New Green Loan Guidance Issued

05 June 2020

Author: Fearghal McVey
Practice Area: Banking & Finance, COVID-19

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Two new guidance documents have been issued by the Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) offering clarifications in connection with the Sustainability Linked Loan Principles (SLLPs) and the Green Loan Principles (GLPs). The guidance has been welcomed by those in the sustainable finance market.

The GLPs were first published in March 2018 (and further refined in December 2018) by LMA, APLMA and the LSTA. The GLPs provide a framework of standards and guidance for lenders and borrowers to consider and adopt when arranging Green Loans, meaning loans and other financial instruments to finance “Green Projects” (e.g. renewable energy generation projects or development of green buildings).

The SLLPs were first launched in March 2019, again by the LMA, APLMA and the LSTA and provide a standard in loan financing which links the sustainability profile of a particular borrower to the terms of loans offered to that borrower. The SLLPs aim to “facilitate and support environmentally and socially responsible economic activity and growth” by providing guidelines on the “fundamental characteristics” of sustainability linked loans, which are loans that encourages a borrower to achieve certain predetermined sustainability objectives.

For further background on the SLLPs and the GLPs please see our previous updates on each.

The new guidance aims to assist participators in the green market with questions that have arisen in connection with the application of the GLPs and SLLPs in practical scenarios.

The key objective of the guidance is ultimately to support those participating in this market, including lenders and borrowers in order that the vitally important sustainable finance market continues to grow and develop, together with the products available under the veil of sustainable finance.

The guidance itself takes and extremely helpful FAQ format and addresses key questions which have been raised by lenders, borrowers and advisors since the inception of each of the GLPs and the SLLPs, including the following:

GLP New Guidance FAQs

  • Is there a definition of green loans?
  • Who can borrow under a green loan?
  • What are the advantages of entering into a green loan?
  • What is the difference between GLPs and SLLPs and can a particular loan follow both?
  • If a tranche of a loan is green, is the whole loan deemed green?
  • How are metrics chosen to report on the environmental impact or efficiency of projects?

Answers to these and other relevant FAQs in connection with the GLPs can be found in the GLP guidance document.

SLLP New Guidance FAQs

  • Is there a definition of sustainability linked loans?
  • What are the advantages of entering into a sustainability linked loan?
  • Can the sustainability strategy of a parent impact a borrower’s eligibility for a sustainability linked loan?
  • On what basis can borrowers and lenders ensure metrics and related sustainability performance targets (SPTs) are ambitious and meaningful to the borrower’s business?
  • What is sustainability-washing?
  • Are there any best practices in documentation for sustainability linked loans?

Answers to these and other relevant FAQs in connection with the SLLPs can be found in the SLLP guidance document.

The guidance also provides comment and explanation on the core components of each of the GLPs and SLLPs and considers certain documentation considerations for a borrower or a lender proposing to enter into a green and sustainability linked loans.

By addressing and offering clarification on these key questions, it is hoped that the wider understanding of the principles in practical situations will improve in order that lenders and borrowers might be more willing to adapt them on a particular financing project.

The new SLLP and GLP guidance, coupled in each case with the existing published standards, will offer greater clarity to potential participators in connection with green financing and green loan product options which may be available to them on a given project. It is hoped that this can be the catalyst for more finance becoming available in this sphere and more sustainability projects being driven by that finance.

If you have any queries the Banking team at Carson McDowell would be happy to help.

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