Differentiate green lending from sustainability-related lending
Many companies have started to focus on environmental, sustainability and governance (ESG) practices now that green financing has become mainstream. However, there are still companies that have been able to catch up quickly. There is currently no legal obligation for companies to set ESG-related targets.
The two terms are sometimes mixed up with an increased emphasis on “green loans” and “sustainability-related loans”. Let’s look at the difference between green loans and sustainability loans.
A green loan is any lending instrument made solely to finance or refinance, whether in full or in existing eligible green projects. “green projects” and “green projects” vary by sector and geography. Example of shared eligibility categories in the LMA’s Green Lending Principles (GLPs) include energy efficiency, renewable energy, climate change adaptation, and green buildings that meet regional, national standards or certifications or internationally recognized.
The GLP provided a framework for green loans created on the following four main components:
- Use of proceeds: Loan proceeds for a green loan must be used for green projects. All green projects must provide well-defined environmental benefits that will be assessed, quantified, measured and reported.
- Project appraisal and selection process: Borrowers must communicate environmental sustainability objectives to lenders, determine eligibility for GLP categories, and manage environmental risks associated with any proposed project.
- Product management: Green loan proceeds must be tracked effectively to maintain transparency and the distribution of funds to green projects.
- Reporting: Borrowers must create and maintain data/information regarding the use of funds, including the list of green projects to which green loan funds have been allocated.
An example of green financing may include a supplier who finances renewable energy upgrades for the housing stock or rental.
Sustainability Linked Loans
A Sustainability Linked Loan (SLL) is a conditional lending instrument or facility (e.g. line of surety, letter of credit, line of guarantee) that incentivizes the borrower to achieve ambitious sustainability goals and pre-established.
A borrower’s sustainability performance is determined by sustainability objectives (SPTs), including external ratings, key performance indicators, and equivalent measures that assess improvements in the borrower’s sustainability profile.
Definitions of “sustainable” and “sustainability” vary by geography and sector; examples of typical improvements that an SPT in a specific category might seek to quantify are contained in the LMA’s sustainability-related lending principles, which include renewable energy, sustainable supply, affordable housing and lending. ‘energetic efficiency.
The main difference
The key differentiator is how loan proceeds for green finance are used; however, the essential components of the Green Lending Principles must also be followed. The purpose of the Sustainability-Linked Lending Principles is to incentivize the borrower’s efforts to broaden its sustainability profile by aligning loan terms with the borrower’s performance against the SPTs. The use of the product is not a determining factor in the categorization of an SLL.
Both structures have proven to be practical tools of sustainable finance, and each is becoming a mainstream green finance tool in its own right. Your next step is to find a banking partner to provide green financing, after which you can take concrete and practical steps to make your business sustainable.
Story by Umair Asif