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Green Loan Principles

September 14, 2018


Partners Josh Cairns, Stuart Evans, Andrew Harkness
Senior Associates Mace Gorringe

Climate change Infrastructure funding

The Loan Market Association and Asia Pacific Loan Market Association have recently published the first Green Loan Principles. Based on the existing Green Bond Principles, these are voluntary guidelines that seek to promote integrity in the development of green finance markets, by helping investors judge when a loan is “green”. This note looks at the burgeoning green finance ecosphere.

Green finance and climate change

If we are to avoid catastrophic climate change, major transformations are required. The transformative projects that can reduce emissions and make us more resilient to climate effects will need substantial capital investment. This is where the world’s financiers and capital markets come in. 

Holding the global average temperature to less than 2°C above pre-industrial levels is probably the best-publicised commitment of the Paris Climate Agreements and this 2°C threshold is a common thread running through disparate green issuers, borrowers and projects.

Investors in green instruments generally still rely on issuer balance sheets for their credit assessments, in the usual way, rather than on returns from any particular green projects or assets. The important thing is that proceeds are used for green projects, not that the debt is necessarily repaid with green profits.  


Early green bonds were issued by supranational organisations, such as the European Investment Bank and the World Bank, which issued bonds in 2007 and 2008 respectively. The first corporate green bonds appeared in 2012, and China entered the picture in 2016, quickly becoming a key player in the global market. There have also been sovereign bond issues, including by France and Fiji in 2017. Internationally, loan products are now becoming more common, in addition to bonds and other securities.

In New Zealand, Contact Energy and Auckland Council are currently availing themselves of green financing. Last year International Financial Corporation, a member of the World Bank Group, issued $125 million of green Kauri bonds (ie New Zealand dollar denominated bonds issued by a foreign issuer) to finance green projects in emerging markets.

The Green Principles and Verification

During this first decade of green finance, the parameters of “greenness” have developed as the market has matured. Rigorous and scientifically grounded analysis and verification have increasingly assuaged concerns of “greenwashing” (ie where proceeds of debt marketed as green are applied for other purposes).

The new Green Loan Principles, modelled closely on the Green Bond Principles, set out four key components for green loans:

•             use of proceeds (to be for green projects);

•             process for project evaluation and selection (should be communicated with investors);

•             management of proceeds (transparent and trackable); and

•             reporting (qualitative and quantitative).

There are a number of anticipated green projects, including renewable energy, energy efficiency, pollution control, sustainable resource management, biodiversity conservation, clean transport, water management, climate change adaptation, eco-efficiency and the circular economy and green buildings. This is not intended to be an exhaustive list.  

The Green Loan Principles recommend external reviews to assess compliance with the four components listed above. In the blossoming industry of green assurance and verification, one of the more respected labels (which Contact Energy and Auckland Council have used) is the Climate Bond Standard. This is published by the Climate Bonds Initiative, a not-for-profit organisation, whose certification scheme requires independent verification, both pre- and post-issuance. The Climate Bonds Initiative approves green verifiers, which so far include most of the large accounting firms as well as some more specialised organisations.

Green Loans, rather than Green Bonds

The publication and adoption of the Green Loan Principles should be a significant step in developing green finance markets. The flexibility, and lower establishment costs, of loans may make them more attractive to SMEs than green bonds. In Europe there have already been loans that include pricing ratchets based on climate-based milestones. And as better measurement and reporting standards continue to develop, this flexibility seems likely to increase.  

Many banks worldwide are now arranging green loan facilities, and helping SMEs to avail themselves of schemes incentivising green investment and/or providing tax relief for green projects. It is not beyond the realms of possibility that central banks will in the future provide favourable regulatory capital treatment to banks for green lending. Climate goals are important for financial stability, after all.   


Around US$150 billion of green bonds were issued in 2017, as well as a significant amount of green loans. Messaging from our Government and those overseas suggests that regulation in this area may assist the market in adding further certainty to green finance in the near future. This certainty, through standardisation of disclosures and classifications, should ensure the continued growth and success of green finance. 

A challenge for those pushing sustainability agendas has been that the art of measuring environmental impacts has lagged behind measuring economic ones. New Zealand’s Government has repeatedly committed to measuring progress other than by traditional measurements (ie GDP). The green analyses and measures developed in the financial markets (of all places) may help show the way for more universal sustainability reporting. As the cliché goes - what gets measured is what gets done.