Recent Clarification on Application of Green Lending Principles and Sustainability-Related Lending Principles
The danger of “green laundering” of non-sustainable assets led the LMA to produce Green Lending Principles and Sustainability-Related Lending Principles in 2018. The recent guidelines published by the LMA, LSTA and APLMA on 5 May 2020 clarify the application and substantiate the veracity of the LMA Principles.
The Green Lending Principles (GLP) are based on the Green Bond Principles and include four key elements:
- the proceeds of this loan must be used for a “green project” such as the purchase of a green building or the development of environmentally friendly transport and a non-exhaustive list is provided;
- project evaluation and selection process;
- revenue management, i.e. the use of a separate bank account; and
- report qualitatively and quantitatively.
GLP Guidelines 2020
the Guidance 2020 provides helpful confirmation of the fundamentals of green lending in the form of answers to frequently asked questions, including the following:
the basic components are described with additional detail and more information is included on how these might be met;
the benefits of green loans are elucidated, including:
positive environmental impact;
positive impact on reputation and lasting credibility;
strengthen a values-based relationship with stakeholders;
resilience to any market disruption caused by climate change;
access new markets and a more diversified pool of investors;
achieve regulatory and policy objectives and commitments; and
increase the ability to attract and retain staff with strong ESG core values;
RCFs and separate tranches of loans can be green loans; and
The Sustainability Linked Lending Principles (SLLP) include four key elements:
- this loan must facilitate and promote sustainable economic activity and growth (but has no specific requirement for use of proceeds);
- the borrower must set ambitious sustainable performance objectives;
- these objectives must be measurable (ideally using equivalent measures and external ratings) and work towards the transition of companies towards sustainability, for example a reduction in water consumption; and
- reporting in the form of an annual report or a CSR report.
SLLP Guidelines 2020
- the basic components are described with additional details;
- it is confirmed that SLLs can be any type of lending instrument that incentivizes the borrower to achieve ambitious and pre-determined sustainability performance-based goals;
- an ambitious target should ideally be matched with an assessment of the materiality of the borrower, or alternatively of its industry, standards can be used to measure this, such as the Science Based Targets initiative, the Transition Pathway Initiative or RE100;
- the benefits of green loans are elucidated, including:
- positive impact on reputation and lasting credibility;
- strengthen a values-based relationship with stakeholders;
- integrating ESG into a lender’s credit assessment
- strengthen a borrower’s ambitions in terms of ESG performance;
- incentivize lenders to encourage sustainability improvements;
- promotes long-term sustainable growth and profitability; and
- increase the ability to attract and retain staff with strong ESG core values;
- anyone can borrow an SLL, which can be any type of loan; and
- SLLs are tied to sustainable performance targets, which can be internal and bespoke, external and assessed against the borrower’s peers by an external reviewer or a combination of both, reporting should take place at least once a year.
Key Differences Between BPL and SLLP
- a green loan must be used for a green project;
- a sustainability-linked loan incentivizes behavior change and requires an improvement in the borrower’s sustainability profile (use of the product is not limited) and is considered a key transition tool.
As we ponder the future of the lending market, green finance provides all the tools for change. The transition to an innovative and low-carbon economy with green initiatives. We have also worked with other organizations to develop green finance, including the Chancery Lane project, the Legal Sustainability Alliance and the Green Finance Institute.