The state of Belgium recently joined the club of sovereign “green” bond issuers preceded in Europe only by Poland and France. Under the last years’ market conditions of persistent low interest rates and high liquidity, both public and private sector stakeholders have developed a means to add value to their financing transactions. While bringing environmental and public benefits into the equation, fresh market opportunities are being created for all those involved.
Following this cross-sector trend, both the International Capital Markets Association (ICMA) and the Loan Market Association (LMA) have issued sets of guidelines for their primary fields of business, respectively named the Green Bond Principles (GBP) and Green Loan Principles (GLP). Both the GBP and GLP aim to provide a high-level framework of market standards and best practices, setting out a consistent methodology for use across the wholesale green financial markets.
What does green financing stand for?
A lending or debt capital market transaction labelled ‘green’ according to these standards ensures to potential investors that the raised funds will be allocated to environmentally responsible causes. The spectrum of potential utilisations varies widely, as indicative categories can be:
- renewable energy
- energy efficiency
- pollution prevention
- clean transportation
- sustainable water management
- climate change adaptation
- green buildings or infrastructure
A suggested project will have to meet strict criteria to ensure the sustainability of its ecological impact. The GBP and 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 the transactional legal framework. Performance indicators and clear objectives will be defined at the outset, depending on the nature of the project. In order to achieve a reliable and workable financial framework, such detailed characteristics will mostly be tailored to the needs of the project and its stakeholders.
During the project’s lifetime it is important to provide financiers with regular updates regarding both the use and the management of the proceeds of the financing. Disclosure requirements must honour the investors’ right to track how their funds are being put to use without overly burdening the borrower or issuer.
In order to strengthen their position, issuers or borrowers wishing to comply with the green financing standards may consider soliciting external review to confirm the alignment of their financing with the key features mentioned above or to develop their own programmes. Whereas obtaining a specific green product rating can provide investor comfort in an initial phase, auditors verifying the management of proceeds against predefined KPIs can provide financiers with the required transparency throughout the lifetime of an investment.
What are the benefits of green financing?
An increasingly large group of institutional investors are being mandated to take sustainability objectives to heart. This explains the spike in demand for green projects in the international financial markets. Those who effectively establish a workable green framework are often seen to secure funding at market-beating conditions.
The positive impact of more funds being allocated to environmentally responsible projects is self-explanatory. From a commercial perspective, green labels provide a silver lining by upgrading well-known business mechanics into more reliable and transparent territory.
In a business cycle flooded with opportunities, green products present themselves with an edge, by incorporating both financial and social perspectives. In this context, investor appetite seems unlikely to fade in view of the expected macroeconomic trends.
Johan Mouraux, Partner at DLA Piper UK LLP
Cedric Hauben, Associate at DLA Piper UK LLP and Affiliate Researcher at Jan Ronse Institute for Company and Financial law, KULeuven