Green Loans: Seven Things to Think About

It is some time since we last looked at green loans. For those new to the field or in need of a refresher, we recommend first reading one or more of our previous articles – Green Loans and Sustainability-Linked Loans and An Introduction to Green, Social and Sustainability-Linked Loans 

In our latest article, following the recent publication by the Loan Market Association of a suite of indicative green loan clauses for use with their investment grade facility agreement or adaptation for their other facility documentation, we summarise some of the key drafting issues which need to be addressed when preparing a green loan facility agreement: 

• The essence of a green loan facility is that it should be used exclusively to fund eligible green projects. These will usually be defined by reference to one or more existing agreed projects, or projects which have not yet been identified but which must satisfy agreed and tightly drawn eligibility criteria, usually set out in a schedule. 

• The agreement will then specify that the purpose of each advance is to finance – or refinance – an eligible green project. In addition to the usual conditions precedent, there will be specific conditions precedent relating to each project which will also need to be satisfied prior to drawdown.    

• Full transparency is extremely important to avoid “greenwashing”.  Accordingly, there will normally be extensive information undertakings. The borrower will be required to provide satisfactory evidence to enable the tracking, monitoring and evaluation of how the advances have been applied.

  There will normally be a requirement to provide regular green loan reports, the format and content of which will normally be specified in a schedule. A report will probably include a description of the project or projects, detail the allocation of funds to those projects and confirm that the funds have been applied in compliance with the agreement. It will also report on achieved and expected environmental impacts. There would usually be a requirement that the contents of each report be verified by an agreed independent environmental expert. In addition, the agent or lender will have the right to ask for additional information evidencing compliance. The borrower will have an obligation to notify the agent or lender of any breaches of the green provisions. 

• As you would expect, there will be corresponding green representations and warranties to be repeated on each utilisation request and periodically thereafter. 

• Prior to declassification, the borrower will be permitted to burnish its green credentials by referencing the green project or projects and loan or loans although there may be a requirement of reasonable consultation with the agent or lender before doing so. 

• Perhaps the most interesting section of the facility agreement will relate to what happens on the occurrence of a breach of any of the green provisions. The current norm is that this would not be treated as an event of default – and there will be an express provision to this effect – but that the green loan would be “declassified”. That is to say, the borrower and its group would no longer be permitted to publicise the loan as being green. 

Finally, it should be noted that, unlike sustainability-linked loans, green loans are not normally subject to pricing incentivisation, so that a declassification would not normally result in an increase in pricing.   

Readers should bear in mind that the green loan market is still in its early days. It is possible that some of the treatments referred to above may change over time and, of course, specific circumstances may result in some facilities being treated differently.