Green Loans: Meaning and principles

The banking sector has an important role to play in combating climate change and promoting sustainable development.

Various instruments exist to support sustainable investments, such as green loans, which have already been contracted by a wide range of companies around the world. But what are green loans?

These are contingent loans or lines of credit (such as bonding lines, guarantee lines or letters of credit) whose ultimate purpose is to provide financial support (financing or guarantees), in whole or in part, to projects that have a positive impact on the environment. 

Examples include projects that promote the conservation of natural resources, minimise climate change, promote the use of renewable energies or energy efficiency, all of which are eligible for this type of loan. However, it is important to underline that their concession depends on the financial institution, depending on the main objective of each project.

Green lending is a market practice that follows recommended voluntary guidelines developed by an experienced working group composed of representatives from leading financial institutions and law firms active in global lending. The Green Lending Principles are issued by the LMA / LSTA.

There are four principles that determine green lending:

• Use of funds: green loans finance projects with a positive impact on the environment, and this clarification must appear in the financial documents. This type of initiative covers areas such as renewable energy or pollution control.

• Project evaluation and selection process: green borrowers must communicate the environmental objectives of their projects and how they align with the available categories, including measures to identify and manage associated environmental and social risks. In addition, entities seeking a green loan must integrate their sustainability strategy, disclose their alignment with certifications, and establish processes to mitigate environmental and social risks by analysing and monitoring commitments.

• Management of funds: Revenues from green loans should be monitored in a transparent manner, with clear labelling and separate accounts for the green tranche(s), ensuring their integrity. Borrowers should disclose the intended temporary placement of unallocated revenues, managing them on a loan-by-loan or aggregated basis.

• Reporting: Borrowers are encouraged to maintain up-to-date records of the use of funds, disclosing annually those that have been allocated, project descriptions and expected impacts, emphasising transparency in reporting the results of initiatives through qualitative and quantitative performance indicators, and disclosing.

Green loans are therefore an essential part of the instruments available to financial institutions to contribute to the fight against climate change.

Last year, green loans accounted for €218 billion, compared to €193 billion in 2022. The trend is growing, and it is only a matter of time before they become the main contributor to a more sustainable future.