photovoltaics: Roof-mounted or standalone solar PVs capture the sun’s energy using photovoltaic cells which convert sunlight into electricity. Whilst becomingly increasingly popular in the residential market, more and more companies are looking to them as a way to save energy and reduce their costs.
Wind turbines: By harnessing the natural force of the wind, the installations blades are forced round, driving a turbine that generates electricity.
The future of green finance
Over the last few years, the requirements of the Paris Agreement and similar regulations have assisted in the adaption and evolution of the political, economic and social agendas of companies, and now such issues are becoming increasingly central to corporate business plans. By launching the Principles, the LMA has clearly shown that it at least thinks it is likely that we will see a growing popularity in the market for green loans. With this in mind it is currently working with the Loan Syndications and Trading Association to introduce similar principles to the North American market, as well as further develop them to accommodate a wider range of financings. It will be interesting to observe, as use of the Principles becomes more common, the extent to which they will drive the structuring of such financings in the future.
The article was first published on Denton’s website.
About the Authors
Sarah Dyke is a partner in the Banking and Finance department of the firm’s London office specialising in asset finance. Sarah has broad domestic and cross-border asset finance experience and acts for UK and overseas financiers, banks, leasing companies, lessees, airlines, borrowers and high net worth individuals and family offices.
Rebecca Urry is a senior associate in the Asset Finance group in London. She has experience in asset finance with a focus on international shipping and aviation finance in the UK and Middle East. Rebecca joined the London office in 2007, where she completed her training and qualified as an English solicitor. She was seconded to Goldman Sachs, London from the spring of 2009 to the autumn of the same year, and to Société Générale, London from the autumn of 2009 to the spring of 2010. Rebecca has also previously worked in SNR Denton’s office in Dubai (2010 to 2012).