Green lending refers to a lending dependent on environmental criteria for the planned use of funds. It is part of the wider sustainable investing and aims to reduce the impact on the environment of new lending activities.
Starting in 2005 major US banks such as Wells Fargo (July 2005, $1bn over 5 years) and Bank of America (March 2007, $20 bn) started dedicating financing toward sustainable entrepreneurship. This usually meant financing the building of environmentally sustainable or friendly buildings or enterprises. The green lending initiative appear to have been taken by the lenders as opposed to borrowers.
In 2018 the Loan Market Association in the UK issued Green Loan Principles to ensure any green loan is used for eligible green projects. This includes stating that this must be clearly articulated in the finance documents along with the expected environmental benefits, which must be assessed, quantified, measured and reported by the borrower. The list of projects that qualify as green is based on the list that the International Capital Market Association uses to define Green Bonds.
ESG ratings and green loans
In April 2017, ING Group issued the world’s first sustainability-linked loan to Philips, coupling the interest rate of the EUR 1 billion loan to the company’s sustainability performance. By June 2018, Bloomberg News reported that ING Group had closed 15 similar deals where the bank would lower the cost of borrowing by between 5% and 10% based on the company’s ESG rating provided by Sustainalytics. As shown on Environmental Finance’s list of sustainability loans, several other banks have teamed with various ESG ratings agencies, copying and building on the ING-Sustainalytics model:
|Date||Company||Amount||USD equivalent||Country||Loan type||Use of proceeds||Objective/KPI||Pricing||Duration|
|April 2017||Royal Philips||€1bn||1170||Netherlands||Syndicated RCF||General corporate purpose||Philips’s sustainability performance and rating provided by Sustainalytics||If the rating goes up, the interest rate goes down—and vice versa.||2022|
|June 2017||Barry Callebaut||€750m||870||Switzerland||Syndicated RCF||General corporate purpose||ESG Score from Sustainalytics||If the ESG rating goes up, the interest rate goes down—and vice versa.||2022|
|July 2017||Gas Natural||€330m||380||Spain||Bilateral RCF||–||Sustainability improvement||Partially index-linked to the environmental, social and corporate governance impact of the company.||Over four years with the possibility of an additional year.|
|October 2017||Abertis||€100m||118||Spain||Bilateral RCF||–||Sustainability improvement||The loan’s interest rate is benchmarked to a sustainability rating from Sustainalytics||–|
|October 2017||SocFin||€15m||18||Belgium||Bilateral term loan||–||Sustainability improvement||–||–|
|October 2017||bPost SA||€300m||354||Belgium||Syndicated RCF||–||Sustainability improvement||ESG rating in the pricing of the loan determined by Sustainalytics||–|
|November 2017||Wilmar||$150m||150||Singapore||Bilateral RCF||General corporate purpose||ESG Score from Sustainalytics||If the rating goes up, the interest rate goes down —and vice versa.||–|
|December 2017||Red Eléctrica de España||€800m||944||Spain||Syndicated loan||General corporate purpose||ESG Score from Vigeo Eiris||If the rating goes up, the interest rate goes down —and vice versa.||–|
|December 2017||Casino Guichard Perrachon||€50m||59||France||Bilateral loan||–||Sustainability improvement||–||–|
|December 2017||LafargeHolcim||Not disclosed||Not disclosed||Switzerland||Bilateral RCF||–||Sustainability Improvement||–||–|
|May 2017||EDF||€150m||164||France||Bilateral RCF||General corporate purpose||ESG Score from Sustainalytics||If the rating goes up, the interest rate goes down —and vice versa.||NA|
|February 2018||Danone||€2bn||2500||France||Syndicated credit facility||General corporate purpose||ESG score provided by Sustainalytics and Vigeo Eiris / KPI: Part of Sales linked to subsidiaries certified by B Corp||Incentive scheme linked to the two KPIs||–|
|February 2018||Mapfre||€1bn||1250||Spain||Syndicated credit facility||General corporate purpose||ESG Score from Vigeo Eiris||If the rating goes up, the interest rate goes down —and vice versa.||Extended its maturity period until 2023 (open to a possible extension)|
|March 2018||Olam||$500m||500||Singapore||Loan||General corporate purpose||Scores granted by Sustainalytics on 50 ESG linked criteria||If the targets are reached on all scores, the interest rate goes down —and vice versa.||Three years|
|April 2018||Adecco||€600m||738||Switzerland||Loan||General corporate purpose||ESG Score from Sustainalytics||If the ESG rating goes up, the interest rate goes down —and vice versa.||–|
|April 2018||Polymetal||$80m||80||Russia||Bilateral RCF||–||Sustainability improvement||If the Sustainalitics score for Polymetal improves, the interest rate for the loan will be decreased. Conversely, if the Sustainalytics score deteriorates, the interest rate will increase.||–|
|June 2018||CMS Energy||$1.4bn||1400||US||Syndicated RCF||–||New credit facilities allow CMS to reduce its interest rate by meeting targets related to environmental sustainability, specifically renewable energy generation||–||–|
|June 2018||Avangrid||$2.5bn||2500||US||Syndicated RCF||–||Sustainability indicator will be independently verified by the agency Vigeo Eiris.||Price-adjustment mechanism based on the continuous reduction of AVANGRID’s emission intensity.||2023|
|May 2018||Generali||€2bn||2380||Italy||RCF||General corporate purpose||ESG Score||The cost is linked both to targets on green investments and to progress made on sustainability initiatives.||3 years|
|July 2018||Pennon||£100m||130||UK||Term loan||–||The loan requires the Pennon Group to meet ESG/Sustainability objectives and key performance indicators based on an ESG Index issued by independent ratings organisation, Sustainalytics||Pennon Group receives a reduced margin on the loan if targets are achieved||5 years|
In September 2018, five banks, including BBVA, structured a revolving credit facility (RCF) for the Italian power utility A2A in a finance deal valued at 400 million euros. The syndicated loan avails itself of a margin mechanism based on two parameters: the performance of two selected KPIs (waste processing capacity and the volume of renewable energy sold in the wholesale market, emphasizing the focus of the A2A Group on the circular economy and decarbonation). The solicited ESG rating is provided annually by Standard Ethics Aei.
- ^Green Lending: Top 10 Reasons Why Banks Lend to Sustainable Buildings[permanent dead link]
- ^Green Wombat: Bank of America Commits $20 Billion to Green Lending
- ^“Credit Agricole closes first two U.S. Green loans”. Reuters. April 26, 2018.
- ^Tallat Hussain (March 22, 2018). “Green Loan Principles to Guide Environmental and Sustainability Finance”.
- ^“ING and Philips collaborate on sustainable loan”. ING. Retrieved 4 October 2018.
- ^Holder, Michael. “Philips agrees €1bn loan with interest rate linked to sustainability performance”. Business Green. Retrieved 4 October 2018.
- ^Hirtenstein, Anna. “Going Greener Can Get You Cheaper Loans at This Dutch Bank”. Bloomberg. Retrieved 4 October 2018.
- ^Roumpis, Nick. “The green and sustainability loan market: ready for take-off”. Environmental Finance. Retrieved 4 October 2018.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.