Green Loans and Sustainability Linked Loans: What’s What?



Allocating funds to projects which have benefits for the environment and the society has been increasingly important in the recent years due to the improved understanding of the frequently detrimental impact of global business operations, especially in relation to climate change. Building on the influence of the Green Bond Principles, issued in 2014 by the International Capital Market Association (ICMA), the Loan Market Association (LMA) published the Green Loan Principles (GLP) in 2018 and the Sustainability Linked Loan Principles (SLLP) shortly after in 2019 in collaboration with ICMA. This article seeks to define characteristics of both types of loans, compare them and find the differences between them.


The objective of the LMA was to promote the development and preserve the integrity of green/sustainable loan products through the establishment of a framework within the respective market for projects and business activities with clear environmental benefits (GLP) or a combination of environmental and social benefits (SLLP) and sufficient oversight. It must be noted that both GLP and SLLP attempt to create voluntary guidelines, and it is upon the lenders and the borrowers to agree on the specifics on each deal.1 Green and sustainability linked loans are still subject to the same rules and regulations on banking and lending as any similar financial transactions.2

Green Loans

According to the GLP, green loans can be any type of loan instruments made available exclusively to finance or re-finance eligible Green Projects.3 Green loans must align with four components of the GLP, which are: use of proceeds, process for project evaluation and selection, management of proceeds, and reporting. The proceeds must be used for a Green Project and the GLP contain an indicative list of categories, such as climate change adaptation and mitigation, clean transportation, renewable energy, energy efficiency, pollution prevention and control, green buildings, biodiversity conservation, circular economy, etc.

Other three principles focus on the oversight of lenders over the borrower, predominantly to prevent misallocation of funds and to promote the integrity of green finance. Firstly, the borrower has to present a strong case for the benefits of the project in the approval process, including compliance with external standards and certifications and potentially provide a rating assessment by qualified third parties. Furthermore, the borrower has to track the allocation of proceeds and report it periodically to the lenders, as well as measure the impact of the Green Projects with qualitative and quantitative performance indicators and external review and verification, where appropriate.

Notwithstanding the above, green loans framework may be combined with revolving credit facilities, and while the use of proceeds would be defined in less detail, the parties should determine the best way to evidence the flow of funds.4

Sustainability Linked Loans (SLLs)

SLLs are aimed at assisting the progress of a combination of environmentally and socially sustainable economic activity or growth.5 Four components of the SLLP are: relationship to borrower’s overall corporate social responsibility (CSR) strategy, target setting, reporting, and review. While similar in their purpose, they follow a slightly different mechanism in contrast to green loans. Instead of focusing on the exclusive use of loan proceeds for pre-determined purposes, SLLs are more flexible and may be used for general corporate purposes, whereas the borrower’s performance will be measured using sustainability performance targets (SPT).6 These targets are intended to measure improvements in the borrower’s sustainability profile and consist of key performance indicators, external ratings and/or equivalent metrics according to SLLP.7 Indicators may include carbon and water footprint, energy consumption and efficiency, renewable sources rate, waste reduction and recycling rate, supply chain miles, sustainable sourcing and producing rate, emissions reduction rate, etc.

The selection, tracking, reporting and reviewing requirements for borrowers are similar to those under the GLP. In the approval process, borrowers must clearly convey the sustainability goals, which they have established in their CSR. Like GLP, SLLP encourage borrowers to disclose any external standards or certifications to which they conform their operations. Lenders and the borrower negotiate the specific SPTs under the loan agreement and it is recommended to set some intermediate goals during loan draw period to immediately incentivize the borrower to pursue more sustainable performance, potentially by reducing the margin, if these targets are reached. SLLP also envision at least yearly reporting on the SPT progress and, where appropriate, encourage public disclosure of related information as well as external review.

Shared benefits

There are several benefits shared by both green loans and SLLs. The greater importance assigned to environmental and sustainable causes benefits lenders on one hand, as there is a greater choice of projects and products available for them to diversify, and businesses, who can acquire new sources of funding for green projects and improve their sustainability on the other hand. The most important factor, however, is that sustainable companies are less prone to a number of external and internal risk factors, which means that companies are incentivized to transform their operations if they want to survive in the long-term and the lenders are willing to give them better margin rates because of the reduced risk and are convincing their clients towards greater use of green/sustainable loans.8

By using green/sustainable financing, companies also indicate their commitment to addressing sustainability issues to their shareholders, consumers and new potential investors, which may positively impact their overall performance on the market in the short run as well. Additionally, in some jurisdictions subsidies, regulatory and/or fiscal incentives may be available both to lenders and to borrowers.9

State of the Market and Other Developments

Biggest levels of growth in green/sustainable finance have been in Europe and will most likely continue to grow due to the governmental and regulatory approach driving the change. US and Asia markets have also been growing, especially the SLLs in the US. It seems that lenders and borrowers somewhat prefer the SLLs over green loans, because lenders have much better oversight and can conclusively evaluate the impact on sustainability through SPTs, while the borrowers mostly prefer the flexibility of the use of loan proceeds.10

While there has been some initial nervousness over SPT setting, predominantly due to a lack of specific guidance, there is constant regulatory activism seeking to improve the circumstances. The Taxonomy on sustainable activities published by the European Commission in 2019 with its comprehensive screening criteria may well help with these issues. Thus, it appears that we are only at the beginning of the sustainable finance era, which is set to thrive in the future.

1 Green Loan Principles, December 2018 (introduction), Sustainability Linked Loan Principles, March 2019 (introduction).
2 See mutatis mutandis Green Bond Guidance Handbook, June 2019, question 1.1 in fine.
3 Green Loan Principles, December 2018.
4 Green Loan Principles, December 2018, appendix 2.
5 Sustainability Linked Loan Principles, March 2019.
6 Sustainability Linked Loan Principles, March 2019.
7 Ibidem.
8 LMA Seminar notes.
9 Green Bond Guidance Handbook, June 2019, question 1.5.
10 LMA Seminar notes.