No Celebrations – March 2022 – Green Lending Series Part 2 – The Four Essential Components of Green Lending Principles | Cadwalader, Wickersham & Taft LLP

In our February issue of REF News and Views, we have introduced the Green Loan Principles (“GLP”) which have been published by the Loan Market Association (“LMA”). The GLP aims to facilitate and support environmentally sustainable economic activity by providing a framework of market standards, guidelines and methodologies that can be consistently adopted in the green lending market.

A key point about BPL is that it is currently still voluntary and indicative, so it is ultimately up to the lenders to set their internal standards in terms of eligibility criteria for what they would classify as a project. green. That being said, we expect to see continued growth in the use of GLP as a guiding principle for green loan products, as well as evolution and development of GLP, over the next few years.

In this article, we dig deeper into BPL to discuss each of its four major components.

The four essential components of GLP

To be considered a GLP-compliant green loan, such a loan product must align with the following four basic elements: (1) use of the product; (2) project evaluation and selection process; (3) revenue management; and (4) reports.

1. Use of the product

Under the GLP, the use of loan proceeds must be for green projects that deliver clear environmental benefits that can be assessed, quantified and measured by the borrower. This objective should be appropriately described in financial documents and, where applicable, in marketing materials. These projects should aim to address key environmental concerns, such as climate change, depletion of natural resources, loss of biodiversity and pollution.

GLP recognizes a number of broad categories of projects as having such an objective; these include renewable energy, energy efficiency, environmentally sustainable management of living resources and land use, sustainable water and wastewater management and adaptation to change climatic. However, the GLP does not provide an exhaustive list as it recognizes that green projects can vary depending on many factors such as sector and geography.

2. Project evaluation and selection process

The GLP requires the borrower to communicate (i) its environmental sustainability objectives, (ii) the process by which the borrower determined that its project meets the GLP Green Project eligibility criteria, and (iii) the criteria for eligibility, including, to the extent applicable, any excluded criteria and the processes to be applied to identify and manage potentially significant environmental risks associated with the project.

3. Revenue management

The GLP recommends that the green loan product be tracked appropriately to promote and maintain the transparency and integrity of the green loan product. This can be achieved in a number of ways – for example, by separating a specific tranche of the facility that will be earmarked for the green project, or by having the funds from the green loan credited to a dedicated account.

4. Reports

The GLP recommends that borrowers keep up-to-date easily accessible information on product usage and details of important developments. This should include details of the green projects and the amounts to be allocated, as well as their expected impact. It is clear in the GLP that transparency is particularly useful in communicating the expected impact of green projects. As such, the GLP recommends the use of qualitative performance indicators and, where possible, quantitative performance measures, as well as disclosure of the key underlying methodology and/or assumptions used.

Next month

While the GLP is intended to support the general expansion of the market for sustainable financial products, it is also intended for use in a real estate-specific context, and in October 2020 the LMA published two guidance documents for specifically address some of the most frequently asked questions about the application of GLP in real estate finance. In the next month REF News & Views we will discuss this in more detail.

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