Green Loan Principles

In 2018, the Loan Market Association (LMA), together with the Loan Syndications and Trading Association (LSTA) and Asia-Pacific Loan Market Association (APLMA), released its Green Loan Principles (GLPs)to create a framework for the green loan market, by establishing the parameters under which a loan can be labeled green.

Green loans are any type of loan instrument made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible Green Projects. The GLPs set out a non-exhaustive list of green projects provided in the table below:

Green Loans Taxonomy

The GLP set out a clear framework, enabling all market participants to clearly understand the characteristics of a green loan, based around the following four core components:

• Use of Proceeds
• Process for Project Evaluation and Selection
• Management of Proceeds
• Reporting

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1. Use of proceeds

The fundamental determinant of a green loan is the utilization of the loan proceeds for Green Projects (including other related and supporting expenditures, including R&D), which should be appropriately described in the finance documents and, if applicable, marketing materials. All designated Green Projects should provide clear environmental benefits, which will be assessed, and where feasible, quantified, measured and reported by the borrower.

Where funds are to be used, in whole or part, for refinancing, it is recommended that borrowers provide an estimate of the share of financing versus refinancing. Where appropriate, they should also clarify which investments or project portfolios may be refinanced, and, to the extent relevant, the expected look-back period for refinanced Green Projects.

A green loan may take the form of one or more tranches of a loan facility. In such cases, the green tranche(s) must be clearly designated, with proceeds of the green tranche(s) credited to a separate account or tracked by the borrower in an appropriate manner.

The GLP explicitly recognize several broad categories of eligibility for Green Projects with the objective of addressing key areas of environmental concern such as climate change, natural resources depletion, loss of biodiversity, and air, water and soil pollution.

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 by which the borrower determines how its projects fit within the eligible categories; and
• the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental risks associated with the proposed projects.

Borrowers are encouraged to position this information within the context of their overarching objectives, strategy, policy and/or processes relating to environmental sustainability. Borrowers are also encouraged to disclose any green standards or certifications to which they are seeking to conform.

3. Management of Proceeds

The proceeds of a green loan should be credited to a dedicated account or otherwise tracked by the borrower in an appropriate manner, so as to maintain transparency and promote the integrity of the product. Where a green loan takes the form of one or more tranches of a loan facility, each green tranche(s) must be clearly designated, with proceeds of the green tranche(s) credited to a separate account or tracked by the borrower in an appropriate manner.

Borrowers are encouraged to establish an internal governance process through which they can track the allocation of funds towards Green Projects.

4. Reporting

Borrowers should make and keep readily available up to date information on the use of proceeds to be renewed annually until fully drawn, and as necessary thereafter in the event of material developments. This should include a list of the Green Projects to which the green loan proceeds have been allocated and a brief description of the projects and the amounts allocated and their expected impact. Where confidentiality agreements, competitive considerations, or a large number of underlying projects limit the amount of detail that can be made available, the GLP recommend that information is presented in generic terms or on an aggregated project portfolio basis. Information need only be provided to those institutions participating in the loan.

Transparency is of particular value in communicating the expected impact of projects. The GLP recommend the use of qualitative performance indicators and, where feasible, quantitative performance measures (for example, energy capacity, electricity generation, greenhouse gas emissions reduced/avoided, etc.) and disclosure of the key underlying methodology and/or assumptions used in the quantitative determination. Borrowers with the ability to monitor achieved impacts are encouraged to include those in regular reports.