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The green finance revolution? A short guide to traditional financing, capital markets and the Green Loan Principles

Posted: 24/09/2020

The fight against climate change remains a global challenge. In the United Kingdom, the green agenda has been growing in both visibility and importance for a number of years, although the current pandemic has challenged this focus.

One element that does not seem to have suffered in recent times is the increasing prevalence of the many varied types of green or sustainable finance. ‘Green finance’ is a broad term used to describe financing that actively supports or encourages environmentally friendly behaviour.

Broadly speaking, this type of finance has a number of advantages: it promotes the green agenda, rewards those who are able to prove their green credentials and is also a socially responsible haven for investors of all types.

With the increase in borrowers/issuers considering the environmental, social or governance (ESG) impact of their actions, the ‘green finance revolution’ looks to be gaining traction and is here to stay.

Traditional financing

The LMA, APLMA and LSTA together published a series of Green Loan Principles with the stated aim of providing a high-level framework of market standards, guidelines and a consistent methodology for use across the green loan market and that can be applied to bilateral or syndicated transactions and, broadly, any type of loan.

The green loan market is in its relative infancy compared to green bonds (see below) and more traditional types of loans and therefore the authors of the Green Loan Principles are quick to point out that these principles need to be flexible and applied on a deal-by-deal basis. However, traditional lenders are now offering more and more green and sustainability linked loan products to the market.

It is worth noting that there is a significant difference between a true ‘green loan’ and a ‘sustainability linked loan’ (SLL). The difference relates to the purpose of the loan. An SLL rewards the borrower for reaching certain agreed sustainability targets. A green loan, by contrast, insists that the utilisation of the loan is used for green projects. It is possible for a loan to satisfy both of these requirements, but in the current market it is rare.

A green loan brings with it a number of information requirements relating to use of the loan, the project itself and the expected environmental impact/benefit that will result from the successful completion of the project. This information should be available to the lender(s) and, on occasion, may be reviewed by an external party to ensure its accuracy/validity. This third party review is often encouraged to ensure that the information provided has not been artificially improved and goes some way to avoid arguments arising over what is often known as ‘greenwashing’.

Capital markets

The first green bond was issued in 2007, but as ESG credentials are being pushed up the agenda there has been a notable shift towards green bonds in recent times. Such bonds are often oversubscribed and this popularity shows the draw for investors of being able to show that money can be made from supporting green and sustainable initiatives.

There is no statutory definition of what is (or is not) a green bond. However, as with the loan market, there is voluntary guidance available that is specific to green bonds (the Green Bond Principles (GBP) issued by the International Capital Markets Association). The aim of these principles is to act as a guide to issuers of the key components that need to be included, but the fundamental principle is that the funds raised should be used for specific environmentally sustainable activities. A brief summary of the four core components of the GBP is set out below:

  • Use of proceeds – the proceeds of the bond should be used for green projects including but not limited to:
    • renewable energy;
    • energy efficiency;
    • pollution prevention and control;
    • environmentally sustainable management of living natural resources and land use;
    • terrestrial and aquatic biodiversity conservation;
    • clean transportation;
    • sustainable water and wastewater management;
    • climate change adaptation;
    • eco-efficient and/or circular economy adapted products, production technologies and processes; and
    • green buildings.
  • Process for project evaluation and selection – the issuer should clearly communicate:
    • the environmental sustainability objective;
    • the process by which the issuer determines how the project falls within the eligible green projects categories; and
    • the related eligibility criteria.
  • Management of proceeds – the net proceeds should be credited to a sub-account or moved to a sub-portfolio or otherwise tracked by the issuer. The GBP recommends that an auditor or third party is used to verify the tracking and allocation of funds.
  • Reporting – the issuer should make and keep readily available up-to-date information on the use of proceeds. The GBP recommends qualitative and quantitative performance indicators.

The London Stock Exchange last year launched its Sustainable Bond Market (to include the Green Bond Segments, which it had previously launched in 2015) and it is developments such as this that have further added to the awareness of green bonds.

By way of an example of the use of green bonds, the social housing sector has seen a particular uptake in their use. This is, perhaps, not surprising given the fact that many of the goals in achieving sustainable development have been at the heart of the sector for a number of years. Awareness of this synergy has been increased by not only the sector’s willingness (or even determination) to highlight and promote its ESG values, but also the growing public interest in the issues.


The green finance market has experienced significant growth in recent years. As a result of (among other things) regulation, political pressures and increased awareness, it is highly likely that the market for these financial products will continue to grow. The environmental impact of such products will always be the subject of intense scrutiny and there will always be arguments that this market has been created merely by rebranding transactions that would have happened in any event. As reporting and data collection continue, the exact impact of this financial movement will be able to be examined and analysed.

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