Despite fast growth of environmentally-friendly projects and associated financing in recent years, there was no consistent and unified definition of what exactly constitutes Green Finance. This is now being addressed as an important body weighs in on the subject and proposes a framework to assess lending projects.
The Loan Market Association (LMA) with support from the International Capital Market Association (ICMA) has provided a framework for assessing deals, which will cover such aspects as management of proceeds, the process of project evaluation and selection, and reporting on the loan performance. The framework separately covers green loans (Green Loan Principles or GLP) and bonds (Green Bond Principles or GBP) and provides guidelines for external reviews (ie by an institution with environmental expertise, that is independent from the issuer).
Green projects have to show clear environmental benefits – which should be assessed and ideally quantified – and cover projects that help mitigate climate change, prevent pollution and to conserve natural resources. What follows is an incomplete list of eligible green projects:
- renewable energy (including production and transmission)
- energy efficiency (energy storage, smart grids, appliances and products)
- pollution prevention and control (reduction of air emissions, waste recycling)
- environmentally sustainable management of living natural resources and land use (ie environmentally sustainable agriculture)
- sustainable water and wastewater management (sustainable infrastructure for clean and/or drinking water, wastewater treatment)
- eco-efficient and/or circular economy adapted products
- green buildings (must meet recognized standards or certifications)
These standards will become increasingly important, especially, if cost of financing for these green projects proves to be lower than similar non-green projects. Indeed, initial signs of such differentiation can already be observed on French green debt issued in June 2018, which trades at a premium (ie lower yield) to non-green debt of similar maturity. A more significant drop in cost of debt for green projects could come about if regulators incentivized banks and possibly asset managers to favor green bonds. The European Commission has taken first steps towards such a “greener and more sustainable economy” with the publication of an Action Plan and recommendations for the financial sector “to support the transition to the low-carbon economy”.
The publication of Green Principles for bonds and loans by the LMA is an important stage in the development of Green Finance and will allow consistent assessment and labeling of projects. These principles might become a driver of credit provision over time, as regulators incentivize lenders (ie by adjusting leverage ratios and reserve requirements for banks) to prioritize environmentally-friendly financing.
Micro Utility Partners is the first organization in Singapore (and possibly in Southeast Asia) to issue uncertified Green Bonds. A major real estate developer – City Developments Limited – followed shortly afterwards.
Being involved in several green projects in Indonesia and Australia, Micro Utility Partners welcome the new framework for assessing environmentally-friendly loans and look forward to being formally recognized as a green borrower.