Recent green finance developments - LMA principles

The danger of ‘greenwashing’ non-sustainable assets led the LMA to produce Green Loan Principles and Sustainability Linked Loan Principles in 2018.  The recent guidance published by the LMA, LSTA and APLMA on 5 May 2020 provides clarity of application and underpins the veracity of the LMA principles.

Green Loan Principles (GLP) are built on the green bond principles and include four key components:

• proceeds of such loan must be used for a ‘green project’ such as purchase of a green building or development of eco-friendly transportation and a non-exhaustive list is provided;
• process for project evaluation and selection;
• management of proceeds, i.e. the use of a separate bank account; and
• reporting in a manner that is qualitative and quantitative.

GLP 2020 guidance

The 2020 guidance provides helpful confirmation of the fundamental elements of green loans in the form of answers to the most frequently asked questions, including the following items most notably:

the core components are described with additional detail and more information is included around how these might be met;

the advantages of green loans are elucidated, including:

• positive environmental impact;

• positive reputational impact and sustainable credibility;

• boosting a values based relationship with stakeholders;

• resilience to any market disruption caused by climate change;

• gaining access to new markets and a more diverse investor pool;

• meeting regulatory and policy targets and commitments; and

• increasing ability to attract and retain staff with strong core ESG values;

• RCFs and separate tranches of loans can be green loans; and

• various standards are available to determine what is ‘green’, such as the EU taxonomy (see our recent summary) amongst others listed on ICMA’s website.

Sustainability Linked Loan Principles (SLLP) include four key components:

• such loan must facilitate and promote sustainable economic activity and growth (but does not have any specific use of proceeds requirement);
• the borrower must set ambitious sustainable performance targets;
• such targets must be measurable (ideally using equivalent metrics and external ratings) and work to transition businesses towards sustainability, for example a reduction in water usage; and
• reporting by way of annual report or CSR report.

SLLP 2020 guidance

• the core components are described with additional detail;
• it is confirmed that SLLs can be any type of loan instrument which incentivise the borrower’s achievement of ambitious pre-determined sustainability performance based objectives;
• an ambitious target should ideally be mapped against a materiality assessment 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 advantages of green loans are elucidated, including:
  • positive reputational impact and sustainable credibility;
  • boosting a values based relationship with stakeholders;
  • incorporating ESG into a lender’s credit assessment
  • enhancing a borrower’s ambitions regarding ESG performance;
  • engaging lenders to incentivise sustainability improvements;
  • promotes sustainable long term growth and profitability; and
  • increasing ability to attract and retain staff with strong core ESG values;
• anyone can borrow an SLL, which can be any type of loan; and
• SLLs are linked to sustainable performance targets, which can be internal and bespoke, external and evaluated against the borrower’s peers by an external reviewer or a combination of both, reporting should take place at least once per annum.

Key differences between GLP and SLLP

• a green loan must be used for a green project;
• a sustainability linked loan incentivises behaviour change and required an improvement to be made to the sustainability profile of the borrower (use of proceeds is not restricted) and is seen as a key transition tool.

As we think about the future of the loan market, green finance provides all the tools for change. The transition to an innovative and low carbon economy with green initiatives. We have also been working with other organisations to develop green finance, including the Chancery Lane Project, the Legal Sustainability Alliance and the Green Finance Institute.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.