Green and sustainable loans: a short explanation
Lending markets have responded to the increase in ESG investing – investments that focus on or care about environmental, social and governance criteria – by establishing certain principles for participants to engage with sustainability-related lending principles (the “SLLP”) and the Green Lending Principles (the “GLP”). Although both of these products may fall under ESG as an umbrella term, it should be kept in mind that they are different products.
GLPs and SLLPs were published by the LMA, APLMA and LTSA in 2018 and 2019 respectively. As the products developed, subsequent guidance outlining the potential applications of GLPs in the context of real estate finance was published in 2020. More recently, with the rapid increase in the number of sustainability-related loans, LMA, APLMA and LTSA took time. to reflect on the increase and have published an update to the SLLPs (see below).
There is currently no standard form documentation for green loans or sustainability-related loans. While each of the GLPs and SLLPS makes suggestions on where the accent should be paid, the absence of any standard market document allows parties to decide whether a loan is compatible with GLPs or SLLPs. The lack of a standard market form can slow the adoption of these types of loans.
GLPs and SLLPs warn of the problem of “green/sustainable laundering” where the green or sustainability characteristics of a loan are exaggerated. The concern here being that such practices will undermine the value of these genuinely green or sustainability-related loans.
Although in many respects, at least in Europe, the introduction of Regulation (EU) 2020/852 of the European Parliament and of the Council of the EU, which entered into force on July 12, 2020 (the “Taxonomy Regulation”)¹ aims to suppress so-called “greenwashing”.
Whether investors are getting green loans to complete a green project or a sustainability-linked loan to improve their credentials, the incentives now go beyond just pricing the finance product and are far longer term.
Many borrowers and sponsors have been made aware of ESG, but it has not been a central focus and has often been relegated to the CSR office as something to include in marketing publications². But that is starting to change. In a recent research report prepared by MSCI ESG Research LLC³, the authors noted that research indicated that companies with better managed ESG risks tended to benefit from lower capital costs, suggesting that the market viewed them as less risky.
ESG investing in an efficient or green building, for example, can allow landlords/investors to demand a premium, often referred to as the green premium⁴, which results in higher rents or asset premiums for sale .