Green finance has been a hot topic over the last few years. Although opinions differ as to exactly what sort of financial activity falls into this sphere, generally any provision of debt or equity funding to take forward a project or product that is expected to reap an environmental benefit could be said to be green finance. Financing of renewable energy projects and climate change mitigation initiatives are usually referred to as key aspects of green finance.

The green bond market is now established, and growing well, with the latest OECD statistics showing that it has risen significantly from $3bn in 2011 to $95bn in 2016, and that green bond new issues continued to rise substantially last year as against previous years.

However, the focus of recent weeks has been not on the green bond market but on the green loan market. This has been particularly brought into focus by the issuance by the Loan Market Association of the Green Loan Principles. The Green Loan Principles are voluntary guidelines which are offered to market participants to adopt when they think appropriate, with the aim of encouraging clarity as to when a loan can legitimately be considered as a “green loan”. There are four core components to the Green Loan Principles:

1. Use of Proceeds

2. Process for Project Evaluation and Selection

3. Management of Proceeds

4. Reporting.

These components are described in some detail within the Green Loan Principles, and there is the common theme of transparency through all of them.

The Green Loan Principles are useful in focusing the minds of lenders and borrowers on what to consider when entering into loans for green purposes. However, there is perhaps no new ground being broken with the concept of a “green loan” as envisaged by the Green Loan Principles.

With no compulsory regulatory regime, and no suggestion in the Principles themselves or in the current market that breach of any “green” covenants or undertakings will lead to a default under the loan, the concept of a “green loan” as a legally distinct type of loan arguably does not stand up to scrutiny.

However, at a practical level, the Principles will open up discussions between lenders and potential borrowers, and some borrowers who are trying to demonstrate their sustainability credentials may well be attracted by the possibility of a loan with the “badge” of compliance with the Green Loan Principles.

And the main benefit may be keeping the focus on the broadening of sources of finance available to support delivery of the UK’s climate change agenda.

What will be interesting to follow in this area is if any favourable pricing differentials emerge with “green loans” as compared to loans for other purposes, perhaps because of the perceived higher stability and/or liquidity of businesses who proactively engage with sustainability and environmental issues.

In the meantime, we are discussing with various lenders and borrowers about their approach to green finance, and green loans in particular, and we would invite anyone who would like to contribute to the conversation on this to contact us.