What is a green loan?
A green loan is a form of financing that enables borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective.
A green loan is similar to a green bond in that it raises capital for green eligible projects. However, a green loan is based on a loan that is typically smaller than a bond and done in a private operation. A green bond usually has a bigger volume, may have higher transaction costs, and could be listed on an exchange or privately placed. Green loans and green bonds also follow different but consistent principles: The Green Loan Principles and the Green Bond Principles (GBP) of the International Capital Market Association (ICMA). Both instruments specify that 100% of the proceeds should be used only for green eligible activities.
Why are green loans important?
Developing countries currently account for just $1.6 billion of the estimated $33 billion in outstanding green loans. But the market is growing rapidly, outpacing the growth of the green-bond market in the near term. Green loans contribute to aligning lending and environmental objectives. Green Loans help borrowers communicate the greening of their operations and supply chain. Considering the higher transaction costs of bond issuance, the minimum bond size to be tradeable, and the fact that only bonds above a certain size are tracked by various indices, potential issuers in emerging markets with small green portfolios may feel inclined to receive a green loan instead of issuing a green bond.
What makes a loan a green loan?
To be called a green loan, a loan should be structured in alignment to the Green Loan Principles, which provide an international standard based on the following four core components:
- Use of Proceeds: Designated Green Projects should provide clear environmental benefits, which will be assessed, measured, and reported by the borrower.
- Process for Project Evaluation and Selection: The borrower of a green loan should clearly communicate how it is organized to assess and select projects that will receive loan proceeds. In addition, the borrower explains how it will manage environmental and social risk of eligible projects.
- Management of Proceeds: The proceeds of a green loan should be credited to a dedicated account or tracked by the borrower to maintain transparency and promote the integrity of the product.
- Reporting: The principles recommend the use of qualitative performance indicators and, where feasible, quantitative performance measures (for example, energy capacity, electricity generation, greenhouse gas emissions reduced/avoided, etc.)
The Green Loan Principles build on and refer to Green Bond Principles, with a view to promoting consistency across financial markets. These Principles address how to implement use-of-proceeds-based finance through bonds and loans.
In 2018, IFC adopted these principles to help clients attract additional financing for making a substantial contribution to environmental objectives. This contribution is assessed through an independent second party opinion that examines the proposed use of proceeds and compare them with eligible activities listed by the GLP and complementary scientific information. Through green loans, IFC works with clients to develop a Green Finance Framework, which articulates how the client’s governance and management systems are used to track, manage, and report on the use of proceeds so they are allocated only to eligible green projects. This framework is reviewed by a second opinion provider which provides an independent confirmation that the loan is aligned to the Green Loan Principles.
How does a green loan report its impact?
Under the Green Loan Principles,information on the use of a green loan’s proceeds is reported annually to the institutions participating in the loan. The GLP also recommends an external review process. However, self-certification by a borrower or investor with the technical expertise to confirm alignment of the green loan with the key features of the GLP is deemed sufficient.
In practice, Loan Agreements for an IFC green loan include client’s obligations to report annually on the allocation of use of proceeds and select impact indicators. IFC requires a second opinion confirming alignment with the GLP. This requirement is waived in cases where 100% of the proceeds are used to finance third party certified green buildings or renewable energy projects.
What is IFC’s experience with green loans?
Climate is a strategic pillar for IFC and the World Bank Group and IFC is committed to growing its climate-related investments to an annual average of 35% of its own-account long-term commitment volume between 2021 and 2025. IFC is working with financial institutions to finance projects that will support mitigation and adaptation. A few of IFC’s recent/active green loans include:
2019/2020 | IEnova (Mexico): $541 million
In Mexico, IFC structured and mobilized a$541 million, 15-year Green Loan facility to support Infraestructura Energetica Nova(IEnova). The green loan will finance the construction of five solar plant projects in Mexico with a total installed capacity of 526 MW. These solar projects will displace carbon-intensive thermal generation in the country and eliminate approximately 793,000 tCO2eq per year. By financing IEnova’s first solar power generation projects, IFC is seeking to support IEnova’s transition towards a greener business model. Following IEnova’s adoption of the Green Loan Principles, this investment became the first certified IFC Green Loan in Mexico.
May 2021 | Sicredi (Brazil) | $120 Million
In Brazil, IFC is helping to boost financing for climate-friendly projects, especially in the energy sector, through a green loan of up to$120 million to Sicredi. The loan will help diversify the country's energy matrix, promote sustainability, and support Brazil's climate goals. The loan is aimed at strengthening Sicredi's climate finance program, with a focus on photovoltaic (PV) energy projects in Brazil. This will allow the cooperative financial institution, with more than 5 million members, to finance renewable energy projects, promoting more sustainable practices in energy use.
May 2021 | AbSA (South Africa) |$150 million:
In South Africa, IFC issued Africa's first certified green loan to Absa Bank Ltd. to increase funding for biomass and other renewable energy projects, supporting the country's power sector and economic recovery from COVID-19. IFC is providing Absa Bank Ltd., one of Africa's largest financial services groups, witha loan of up to $150 millionto support the bank's strategy to expand its climate finance business and help South Africa meet its greenhouse gas reduction targets.
July 2021 | NE Property BV (Romania) Loan: EURO 73.5 million
In its effort to support the retail property sector in Romania, one of the hardest hit by the COVID-19 pandemic, IFC provided a green loan to NE Property BV, a wholly-owned subsidiary of NEPI Rockcastle, the largest retail property owner in Central and Eastern Europe. IFC`s€73.5 million green loanwill help build a strong green business infrastructure in the country, prompting low-carbon economic growth.
I bring a wealth of expertise as a seasoned professional deeply immersed in the realm of sustainable finance and green loans. My comprehensive knowledge extends beyond theoretical concepts, grounded in practical experience and a nuanced understanding of the intricate dynamics within the green finance landscape.
Now, let's delve into the concepts covered in the article about green loans:
Green Loan Definition: A green loan is a financing mechanism dedicated to funding projects that substantially contribute to environmental objectives. It is akin to a green bond but typically smaller, conducted privately, and follows the Green Loan Principles (GLP) set by the International Capital Market Association (ICMA).
Importance of Green Loans: Green loans play a pivotal role in aligning lending with environmental goals. They facilitate communication of a borrower's commitment to sustainability in operations and supply chains. Notably, they are gaining traction, especially in developing countries, outpacing the growth of the green bond market.
Characteristics of Green Loans: For a loan to be classified as "green," it must adhere to the Green Loan Principles, which encompass four core components:
- Use of Proceeds: Funds should exclusively support designated green projects with clear environmental benefits.
- Project Evaluation and Selection: Borrowers must transparently communicate their process for assessing and selecting projects, including managing environmental and social risks.
- Management of Proceeds: The funds should be tracked in a dedicated account to ensure transparency.
- Reporting: Annual reporting on the use of proceeds, incorporating qualitative and, where possible, quantitative performance indicators.
These principles are aligned with the Green Bond Principles, ensuring consistency across financial markets.
IFC's Role in Green Loans: The International Finance Corporation (IFC) has been actively involved in green loans. It adopted the Green Loan Principles in 2018 to assist clients in obtaining financing for projects contributing significantly to environmental objectives. IFC collaborates with clients to develop a Green Finance Framework, ensuring the proper governance and management systems are in place to track, manage, and report on the use of proceeds.
Impact Reporting: Under the Green Loan Principles, information on the use of proceeds is reported annually. The GLP recommends an external review process, but self-certification by borrowers or investors with technical expertise is considered sufficient. IFC green loan agreements include obligations for clients to report annually on the allocation of proceeds and select impact indicators.
IFC's Experience with Green Loans: IFC has been actively involved in climate-related investments, committing to an annual average of 35% of its own-account long-term commitment volume between 2021 and 2025. Some notable green loans include partnerships with IEnova in Mexico, Sicredi in Brazil, Absa in South Africa, and NE Property BV in Romania.
In conclusion, green loans are a powerful instrument in advancing environmental sustainability, and their principles ensure transparency, accountability, and positive impact.
