Many hope to see an expansion in areas that stimulate growth in a more environmentally friendly manner.

While the world is currently focused on the impact of COVID-19 on the global economy, with “COVID-19 Bond” issuance easily outdistancing the current volume of green financing, it is time to consider post-COVID-19 activities. One positive effect of the pandemic is the demonstrable improvement of carbon levels and other environmental measures. So, as national governments consider measures to reopen their economies, lenders and borrowers may want to consider how best to finance the economies’ reemergence. Many hope to see an expansion in areas that stimulate growth in a more environmentally friendly manner.

In this context, loan market groups including the Asia Pacific Loan Market Association (APLMA), Loan Market Association (LMA) and Loan Syndications and Trading Association (LSTA) have recently published guidance to market participants on how to apply the Green Loan Principles (GLP) and Sustainability Linked Loan Principles (SLLP) in practice. The aim of the guidance is to develop the market for green financing, following the publishing of the GLP in March 2018 and the SLLP in March 2019.

The key difference between green loans and sustainability linked loans is that green loans place greater significance on the use of proceeds for green projects, whereas sustainability linked loans look to the sustainable nature of the borrower measured against specific targets. Loans can follow both the GLP and SLLP, but are rarely seen in the current market.

Further guidance has been given on the following aspects:

Guidance on GLP

• Revolving credit facilities can be green.
• If a facility is tranched and only certain tranches are deemed green, the loan as a whole will not be deemed to be green. In this case, the green tranche proceeds will need to be segregated.
• The standards used to assess whether a loan is deemed green are guided by international and national policy.
• There are varying levels as to how green a particular loan will be classified – for example, a loan could be deemed “light green,” which is defined in the LMA Green Lending Glossary as “environmentally friendly activities or projects that won’t change the long-term outlook on their own, such as more efficient fossil-fuel infrastructure.”
• A green loan may be made to borrowers whose businesses would not typically be deemed “green” (for example, by their involvement in fossil fuels or nuclear energy) if the financing is for an eligible green project.
• In terms of reporting on the use of proceeds, although a lender may determine the frequency of reporting, borrowers should have available up to date information on the use of proceeds.
• Parties to a loan should determine from the start (including in the case of a refinancing) if an external review is required to determine the green credibility of the use of loan proceeds.
• No precedents exist for green loan documentation or breaches for using loan proceeds for nongreen purposes, due to the bespoke nature of transactions so far.

Guidance on SLLP

• Sustainability linked loans (SLLs) can constitute any kind of loan financing, including revolving credit facilities.
• SLLs are used to develop the borrower’s sustainability practices and promote sustainable business models.
• The sustainability criteria against which the borrower will be assessed will be determined on a case-by-case basis between the relevant borrower and lender to ensure that such standards are relevant to the borrower’s business and provide sufficient challenge for the borrower to meet such standards.
• No market standard for reporting exists, but reporting will be determined by the standards against which the borrower is assessed and the business of the borrower. However, there are methodologies for reporting currently in the market, which include the Global Reporting Initiative’s Sustainability Reporting Standards.
• External reviews of the SLL can be used both before and after signing the facility documentation.
• It will need to be determined between the loan parties as to the requirement to have external reports for new loans or loan extensions.
• Lenders/arrangers may wish to act as a “sustainability coordinator” or “sustainability structuring agent” to liaise with the borrower regarding the sustainability methodology, any external reviewers and between the lender group as to sustainability linked queries.
• No precedents exist for SLL documentation or how potential breaches of sustainability criteria would operate, due to the bespoke nature of transactions so far.

For More Information

If you have any questions about this Alert, please contact Drew D. Salvest, Natalie A. Stewart, any of the attorneys in our Banking and Finance Industry Group, any of the attorneys in our Energy Industry Group or the attorney in the firm with whom you in regular contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.