Going green is a proven strategy for those businesses seeking to align their corporate profile more closely with the demands of investors and to take advantage of more favourable products or tax rebates.
The Green Loan Principles, issued by the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) earlier this year, are intended to promote and develop the integrity of the green loan product by establishing clear principles aimed at defining and increasing the amount of green loan funding available in the market. Green loans will complement the already active green bond market.
HOW GREEN LOAN PRINCIPLES WORK
The Green Loan Principles work by:
- defining what an ‘eligible green project’ is;
- setting a process for evaluating the success of the green project;
- monitoring the use and management of proceeds; and
- establishing clear reporting requirements.
UTILISING THE BENEFITS OF GLPs
Green loans can link pre-set sustainability targets to a facility’s interest rate through a ratchet margin based on green covenant compliance.
Over the last few years we have seen increased investment in green projects from industries across the board. In the property sector there are opportunities to obtain funding for green buildings, energy efficiency and clean energy projects. In the construction sector there is funding for outfitting buildings with energy efficiency upgrades and adopting low emission construction methods and materials. Other sectors, such as the food and beverage industry and the infrastructure sector, have seen fresh investment in low emission vehicles, plants and equipment.
The Green Loan Principles provide worthwhile incentives through reduced margins when financing or refinancing an eligible green project while simultaneously incentivising green covenant compliance.
By way of example in relation to debt issues this year, it has been reported that the Clean Energy Finance Corporation provided a A$200 million green loan to the Queensland Investment Corporation to overhaul the energy efficiency of its shopping centre portfolio by retrofitting LED lighting, rooftop solar panels and upgrades to heating and air condition systems and other energy monitoring systems. The green targets will be measured by NABERS to evaluate the success of the green projects.
APPEAL TO INVESTORS
Demand to reduce emissions and transition towards a low carbon economy is being driven by various stakeholders and obligations under the Paris Agreement (although the latest reports indicate Australia will miss its Paris Climate targets by a substantial margin). The Green Loan Principles require clear sustainability criteria and transparent reports on the outcome of a green project that investors can confidently use to ensure they are funding truly green initiatives. The ratcheting margins can also be designed to reward successful green projects.
Macquarie Group is an example of an investor successfully utilising the new Green Loan Principles. Macquarie Group entered into a £2 billion loan facility, with £500 million dedicated to support renewable energy, clean transportation and low-carbon building projects. The green loan was claimed to be the first green loan by Australian Issuers under the Green Loan Principles and will be split into two tranches.
THE COST OF GOING GREEN
Green loans, like green bonds, carry additional transactional costs typically from the monitoring and reporting requirements on the use of proceeds and the success of the green projects. However, the added reporting requirements from the Green Loan Principles add to the integrity of the green loan market, allowing businesses to authenticate their ‘greenness’, lenders to gain a better insight into a borrower’s sustainability targets and their success in achieving them through more comprehensive analysis of the borrower’s underlying assets.
Borrowers will need to consider on a case-by-case basis whether they will benefit from the benefits of a green loan or if the costs of compliance would be prohibitive.
Prior to the Green Loan Principles limited regulation led to incidents of greenwashing where consumers and investors may not have fully understood the environmental performance and benefits of products and services. Greenwashing is harmful to consumer and investor confidence in green products, can diminish the value of green reputations that companies have invested in and ultimately reduces the amount of green funding available in the market.
GREEN LOANS OVER GREEN BONDS
Although green bonds have grown exponentially in recent years, the green bond market remains unappealing to market participants that lack the ability to make large liquid debt issues.
Those entities which are normally excluded from the green bond market should be enticed by the flexibility in lending available from green loan financing. With the creation of the Green Loan Principles, green loans may become more readily available for companies provided they understand the product, its application and how it can benefit them.