Green loans, eco-friendly financing | In Principle

Go to content
Subscribe to newsletter
In principle newsletter subscription form

Green loans, eco-friendly financing

Environmental protection is a major issue today, and many organisations and enterprises attempt to incorporate environmental protection requirements into their operations. Banks are also trying to keep up with the trend by offering eco-loans or green loans.

In view of the cause it serves, financing of this kind is usually granted on slightly better and more competitive conditions. Recently, one of the major banks in Poland introduced eco-friendly loans for businesses and consumers (including mortgages). These involve preferential conditions for lending for products and systems which save on conventional energy and increase use of clean energy. The bank waives the commission on the loans, or refunds the commission after three months of regular payments and when the customer submits an invoice for the financed eco-friendly product.

Eco-friendly loans are often subsidised by government institutions. In Poland, one bank offers loans for environmentally friendly modernisation of houses where 40% of the loan is repaid thanks to subsidies from the Province Environmental Protection and Water Management Fund.

There will probably be a gradual rise in the share of eco-friendly financing in project financing, including on the Polish market.

LMA recommendations

Due to the increasing number of green financing packages, the Loan Market Association has published Green Loan Principles to standardise market practice with regard to the green loan market and devise certain standards and models. This brochure describes the green loan market trend and attempts to formulate certain standards and policies for banks providing financing for environmental protection in the broad sense.

The LMA defines green loans as any lending instruments used to finance or refinance the costs of green projects. A list of examples of projects is given in the brochure. These include projects concerning renewable energy, combating air pollution, improvement of electricity efficiency, and clean forms of transport, or for instance eco-friendly construction. Four areas can help participants determine whether the financing in question constitutes a green loan:

  • How the loan funds are used
  • The project financing evaluation process
  • How the loan funds are managed
  • Reporting.

Above all, green loans should only be used to finance projects which are specifically beneficial to the environment. The specific benefit attained should be described in detail, with reasons, by the borrower.

The borrower should also provide a precise description of the eco-friendly product for which it is seeking financing. This information should describe all risks and problems that might disrupt realisation of the project being financed. The borrower is also required to produce for banks any certificates, permits, or other documentation pertaining to the project being financed.

For the sake of transparency, funds from green loans should be kept separately in a special bank account, and not mixed with the borrower’s other funds. An internal policy should also be recorded in the borrower’s enterprise concerning monitoring of use of funds from green loans.

The borrower should report on how funds are used and progress in realisation of the project being financed. If the borrower presents test results, measurements, or statistics, it should also present and explain the adopted methodology. The LMA also points out that in certain situations it might also be advisable for a third party independent of the borrower to conduct this monitoring. Sometimes certificates or ratings given by professional environmental protection institutions may be required.

The LMA is a voluntary association which does not have any power or jurisdiction of an administrative nature over financial institutions, and LMA recommendations and standards are not law. They do not give rise to rights or obligations for entities governed by law. As the LMA is an industry organisation known and recognised around the world, it has considerable influence on the market and conduct of financial institutions. By way of its standards, standard loan documentation forms, and recommendations (soft law) the LMA formulates the conduct of players on the financial market. Banks and law firms assisting banks and drafting lending documentation for eco-friendly loans can therefore be expected to consider LMA recommendations in this regard.

There are also recommendations on special treatment of eco-friendly loans for regulatory purposes. At the moment, the banking community, for example the European Banking Federation, is recommending that EU authorities amend regulations on capital requirements for financial institutions with respect to preferential treatment of eco-friendly loans to lower capital requirements. This is intended to prompt development of green loans and make them cheaper for borrowers.

To summarise, certain harmonisation measures and standards as regards the criteria for a particular loan to be classed as a green loan would be advisable. At some point EU legislators, and consequently Polish legislators, will regulate in a comprehensive manner the new green loan market trend.

Mateusz Tusznio, Artur Bednarski, adwokat, Banking & Project Finance practice, Wardyński & Partners