Green Loans are a form of sustainable lending. They require the borrower to use the proceeds of the loan instrument to finance or re-finance, in whole or in part, new and/or existing eligible green projects.
The Green Loan Principles (GLP) issued by the Loan Market Association have become a leading framework internationally on the characteristics of a green loan. Green loans are generally structured in alignment with the following core principles of the GLP:
- Use of proceeds
- Process for product evaluation and selection
- Management of proceeds, and
- Reporting
What is a green project?
Green loans are often used to finance environmental initiatives such as green real estate, household solar panels or electric cars. The GLP lists a number of eligible green project categories which include:
- Renewable energy
- Pollution protection
- Clean transportation, and
- Energy efficiency
However, the GLP are voluntary guidelines. Credit institutions retain discretion in deciding what may be considered an eligible green project for the purpose of green lending.
What are the benefits of green loans?
Green lending offers significant benefits to both borrowers and lenders. From the borrower perspective, green loans are an excellent way to embed ESG policies into the finance function whilst also availing of an improved interest rate. An improved interest rate may come in the form of an interest rate ratchet whereby the interest rate is reduced if the borrower meets specified sustainability targets. From the lender perspective, green loans may help credit institutions to meet their sustainability goals. In addition, the cost of raising green financing is generally lower due to large investor appetite in the capital markets for green bonds.
The common framework for green loans
The lack of a common definition or rules has resulted in a lack of clarity and consistency in the green loan market. This in turn has affected market growth. A European Bank Authority (EBA) report published in December 2023 suggested a common framework for green loans which would not be based solely on the EU Taxonomy. This common framework would create standardised criteria for market access. A definition which is not solely based on the EU Taxonomy would ensure that the large range of sustainable economic activities which the Taxonomy excludes would be capable of being considered “green”. The introduction of a common framework would also ensure consumers do not fall victim to mis-selling and allow consumers to more easily identify and compare different green loan products.
Despite the lack of a common definition or framework, green lending is a growing trend. The number of green personal loans in Ireland increased by 92.4% to 4,266 in 2023, with the value of these loans also more than doubling to €95 million. Despite this, the 2023 EBA report found that green loans still only make up a small portion, on average 4.5%, of the total loans of credit institutions. The implementation of the EBA recommendations would likely facilitate the further growth of the green lending market.
The content of this article is provided for information purposes only and does not constitute legal or other advice.