What is green loan funding? How is it influenced by the Green Loan Principles? If you intend to fund a project through green loans, go through this guide to discover everything you need to know.
If we want to avoid the catastrophic effects of global warming and climate change in general, serious measures have to be taken. It’s no longer a question of whether we will do it or not! It’s a question of how we should do it.
Every individual, company, and institution is responsible for ensuring that their actions are geared towards a better tomorrow. Whether through reducing greenhouse gas emissions, water pollution, or deforestation, we must take measures that matter.
Green Loan Principles are one set of measures that financial institutions have employed in their lending activities. Through these principles, the institutions try to ensure that when they offer green loans, the loans are used for projects that benefit the environment.
But what exactly are Green Loan Principles, and how do they work? Are they feasible and applicable?
Well, let’s find out;
What are Green Loan Principles?
Green Loan Principles are guidelines that help lenders tailor responsible and sustainable loans. By following these principles, borrowers can get the financing they need to grow their businesses while also supporting environmental initiatives.
Generally, the principles are designed to help lending institutions define what a green loan is and what it is not.
Here are a few things you need to know about Green Loan Principles:
- The guiding philosophy behind Green Loan Principles is that businesses should be able to access capital without harming the environment or compromising their social responsibility goals.
- The seven core principles of Green Loan Principles are transparency, due diligence, community impact, environmental impact, social impact, financial risk assessment, and creditworthiness.
- Lenders who adhere to Green Loan Principles will be certified by an independent third party.
- Certification provides assurance to lenders that a borrower is committed to the environment and the community. It also helps borrowers comply with any regulations they may need to meet, such as those mandated by international law or local government agencies.
With these guiding principles, lenders can give borrowers green loans to undertake or support green projects.
Green Loan Meaning
So, what are green loans?
These are financial solutions that help businesses adopt environmentally friendly practices and invest in greener products or projects. According to the Green Loan Principles, a green loan is any funding offered exclusively to support part of or an entire green project, whether new or existing.
The guidelines of an Eligible Green Project are defined in Green Loan Principles (Appendix 1), which is similar to what ICMA (International Capital Market Association) requires for green bonds. For a project to qualify as a green project, it must fall under any of these categories;
- Sustainable natural resources management
- Renewable energy production and transmission
- Pollution prevention and control
- Climate change adaptation
- Green buildings
- Biodiversity conservation
Green loans can also be used to support smaller initiatives such as switching over to energy-efficient appliances, installing solar panels, etc.
Components of the Green Loan Principles
Green Loan Principles dictate the following for green loans;
1. Use of Proceeds
The money extended as a green loan should only be used to support Eligible Green Projects. These include all the project’s associated expenditures and research and development expenses.
The requirements should be plainly indicated in the finance documentation. The document should also include all the environmental benefits that the project is expected to bring about. The borrower should assess, quantify, measure, and report these expected environmental benefits.
Some of the main projects that will be considered for green loans include;
- Renewable energy
- Pollution prevention and control
- Energy efficiency
- Green Buildings
- Biodiversity conservation (terrestrial and aquatic)
- Sustainable water management (including wastewater)
- Sustainable management of land and living natural resources
- Climate change adaptation
In essence, the loans should only be geared towards a greener environment.
2. Project Evaluation and Selection Process
Borrowers must agree with the green lenders on a suitable green loan framework. The borrower should communicate clearly the following issues to the lender.
- The project’s environmental sustainability objectives
- How the borrower determined that the project is a green project
- How they will identify and manage environmental, material, and social risks posed by the project
- The type of green standards and certifications they seek to conform to.
Proving this is a step towards acquiring that green loan.
3. Proceeds Management
Proceeds of a green loan should be credited into a designated account or tracked by the borrower to ensure transparency. This should include even instances where the green loan given is a tranche of a loan facility.
Additionally, the borrower should establish internal loan governance procedures to help track funds allocation towards the green project.
Besides transparency, the borrower needs to be accountable for the loan. The Green Loan Principles requires the borrower to;
- Keep up-to-date data regarding the use of proceeds (this should be renewed annually)
- Offer a detailed description of the projects, how much money goes to each project, and the expected impact.
The borrower should use qualitative and quantitative performance measures and indicators where applicable. They should also disclose any fundamental methodology or assumption used in the process.
Green Loan Principles also recommend external assessments to ensure compliance of green loans with the above-mentioned components.
Lending green is a significant step towards environmental protection and preservation. If more green projects are supported, more people will learn about the dangers of climate change and the benefits of living sustainably.
While green bonds have already been in existence before green loans, the introduction of the Green Loan Principles comes to boost the green finance markets. Generally, green loans are flexible and less costly. And for this reason, they tend to be more favorable to SMEs than their predecessors, the green bonds.
Currently, many banks globally offer green loan facilities. They are also helping various SMEs to participate in schemes that offer incentives or tax reliefs for green investments or projects.
It seems quite possible that central banks might offer banks favorable regulatory capital for green lending in the near future. It’s not a secret that supporting climate change goals is crucial even for global financial stability.
Why are Green Loans Important?
What is a green loan? I’m sure you now know what we mean by green loans. Now, why are these loans important? Well, the answer is as simple as you might guess – they are meant to support green projects. The green projects, in return, help to make our planet more habitable both for us and future generations.
Currently, the estimated outstanding green loan debt stands at around $33 billion. The developing countries account for a mere $1.6 billion, indicating that the market has great growth potential.
Green loans are designed to offer lending that aligns with environmental objectives. The rules governing these loans help borrowers show how their projects and operation help the environment.
The good thing is green loans are quite flexible and affordable, offering cost savings compared to green bonds. Usually, green bonds have higher transaction costs and can only be tracked above a certain size. For this reason, more green investors are inclined towards green loans than green bonds.
Reporting for Green Loans
Green Loan Projects must report their environmental impact annually. They must report on the use of the loan proceeds. Green Loan Principles also advocates for external reviews of the project. This helps to maintain transparency and accountability for the money loaned.
However, external reviews aren’t mandatory. A borrower’s self-certification is enough if they have the technical expertise. This means they can show the alignment of the green loan with the Green Loan Principles.
For instance, if you want a green loan with the IFC (International Finance Corporation), you are obligated to offer annual reports on the allocation of the loan and the impacts of that project on the environment.
Also, the IFC demands a second opinion to confirm the alignment of the project with the Green Loan Principles. But if the entire loan proceeds finance third-party certified renewable energy projects or green buildings, this requirement is waived.
How to Get an External Review
Where appropriate, green loan usage requires an external review. And there are several ways you can get these external reviews as a borrower. Also, there are several types and levels of these reviews that you can get for your green loan process.
The best ways to get external guidance and reviews might include;
1. Consultant Review
This is when a borrower seeks advice from well-recognized consultants for their expertise in environmental sustainability and other aspects of green loan administration. Any second-party opinion may also be categorized as a consultant review.
This type of green loan review requires a borrower’s green loan or related loan framework to be certified through external assessment standards.
The assessment standards dictate the criteria. And qualified third parties or certifiers test the criteria.
As a borrower, you might also have qualified parties (auditors or ESGs rating services) verify your green loan, related green loan framework, and underlying assets.
Unlike certification, verification looks at the alignment of green projects with internal standards or claims by the borrower.
Lastly, borrowers could have specialized rating agencies or research providers rate their loans and associated loan frameworks.
See related: 5 Climate Change Investment Opportunities for Your Portfolio.
Green Loans Review Levels
Typically, an external green loan review is either partial or full. A partial review covers several aspects of the green loan or green loan framework. On the other hand, a full review covers the green loan or the loan framework in its entirety. A full review assesses the alignment of the borrower’s suggested green project with all four fundamental GPL components.
Where possible, green loan borrowers ought to make this review available to the public (considering confidentiality and competition). This should be either through their website or any other way they see fit.
However, in cases where the financial institution knows the borrower well, through their activities, a self-certification process is enough. However, the borrower should have demonstrated internal expertise in confirming the alignment of green loans with GLP requirements.
Types of Green Loans and Interest Rates
As earlier mentioned, a green loan is any type of funding that helps borrowers finance projects with a positive environmental impact. A simple example of a green loan is when a borrower takes a loan to upgrade their home to be more energy-efficient.
When it comes to interest rates and repayments, green loans are similar to normal personal loans. They usually range between 6% and 36%, dividing your loan into small affordable monthly payments. Green mortgages offer up to a 1.25% discount when financing new constructions.
Generally, there are four types of green loans. These include;
- Green bilateral loans: These ones have a corporate guarantee and are usually between a bank and a company.
- Green syndicate loan: This involves the financing of an operation by several banks. One of the banks acts as the green agent, managing relevant documentation and certification.
- Green revolving credit line: This is a line of credit that is not meant to finance green projects, but it’s still offered under the ESGs criteria.
- Green project finance: These are based on long-term cash flows from a project or several projects. Assets associated with the project act as collateral such as in commercial solar financing.
See Related: Capitalism and the Environment: Are they Good or Bad for Each Other?
Where to Get a Green Loan Today
Getting a green loan isn’t hard. Many financial institutions have joined this wagon and are ready to lend green loans to those interested in green projects.
Some of the best money lenders online for green loans in the US include:
Upstart is a platform that partners with banks, giving borrowers a chance to borrow personal loans of up to $50,000. Their annual interest rate ranges between 6.53% to 35.99%, and you can access several types of loans.
Whether you are looking for personal loans, debt consolidation loans, credit card refinancing, or student loans, Upstart offers exactly that. It is among the biggest global lending platforms that connect you to the best online lenders for all types of loans.
Even better, the platform allows you first to compare personal loans and other loans from various lenders. This way, you can make an informed decision.
Upgrade is an online lending platform that receives an enormous amount of loan applications every year. Their APR ranges between 5.94% and 35.97% and charge zero prepayment fees.
The platform offers various types of loans, including personal loans, auto refinances, lines of credit, Upgrade credit cards, etc. And while their lines of credit offer up to $25,000, their personal loans can offer up to $50,000. The platform also allows you to compare lenders to ensure you settle for the one that best suits your needs.
SoFi is a social finance company offering online financing of up to $100,000. Whether you want a mortgage, refinancing loan, or personal loan, SoFi is a great option.
The company’s interest rates fall between 5.74% and 20.28%. Their loans are ideal for borrowers with impeccable credit scores. It is one of the best quick-help loans for green projects.