Green financings surge in high liquidity markets

In brief…

The state of Belgium recently joined the club of sovereign‘green’ bond issuers, preceded in Europe only by Poland andFrance. During recent years’ market conditions of persistentlow interest rates and high liquidity, both public and privatesector stakeholders have developed a means to add value totheir financing transactions. While bringing environmentaland public benefits into the equation, fresh marketopportunities are being created for all those involved.

Following this cross-sector trend, both the InternationalCapital Markets Association (ICMA) and the Loan MarketAssociation (LMA) have issued sets of guidelines for theirprimary fields of business, respectively named the GreenBond Principles (GBP) and Green Loan Principles (GLP).Both the GBP and GLP aim to provide a high-levelframework of market standards and best practices, settingout a consistent methodology for use across the wholesalegreen financial markets.

What does green financing stand for?

A lending or debt capital market transaction labelled ‘green’according to these standards assures potential investors thatthe raised funds will be allocated to environmentallyresponsible causes. The spectrum of potential utilizationsvaries widely, as indicative categories can be:

• Renewable energy
• Energy efficiency
• Pollution prevention
• Clean transportation
• Sustainable water management
• Climate change adaptation, and
• Green buildings or infrastructure

A suggested project will have to meet strict criteria toensure the sustainability of its ecological impact. The GBPand GLP offer a set of guidelines for such criteria.

How to achieve a green label?

Having selected a certain project or series of projects,accurate evaluation standards must be implemented in thetransactional legal framework. Performance indicators andclear objectives will be defined at the outset, depending onthe nature of the project. In order to achieve a reliable andworkable financial framework, such detailed characteristicswill mostly be tailored to the needs of the project and itsstakeholders.

During the project’s lifetime it is important to providefinanciers with regular updates regarding both the use andthe management of the proceeds of the financing.Disclosure requirements must honor the investors’ right totrack how their funds are being put to use without overlyburdening the borrower or issuer.

In order to strengthen their position, issuers or borrowerswishing to comply with the green financing standards mayconsider soliciting external review to confirm the alignmentof their financing with the key features mentioned above orto develop their own programs. Whereas obtaining aspecific green product rating can provide investor comfortin an initial phase, auditors verifying the management ofproceeds against predefined KPIs can provide financierswith the required transparency throughout the lifetime ofan investment.

What are the benefits of green financing?

An increasingly large group of institutional investors arebeing mandated to take sustainability objectives intoaccount. This explains the spike in demand for greenprojects in the international financial markets. Those whoeffectively establish a workable green framework are oftenseen to secure funding at market beating conditions.

The positive impact of more funds being allocated toenvironmentally responsible projects is self explanatory.From a commercial perspective, green labels provide asilver lining by upgrading well-known business mechanicsinto more reliable and transparent territory.

In a business cycle flooded with opportunities, greenproducts present themselves with an edge, byincorporating both financial and social perspectives. In thiscontext, investor appetite seems unlikely to fade in view ofthe expected macroeconomic trends.