The Move to Greener Pastures – An Overview of Green Loans

The lending market in Ireland continues to see the area of Green Loans becoming more and more prevalent as both lenders and borrowers seek to align their portfolios with supporting green initiatives.  On foot of this, it is worth considering the LMA’s Green Loan Principles (“GLP”), which were originally published in March 2018, and subsequently updated in February 2021.

Green Loans are defined as any type of loan instrument made available exclusively to finance or re-finance, in whole or in part, new and / or existing eligible Green Projects.  From a borrower’s perspective, Green Loans are quite attractive as there is potential to get an improved interest rate.

The GLP comprise voluntary recommended guidelines, to be applied by market participants on a deal-by-deal basis depending on the underlying characteristics of the transaction.  In addition, the GLP sets out a framework for market participants to clearly understand the characteristics of a Green Loan, based around the following four components:

Use of Proceeds

Importantly, the proceeds of a Green Loan must be used for a Green Project and this should be appropriately reflected in the finance documentation.  Helpfully, the GLP, at Appendix 1 (Indicative Categories of Eligibility for Green Projects), sets out a non-exhaustive list of indicative categories of eligibility for Green Projects.

These categories include, inter alia, energy efficiency – such as in new and refurbished buildings, energy storage, district heating, smart grids appliances and products; and green buildings which meet regional, national or internationally recognised standards or certifications.

Process for Project Evaluation and Selection

The borrower of a Green Loan should clearly communicate to its lender(s):

• its environmental sustainability objectives
• the process by which the borrower determines how its projects fit within the eligible categories set out in Appendix 1 (Indicative Categories of Eligibility for Green Projects) and
• the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental risks associated with the proposed projects.

Management of Proceeds

The proceeds of a Green Loan should be credited to a dedicated account or tracked in an appropriate manner, to maintain transparency and promote the integrity of the product.

Reporting

Borrowers should make and keep readily available up to date information on the use of proceeds to be renewed annually until fully drawn, and as necessary thereafter in the event of material developments.

It is important to note that practitioners will need to pay particular attention to certain key clauses when drafting the relevant finance documentation, to incorporate the foregoing components, specifically concerning information undertakings, representations and purpose / use of proceeds provisions.

In the context of real estate finance (“REF”), on 22 October 2020, the LMA published practical guidance concerning the application of the GLP in respect of (i) green buildings and (ii) retrofit projects (the “Guidance”), by addressing some of the most frequently asked questions concerning these areas.

The Guidance provides examples of Green Projects which may be funded in the REF investment context including: the acquisition of a green building or portfolio of green buildings / properties; the refinancing of a green building or a portfolio of green buildings; and financing of capital expenditure for improving energy performance and water consumption as well as other expenditure relating to the financed building or portfolio of buildings which contribute to climate change mitigation or other environmental goals (i.e. retrofit works).

The Guidance in relation to retrofit projects separately acknowledges that there is no single standard for determining which retrofit activities should qualify for funding under a Green Loan.  However, such retrofit projects should result in a material improvement in the energy efficiency of, and result in a material reduction in the carbon emissions associated with, the building or portfolio of buildings being funded.

Market participants are recognising the increasing importance of Green Loans and it is expected this area will continue to develop as both lenders and borrowers seek to shift their business models to function in a more socially and environmentally responsible manner.  A particular focus is expected in relation to the development of new buildings along with the refurbishment of existing buildings given their role in energy consumption and emission.  Bank of Ireland and AIB for example, are presently providing Green Mortgages which offer preferential rates to the customer where the building meets a certain Building Energy Rating (BER).

Notably, HSBC Ireland provided Ireland’s first ever GLP compliant loan for Singapore based property group Oxley and Dublin based developer Ballymore^[1], while the European Investment Bank and Avant Money had previously announced their support of €75 million of new green investment to private homeowners across Ireland^[2]. Bank of Ireland will also increase its sustainable finance fund to €5 billion by 2024 to meet demand from both households and corporate borrowers^[3].

How we can help?

If you have any queries or concerns, or would like to discuss the above in further detail, please feel free to contact Gregory Gannon, Banking & Finance (ggannon@bhsm.ie) for further information.

This article is for general information purposes.  Legal advice must be obtained for individual circumstances.  Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.

Footnotes

[1] News Release – HSBC completes Ireland’s first ‘Gold standard Green Loan’ – 14 May 2019 – https://www.about.hsbc.ie/-/media/ireland/en/news-and-media/190517-hsbc-announces-irelands-first-ever-glp-loan.pdf

[2] Ireland: EIB and Avant Money unlock EUR 75 million of green financing for Irish homeowners – 4 November 2021 – https://www.eib.org/en/press/all/2021-376-eib-and-avant-money-unlock-eur-75-million-of-green-financing-for-irish-homeowners

[3] Bank of Ireland increases Sustainable Finance Fund to €5 Billion as it launches Responsible & Sustainable Business strategy – https://www.bankofireland.com/about-bank-of-ireland/press-releases/2021/bank-of-ireland-increases-sustainable-finance-fund-to-e5-billion-as-it-launches-responsible-sustainable-business-strategy/