For those watching the sustainable loan market, 2020 has again been remarkable. Whereas its growth has perhaps been less visible than that in the sustainable bond market (with news typically restricted to press releases due to confidential nature of the loans), there is more than meets the eye. Bloomberg research shows a huge leap in green loans, and, to a lesser extent sustainability-linked loans. By way of reminder, green loans are funding green projects. Sustinability-linked loans can be taken by any corporate, even for general purposes, provided it commits to certain sustainable targets – for instance a reduction of greenhouse gas emissions, or improving access of developing countries to certain medicines.
The targets are laid down in a ‘sustainable finance framework, published on the company’s website. Behind this ‘framework’ stands the publication by the Loan Market Association of market principles, initially only for green loans, but in 2020 also for sustainable-linked loans. It is this development which has helped standardise (and continuing to do so) this market. In each case these principles build upon components: (i) the use of proceeds, (ii) project selection and evaluation, (iii) management of proceeds and (iv) reporting.
“The publication of ever tightening voluntary principles has helped both lender and borrower manage expectations and ensure that the green loan market is no window dressing.”
There were teething problems. In (in)famous matter related to a large oil company using market principles for green bonds to increase its efficiency in refineries, leading to a public outcry as well as discussion within different standard setters. Should ‘brown’ companies be allowed to use the ‘green’ label? Rather than exclude these, some market participants are advocating a ‘transitional finance’ label, facilitating the change demanded if we want to reach the Sustainable Development Goals by 2030. Quite a change!