Posted on: 6 August 2020
Archie Campbell, Partner and Slavina Dimitrova, Knowledge development paralegal at international law firm Stephenson Harwood LLP say in their recent article that green and sustainable finance is now an area of focus for both the public and private sector. A key part of this type of financing is to better manage environmental and social risks, take on opportunities that bring both a satisfactory rate of return and environmental benefit and deliver greater accountability.
The finance industry is becoming increasingly proactive in this area. The Loan Market Association (LMA), in particular, has played a significant role in steering the market and (as has been shown recently by its detailed response in July 2020 to the EU Commission’s consultation on the Renewed Sustainable Finance Strategy) it is well aware of the need to demonstrate commitment and support for green and sustainable nance initiatives. As this type of lending is only going to increase and develop over the coming months and years, it is helpful to look first at what is meant by “Green” and “Sustainability Linked” lending.
Green loans and the development of the Green Loan Principles
Loans that require the borrower to use the proceeds for a “green” purpose have been around for many years. However, to help grow the market of green loans, in March 2018, the LMA published the Green Loan Principles (GLP). The GLP de ne green loans as any type of loan instrument made available exclusively to nance or re- nance, in whole or in part, new and/or existing eligible “Green Projects”. The GLP set out the framework for understanding
the characteristics of green loans based around four main components:
• use of proceeds
• process for project evaluation and selection
• management of proceeds
The GLP build on the Green Bond Principles (GBP) administered by the International Capital Market Association with a view to promoting consistency across financial markets. The GBP are internationally recognised voluntary guidelines that promote transparency, disclosure and reporting in the green bond market.
Sustainability-linked loans and the development of the Sustainability-linked Loan Principles and Guidance
Recently, the volume of sustainability-linked loans has grown exponentially, outstripping the volume of green loans. The Sustainability Linked Loan Principles (SLLP) (published by the LMA in March 2019) make it clear that sustainability- linked loans are not characterised by the borrower’s use of proceeds. Instead, the goal of the sustainability-linked loans is to enable lenders to incentivise improvements in the borrower’s sustainability pro le by aligning the loan terms to the borrower’s achievement of pre-determined sustainability performance targets (SPTs). Examples of SPTs categories include improvements in the energy efficiency of buildings, reductions in greenhouse gasses, improving a company’s environmental, social and governance (ESG) rating and the achievement of a recognised ESG certification.
Sustainability-linked loans are attractive to borrowers who do not operate in the green sector and who do not have the resources or appetite to invest in green projects, but who are beginning to introduce sustainability targets and policies.
In order to promote the development of green and sustainability-linked loans, in May 2020, the LMA produced guidance on the GLP and SLLP to provide market practitioners with clarity on their application and promote a harmonised approach.
Sustainable finance regulation
In June 2020, the EU Commission adopted the Regulation on the Establishment of a Framework to Facilitate Sustainable Investment (Taxonomy Regulation), marking a significant step in the realisation of the EU Commission’s action plan on financing sustainable growth. The Taxonomy Regulation introduces an EU-wide classification system of environmentally sustainable activities. The Taxonomy Regulation, together with the Non-Financial Reporting Directive, will require certain financial services firms and large public interest entities to perform an analysis of their economic activities and disclose additional information in their non-financial statements on how these activities are associated with environmentally sustainable targets.
Despite Brexit, the UK government is committed to matching the EU Commission’s sustainable growth strategy, which means that the UK will retain the taxonomy framework, including its high-level environmental objectives. However, the disclosure requirements contained in the Taxonomy Regulation only apply after 31 December 2021. Therefore, the disclosure requirements referred to above will not form part of the retained EU law as things currently stand (albeit it remains open to the Government to introduce further legislation to also retain these disclosure provisions and it will be interesting to see if this is a step taken in the future).
For more information use this link.