In May 2020, the Asia Pacific Loan Market Association (APLMA), Loan Market Association (LMA) and Loan Syndications and Trading Association (LSTA) jointly released two guidance documents on Green Lending Principles and sustainability-linked loans, seeking to answer some of the most frequently asked questions about green loans and sustainability-linked loans (SLL).
A green loan is defined as any type of facility made available to a borrower to finance or refinance green projects and must align with the following four fundamental components:
- product use – the loan proceeds must be used only for green projects; for a non-exhaustive list of green projects, please consult appendix 1 of the Principles of green loan;
- project evaluation and selection process – borrowers must clearly communicate their environmental sustainability objectives to their lenders;
- revenue management – the proceeds of a green loan must be transparent and easy to follow (eg using a separate account for the green product); and
- report – lenders should get updated information on the use of borrowers’ funds each year until the loan is fully utilized.
Due to the varied nature of the green loan market, there is currently no wording template available for adoption in the loan documentation process. Important clauses such as the purpose or use of the product provisions, information commitments and representations should be given due consideration when drafting green loans. While there is no set market standard as to what constitutes a “green” violation, parties should consider whether such a violation will trigger default and cross-default provisions on outstanding loans.
For the complete APLMA / LMA / LSTA Guide to Green Lending Principles, please see here.
Sustainable development loans
An SLL is any type of facility that prompts the borrower to meet ambitious, predetermined sustainability performance goals. The fundamental difference between green loans and SLLs is in the use of loan proceeds – while green loan proceeds should be used only for green projects, SLL proceeds can be used for general corporate purposes. business. SLLs seek to improve the sustainability profile of the borrower by aligning loan terms with the borrower’s performance against relevant predetermined sustainability performance goals (SPTs). If the predetermined SPTs are met, borrowers may qualify for a reduced interest rate, depending on the loan terms involved.
The SLL Principles have four main components:
- relationship with the borrower’s overall sustainability strategy – SLL borrowers should clearly communicate to their lenders their sustainability goals and how they align with the SPTs they offer;
- setting objectives – measuring the viability of the borrower –SPTs must be ambitious and meaningful to the borrower’s business; it should be linked to an improvement in sustainability against a predetermined performance benchmark;
- report – borrowers should keep their lenders informed of their SPTs, as well as any underlying methodology and assumptions, at least once a year; and
- review – for loans for which information on SPTs is not made public, an external review of a borrower’s performance against its SPTs is strongly recommended.
For the complete APLMA / LMA / LSTA Guide to SLL Principles, please see here.