June 14, 2018 - An area of increasing attention in the US loan market is ESG (Environmental, Social and Governance). Thomson Reuters LPC reports global green and sustainable loan issuance has totaled nearly $17 billion, over twice 2017’s totals. Green bond issuance has led the way in the global debt markets, but green loans are emerging as an intriguing alternative. Although dwarfed by activity in EMEA and the rest of the world, 2018 has seen $2.2 billion of green and sustainable activity in the Americas. As reported by Thomson Reuters, Credit Agricole completed two syndicated Green Loan transactions in the US, leading a total of $419M in financing to two US renewable energy developers’ clean energy projects, sPower and Terra-Gen. Both of these loans fit within the Green Loan Principles (GLP) framework published by the Loan Market Association (LMA) and Asia Pacific Loan Market Association (APLMA) in March 2018.
The Green Loan Principles offer a “high-level framework of market standards and guidelines, providing a consistent methodology for use across the green loan market, whilst allowing the loan product to retain its flexibility, and preserving the integrity of the green loan market while it develops”. The contents of the GLP build on the Green Bond Principles (GBP) which have been taken up as the gold standard for green bond issuance since they were first published and have supported the incredible growth of the global green bond market. The GBP, maintained by International Capital Market Association (ICMA), set forth a voluntary framework that promotes transparency, disclosure and reporting and is understood by issuers, underwriters and investors. With the support of ICMA, the GLP build on and refer to the 2017 Green Bond Principles. The GLP define Green Loans as those made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible Green Projects and require that Green Loans align with the four core components set out in the GLP: use of proceeds; process for project evaluation and selection; management of proceeds; and reporting. In addition, similar to the GLB, the GLP includes a recommendation that, where appropriate, an external review be conducted. That review can take different forms and may cover only certain aspects of a borrower’s green loan or associated green loan framework or may assess alignment with all four core components of the GLP. Unlike the GBP, the GLP offers self-certification by the borrower as an alternative approach in certain circumstances.
The use of loan proceeds for Green Projects is the fundamental determinant of a Green Loan. Europe has seen a number of these Green Loans where the proceeds finance one or more green projects. While it is expected that this will continue and grow, when looking at the corporate loan market and how green lending may develop, a broader framework may be required. In Europe, ESG-linked facilities have emerged where borrowers are able to benefit from discounts in pricing if they (or pricing premiums if they do not) meet certain environmental targets. These facilities are typically not “Green Loans” as defined by the GLP, but they are gaining in popularity. Last week, the first syndicated sustainability-linked facility closed in the US. As covered in Thomson Reuters LPC, Barclays acted as sustainability structuring agent on the $1.4 billion revolver to CMS Energy and its unit, Consumers Energy. As we look to the future, these ESG-linked facilities may be an important component of the green loan market.
The GLP expressly contemplates a regular review and the LMA has been clear that it is already looking at how the GLP framework can be broadened. The LSTA and its working group will join them in this effort. In the interim, the LSTA will continue to monitor this space and educate the loan market on the developing green loan product.