Below trend growth to continue
The launch of the green-loan principles (GLPs) presents an opportunity for another evolutionary step in sustainable funding. By standardising and codifying what qualifies as green bank lending, the GLPs could make sustainable finance relevant to a wider cohort of borrowers according to David Jenkins, director, sustainable capital markets at NAB.
The GLPs explicitly “build on and refer to” the existing green-bond principles (GBPs) “with a view to promoting consistency across financial markets” according to the Asia-Pacific Loan Market Association (APLMA).
Published in March this year, the GLPs are the brainchild of the Loan Market Association (LMA) and APLMA. NAB was a member of the APLMA committee responsible for drafting the principles.
The GLP framework is designed to be self-regulating. According to the LMA and APLMA it comprises “voluntary recommended guidelines, to be applied by market participants on a deal-by-deal basis depending on the underlying characteristics of the transactions, that seek to promote integrity in the development of the green-loan market by clarifying the instances in which a loan may be categorised as ‘green’.”
The heart of the principles is four “core components” that mirror the green-bond principles and are designed to encourage results with clear environmental benefits as well as increase accountability and transparency.
While green bonds are arguably the more eye-catching funding option, there’s potential for green loans to experience quicker takeup – at least in the sense that there’s a subset of corporate borrowers that are very engaged and already see the potential value to their businesses.
Jenkins says some borrowers may move quickly to classify at least part of their bank debt as green. “We’ve had a number of immediate enquiries and there are transactions bubbling away in different markets,” he reveals.
Pace of adoption isn’t the main game, however. The focus of interest is instead on the range of borrowers that should be interested in green loans, particularly given the potential for the product to suit a wider range of corporate borrowers than green bonds.
Jenkins suggests there’s “no shortage” of unrated or subinvestment-grade corporate borrowers that make use of bilateral bank lending facilities and have an interest in corporate sustainability but aren’t – for reasons of scale or cost – engaged with bond issuance.
The infrastructure sector is another that might seek to have appropriate bank debt green certified – especially construction-phase debt that has always been better suited to bank than bond finance.
“This is a great way for infrastructure lenders and asset financiers that may not have been capital markets issuers to enter into small-scale green finance,” Jenkins says.
He points out that NAB earmarked the project-finance facility it provided to the Sydney Light Rail development as part of the collateral for its own green-bond issuance, saying there’s no reason, now the GLPs are available, why this facility couldn’t have been designated as a green loan in the first place.
Jenkins adds: “The challenge we face with corporate borrowers is that there has always been concern about the cost of getting specialist teams involved to issue a green bond, and then the requirements of maintaining the verification and certification process. But we can all see it has become simpler and simpler, and the GLPs add another layer of value.”
As well as supporting their own corporate sustainability goals, borrowers may find cost and liquidity advantages from the green-loan format.
Market participants are habitually cautious about seeking a pricing advantage from green-bond issuance, but the asset class has anecdotally outperformed in some areas. The pricing equation for green loans looks like it could be similar.
However, Jenkins believes the primary driver of additional liquidity available to green-loan borrowers will initially be banks’ own commitments to increasing their lending to sustainable assets. Labelling loans as green, especially when supported by third-party verification and ongoing reporting, can only make it easier for banks to identify and quantify the qualifying components of their own books.
As green loans become generally adopted, so will the supply of ready-labelled, pre-verified assets suitable for terming out in the bond market. In other words, the development of a green-loan market will likely also prove to be a fillip for green-bond supply.
There’s also a natural flow-through to term markets for borrowers certifying some or all of their loan facilities as green. The close linkage between the GLPs and the earlier green-bond principles means borrowers should find it easy effectively to roll the same certification, verification and reporting techniques from the loan market to bond issuance.
The overriding goal of the GLPs was to create a consistent framework – and the challenge was doing so in the loan space, which by its nature tends to feature more bespoke arrangements than the bond market, which tends to be attenuated to the value of simplicity, comparability and consistency.
These aspects are important to developing a transparent green product and streamlining the process was a key selling point in creating a consistent set of principles.
“For a borrower, not having to reinvent the wheel every time is very important,” says Jenkins. “Investors are after something credible and transparent and the GLPs set the bar at a minimum level. If you don’t need to have these debates every time you do a green loan it can only be positive.”
Outside the core components, the GLPs also recommend – though they don’t mandate – the use of external review for some or all aspects of a proposed green loan. Again, the goal is to produce something readily acceptable by the market and which is easily repeatable and consistent.
Jenkins adds: “With the use of the GLPs, the players that have been in the green-bond market – such as the assurance providers – can easily adapt to provide opinions on green loans. This vastly improves scalability and ease of execution.”
The big picture for green loans is the role the asset class could play in completing the jigsaw puzzle of understanding, quantifying and – in the end – favourably funding assets that have a positive sustainable purpose. Green bonds were a bridgehead in institutional lending, but green loans make the same type of assessment a reality for more borrowers, including for project finance and at smaller scale.
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