Green loans and social loans: An update of LMA, APLMA and LSTA principles | In Principle

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Green loans and social loans: An update of LMA, APLMA and LSTA principles

For a loan to be classified as “green,” “social,” or “sustainability-linked,” it must meet certain criteria described in the principles jointly developed by the LMA (Loan Market Association), APLMA (Asia Pacific Loan Market Association) and LSTA (Loan Syndications and Trading Association). The principles are not binding law, but voluntary recommendations allowing all market participants to clearly understand the essential features of such loans. The principles were amended in February 2023.

The Green Loan Principles, Social Loan Principles, and Sustainability Linked Loan Principles are regularly updated. Revised versions of the principles (with accompanying guidance) were published on 23 February 2023. The changes are considerable, although some of them only clarify earlier provisions. The update also aims to bring the principles into line with similar principles published by the ICMA (International Capital Market Association) for the bond market. The updated principles apply to all loans granted, extended, or refinanced after 9 March 2023.

Both green loans and social loans are defined by the purpose of financing (green or social) and must align with core components in four areas:

  • Use of proceeds
  • Process for project evaluation and selection
  • Management of proceeds
  • Reporting.

With sustainability-linked loans, it is not the purpose of the loan that defines the financing, but the borrower’s fulfilment of certain ESG goals.

Key changes in the guidelines

Currently, the Green Loan Principles state that they aim to support the financing of projects that “foster a net-zero emissions (i.e. carbon-neutral) economy, protect and restore the environment, facilitate the adaptation to climate change, and/or provide other environmental benefits.”

The definition of green loan/social loan has been expanded. Green loans/social loans no longer include just loan products, but also instruments such as guarantee lines and letters of credit which are:

  • Made available exclusively to finance, refinance or guarantee, in whole or part, new and/or existing eligible green projects or social projects
  • Aligned with the four key elements of the guidelines.

An exemplary list of projects qualifying as “green” has been included in the body of the Green Loan Principles (previously in the appendix). A major change is the addition of green technologies (such as energy storage systems) to the list. Also, borrowers hinted that national and international taxonomy initiatives might be useful in assessing what lenders might consider “green” and acceptable projects. The Social Loans Principles also include a sample catalogue of projects categorised as “social” and examples of target populations (previously placed in the appendices).

The principles and guidance focus on projects rather than borrowers. More emphasis is placed on whether a project meets the criteria than on the borrower itself. At the same time, it is stressed that the borrower will have to present and explain its comprehensive environmental sustainability strategy to the lender, and borrowers operating in controversial sectors will have to be more transparent. The guidance points out that when assessing green loans, many lenders will consider the borrower’s overall profile on sustainability issues. If controversial issues arise, including in terms of transition strategies, lenders may require additional transparency from some borrowers.

The section of the guidance on refinancing green loans is greatly expanded. Now it discusses the expectations for lookback periods, which will be shorter when refinancing projects for operating expenditures. Other issues raised include the possibility of:

  • Refinancing a green loan before the maturity date
  • Further refinancing for long-term green assets
  • Green loan financing of assets pledged as collateral for another loan.

External reviews (conducted both before and after the loan is granted to assess whether the loan meets the four core components of the principles) remain only a recommendation, not a requirement. This recognises that some borrowers may have sufficient experience to assess for themselves whether a loan meets the four core components (but competencies in this regard must be documented). This reflects the current practice of the green loan/social loan market, where the need for an external audit depends on the specific circumstances. The principles no longer include a catalogue of various possible types of post-origination external audits. On this issue, borrowers are referred to the LMA’s separate guidance on external audits.

The guidance significantly expands the catalogue of potential clauses to be considered for inclusion in green loan agreements. These clauses address confidentiality, conditions precedent, communication, the green loan coordinator, and declassification. The clause on what should be treated as a green breach has been removed, perhaps as there was no market consensus on it.

Core components: Loan criteria

The four key elements that green loans and social loans must meet have been expanded. This reinforces the principles of disclosure and transparency established in the guidelines.

  1. Use of proceeds

The principles foresee that the borrower should describe the method for use of the loan proceeds not only in the loan documentation itself, but also in an additional document, the loan framework. In turn, the use-of-proceeds section of the guidance is expanded to include the possibility of green financing for intangible assets and expenditures. Loans meeting both green loan criteria and social loan criteria are to be classified according to their primary purpose.

  1. Project evaluation and selection

The borrower should provide the lender with comprehensive information on the processes by which it identifies and manages the environmental and social risks associated with the project. It should have a method available for identifying factors reducing the known or potentially material risks of adverse environmental or social impacts associated with the project. Borrowers are also encouraged to provide information regarding the alignment of financed projects with taxonomies (official or market-based) (in addition to disclosing green standards and certifications, as encouraged earlier).

  1. Management of proceeds

The borrower should deposit the proceeds from a green loan/social loan in a dedicated bank account, or otherwise monitor the proceeds to ensure transparency. Before, the principles only encouraged a “green” borrower to establish an internal governance process to track the allocation of loan proceeds. From now on, borrowers must implement such a process, and also inform lenders of the temporary placement of the unallocated proceeds. The principles clearly state that if a loan includes both green and non-green (or social and non-social) tranches, overall it cannot be labelled as green/social.

  1. Reporting

The content of this element has not changed, but this section of the guidance is significantly expanded to indicate how borrowers should approach reporting on the effects of using loan proceeds. Now, the guidance includes a methodology for reporting (emphasising the use of both quantitative and qualitative performance indicators where possible). It is understood that for certain projects, the actual impact cannot be estimated until the financed assets become operational or projects are completed. In such cases, borrowers should report the estimated impact.


Both the principles and the guidance are regularly reviewed, also in response to market signals. They will probably be updated more than once, especially given the dynamic development of the green loan and social loan market and the changing regulatory environment for a sustainable economy.

The principles are not directly applicable to projects implemented in Poland for ESG loans generally, but they certainly clarify some issues and can provide a useful touchstone when structuring a green loan or social loan agreement governed by Polish law.

Ewa Winiarz, attorney-at-law, Banking & Project Finance practice, Wardyński & Partners