What are green loans?
Green loans allow companies to finance initiatives that have
environmental benefits. Some innovative green loan deals in
Asia include Wilmar and ING’s $150 million
bilateral revolving loan and New World
Development’s $459 million hybrid green bond/loan
facility. While green bonds have taken off in recent years,
their loan counterparts are still at a nascent stage of
development. But the financial community sees the potential for
green loans to develop as momentum builds for environmentally
sustainable projects in various industries.
Where’s the demand for green loans
There is increasing pressure on companies to report on their
Paul Davies, partner at Latham & Watkins observes that
this has taken the form of government policy such as the Task
Force on Climate Related Financial Disclosures (TCFD)
recommendations and from investors, in the form of shareholder
legal action. Another example of increased attention to
companies’ environmental impact are trackers on
environment, social and governance (ESG) disclosures, such as
Institutional Shareholder Services’ E&S
QualityScore, which tracks the quality of
companies’ ESG disclosures and includes hundreds
Financial institutions have demonstrated their growing
commitment to becoming greener, in particular, by investing in
more green assets such as alternative energy
"The banks themselves are playing an important role in
developing the green loan market, while the Portfolio
Decarbonization Coalition is an example of a multi-stakeholder
initiative which promotes the reduction of greenhouse gas
emissions by engaging nearly 30 international, institutional
investors with over $3 trillion in assets," said Davies.
For borrowers, green loans give them the extra edge in
showcasing their involvement in sustainability.
"Green loans provide
borrowers with tangible credentials that they can share
with shareholders and other stakeholders to demonstrate
a commitment to sustainability...It's effectively a
stamp of approval"
"Green loans provide borrowers with tangible credentials
that they can share with shareholders and other stakeholders to
demonstrate a commitment to sustainability," said Andrew
Ashman, head of loan syndication at Barclays.
"It’s effectively a stamp of approval."
The demand and supply for green loans can be seen from both
borrowers and lenders. "While green bonds have taken off, not
all borrowers and not all financings are appropriate for bonds
because the bond market likes large, liquid quantums that
require sufficient earnings to service," said Latham &
Aaron Franklin. "From a lender’s perspective,
they are similarly looking to arrange and lend sustainable
finance. Sometimes this is because the lender itself has raised
green bond finance and is looking for borrowers to fulfill
their own obligations."
What areas of improvements are there for green
While green bonds have taken off, more work needs to be done
on green loans. The Asian Pacific Loan Market Association
(APLMA) has launched the
Green Loans Principles to provide a consistent and
standardised framework for green loans across the region and
will be key to building the green loan market.
Andrew Hutchins, partner at Clifford Chance, explains that
the green loan principles focus on use of proceeds, project
evaluation and selection, management of proceeds and
reporting. "The development of the green loan principles
should ensure more transparency and green compliance, leading
to less scope for greenwashing of loan financings and loan
documentation will continue to develop to reflect the
developments in the green loan sector," he said.
Anna-Marie Slot, partner at Ashurst, the Green Loan
Principles provide a clear set of criteria on what green means
so that lenders and borrowers can assess their projects against
it. "Unless money is being lent to an entirely green entity,
there is a challenge in defining what green means and how the
proceeds are used," she said.
Green bonds operate through the public disclosure. Issuers
tell the market what they will do with the proceeds and
investors trust that an issuer will honour that promise, backed
up by anti-fraud laws applicable to securities
transactions. "By contrast, loans do not necessarily
involve public disclosure. It remains to be seen whether this
means that the market practice will be to make green promises
about use of proceeds part of the loan’s
contractual documentation," said Franklin.
Two key instruments have been created in the green loan
market to increase incentives. One concept, which was pioneered
by ING, is a sustainability improvement loan. Herry Cho, the
company's head of sustainable finance for Asia Pacific,
explains that it links the interest rate of a general corporate
purpose loan to the sustainability performance of borrowers
across the environmental, social and governance aspects. If the
pre-set sustainability improvement targets are achieved, the
interest rate on the facility will be subsequently
Another concept is the green use of proceeds loan. These are
loans where proceeds are dedicated to a pre-defined eligible
green assets or projects.
"On the back of the Green Loans Principles, we are already
seeing increased interest in green loans," said Cho. Measures
that improve the risk-return profile of sustainable borrowers,
or bring down the cost of funding can also help. For example,
ING has teamed up with EIB to €300 million ($371 million
approximately) to finance green shipping under advantageous
How can green loans be more mainstream?
An effort from the financial industry itself will improve
the system and ultimately make green loans more mainstream.
"This can be done by increased reporting from banks and will
help streamline the system internationally," said Davies. "The
TCFD is a good example of how the industry can achieve
consistent reporting once everyone is given some guidance on
how to carry this out."
Davies adds that SMEs are well
positioned to take out green loans due to their versatility and
size. Their borrowing will represent an important driver in the
development of the green loan market. Green loans are likely to
play a significant role in helping countries meet their targets
under the Paris Agreement.
"Sectors such as renewables, including wind and solar,
across China and India are the low hanging fruit that will be
interested in green loans. In the longer term, how other
industries that are not traditionally known for being green and
how they capture green opportunities will be interesting to
watch," said Slot.
A number of factors could influence the future uptake of
green loans, including tax incentives and pricing.
"At this stage, there is no separate pool of liquidity for
green loans, but that will be the next development that will
spur growth," said Ashman. He adds that from a
regulator’s perspective, incentives such as a
reduction in withholding tax could help to accelerate the
development of the green loan market.
"We are seeing loan transactions contain ratcheting margins
based on green covenant compliance, so one of the incentives
for green loans for a particular borrower can be reducing
pricing, although for borrowers new to the green loan or green
bond space, green loans may come with new additional burdens
associated with the required additional monitoring, reporting
and segregated bank accounts," said Hutchins.
DEAL: world’s first sovereign green
DEAL: ICBC’s Belt and Road climate