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  • Put the E in ESG. Continuing our dive into environmental, social and governance (ESG) finance, our financial group examines the what, why and how of green lending principles.

    • What is a green loan?
    • The 4 basic components
    • Recent green loans in UK and Europe

    Part 1 of our ESG series introduced ESG, examined its impact on structured finance markets, and examined the implications of the COVID-19 pandemic on ESG.

    What are green loans?

    Following a profusion of sustainable finance and development initiatives, both internationally and nationally in 2018, as evidence of changing investor preferences and increased recognition that investments in well-governed entities that create a positive social and environmental impact are increasingly important, the Loan Market Association (LMA), Asia Pacific Loan Market Association and Loan Syndications and Trading Association (LSTA) have launched the ‘Principles of green loan(GLP), which were designed to provide environmental, social and governance (ESG) criteria for credit products.

    Since the launch of BPL, in all structured finance markets, an increasing number of “green” loans have emerged. The BPL defines green loans as “any type of lending instrument made available exclusively to finance or refinance, in whole or in part, new and / or existing eligible green projects. … Green loans must be aligned with the four essential components of GLP ”.

    In other words, Green Day Online are loans whose proceeds are used specifically for environmentally friendly or sustainable purposes – for example, building solar or wind farms or investing in new green technologies. The BPL also places a very strong expectation that green loans will require continuous reporting and monitoring to ensure that the loans are being used for their intended purposes throughout the life of the loan. It is important to note that a distinction should be made between green loans and sustainability loans (and the LMA / LSTA sustainability lending principles), which we will discuss in our next article. The classification of loans linked to sustainability does not depend on how the product is used – the key characteristic is rather that the pricing is linked to the performance of the borrower against predetermined sustainability criteria. How businesses can attract cash for green loans has become a task that will become increasingly important in a post-COVID-19 world where cash scarcity will determine the survival of some businesses.

    As a growing number of lenders seek to offer better loan terms to borrowers who are able to show they are reducing their environmental impact, green loans are growing rapidly. And it looks like the coronavirus pandemic hasn’t stopped the surge in green lending.

    Why should my business take out a green loan?

    There are a number of advantages for borrowers and lenders to take out green loans. The BPL suggests the following non-exhaustive list:

    • Positive impact on the environment, climate change mitigation and adaptation.
    • Positive impact on reputation and credibility.
    • Build stronger, value-based relationships with stakeholders.
    • Access new markets, offer greater resilience to market disruptions caused by climate change and reduce risk in portfolios.
    • Access a larger and more diverse pool of investors, especially those looking for ESG-focused investments.
    • Achieve regulatory and political objectives and commitments.
    • Increase the ability to attract and retain staff who view contributions to sustainable development as an important part of their personal and professional life.

    How does my business qualify? The 4 basic components

    In order to qualify for a green loan, your business will need to comply with the “4 basic components”.

    1. Use of the product

    The fundamental determinant of a green loan is the use of the loan proceeds for green projects (and other related and support expenses, including R&D), which should be appropriately described in financial documents and, where applicable, in marketing materials. Your green projects should provide clear environmental benefits, which will be assessed and, if possible, quantified, measured and reported.

    2. Project evaluation and selection process

    You will need to clearly communicate to your lenders:

    • Your company’s environmental and sustainable development goals.
    • How your business determines how its projects fit into the eligible categories.
    • The associated eligibility criteria, including, where applicable, exclusion criteria or any other process applied to identify and manage potentially significant environmental risks associated with the proposed projects.

    3. Product management

    The proceeds of your green loan will need to be credited to a dedicated account or otherwise appropriately tracked to maintain transparency and promote the integrity of your green loan. If your green loan takes the form of one or more tranches of a loan facility, each green tranche should be clearly designated, with the proceeds of the green tranche credited to a separate account or appropriately tracked.

    4. Reports

    You will have to make and keep up-to-date and easily available information on the use of the product to be renewed annually until it is fully used, and if necessary thereafter in the event of significant developments. According to the BPL, “this should include a list of green projects to which the green loan proceeds have been allocated and a brief description of the projects and amounts allocated and their expected impact”. When confidentiality is an issue, information can only be provided to institutions participating in the loan. GLP recommends the use of qualitative performance indicators and, where possible, quantitative performance measures (e.g. energy capacity, power generation, reduced / avoided greenhouse gas emissions) and disclosure of the Key underlying methodology or assumptions used in the quantitative determination.

    Avoid greenwashing!

    Greenwashing, in the context of green loans, occurs when a borrower or project is supposed to have green credentials, but those credentials are bogus, over-excited, or misleading. Of course, this practice is strongly discouraged by all market players. Many lenders have sought to prevent borrowers from taking advantage of favorable terms on their green loans by introducing quantitative environmental measures. For example, ING requires that any green loan meets at least three of its five ESG objectives.

    Charges of greenwashing can lead to litigation, undermine investor confidence and call into question the integrity of green loans. The GLP and the four building blocks are therefore written to provide a clear framework of the processes to be followed to maintain the integrity of green loans.

    Recent developments in the UK and Europe

    Bank of Scotland £ 30million green loan for Glasgow properties

    In mid-May, Dunaskin Properties secured £ 30million in financing from the Bank of Scotland against 10 of its downtown properties, including Baltic Chambers, Central Chambers and Ingram House.

    The financing package was set up as part of the Bank of Scotland’s Green Lending Initiative and consisted of a term loan and revolving credit facility which gave Dunaskin the flexibility to trade assets and fund capital expenditures across the portfolio.

    The green loan was part of the refinancing discussions and the broader plans for a clear sustainability strategy for Dunaskin. The terms of the deal include green commitments requiring the company to spend £ 1.2million on improving the sustainability of its buildings and meeting a number of EPC improvement targets.

    IPUT Real Estate’s € 300 million green loan with Wells Fargo

    At the end of May, the Irish real estate company IPUT Real Estate signed a revolving credit line (RCF) of 300 million euros with Wells Fargo, increased by an existing RCF of 50 million euros. This made RCF Augmented the largest green finance facility in the Irish property market. RCF’s € 200 million green component will be used to finance green projects that meet several criteria based on GLP and tested by several renewable and energy efficient metrics.

    Van Oord’s green loan agreements with Rabobank and BNP Paribas

    In June, Van Oord, a dredging specialist based in the Netherlands, signed its first green loans with Rabobank and BNP Paribas. The green loans were based on Van Oord’s SEA sustainability program and will fund three new trailing suction hopper dredgers that will each get a green passport and clean ship rating. Van Oord’s SEA program is based on BPL, and one of its advantages is that additional green loans can be added in the future.

    The ESG acid test and the green loan

    We previously discussed the concept of “ESG acid test”. Once the COVID-19 pandemic has passed, the practice of investing in companies that comply with ESG standards will surely continue to grow. The coronavirus pandemic presents an opportunity for investors with ESG mandates to delve into a company’s track record before making capital allocation decisions. This means that the actions of companies during the COVID-19 crisis can act as an acid test.

    Likewise, efforts to rebuild the global economy in the wake of the COVID-19 pandemic will surely lead many borrowers and lenders to focus on rebuilding the economy in a sustainable manner, leading to a “ new green deal. or a “ green recovery ”. We urge all market participants not to fall behind.

    Read more
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