The main job of green loans is to align credit objectives with environmental objectives. People usually obtain these types of loans to eco-streamline their operations and supply chain.
But let’s see in more detail what a green loan is:
What is a Green Loan?
In 2016, Lloyds Banking Group created a powerful initiative, which they called green lending. The loan would be to help its clients reduce CO2 emissions.
The plan was a loan that consisted in allowing the borrower to spread the costs of the improvements over 10 to 25 years.
However, nowadays green loans are a type of financing that allows borrowers to use the proceeds exclusively to finance projects that contribute substantially to an environmental objective.
A green loan can be compared for example with green bonds because both are aimed at raising capital to start green projects. However, green loans are typically smaller than bonds and are made privately. Another important difference is that green bonds can generally have higher transaction costs, can be traded with exchanges, or placed privately.
Besides, green loans and green bonds follow different but consistent principles as well: the Green Loan Principles and the Green Bond Principles (GBP) of the International Capital Market Association (ICMA).
They are both instruments that are responsible for specifying that the total income of the projects should be used only for eligible green activities.
Of course, being a special loan also has different conditions and benefits. For example, with a green loan, repayments are added to your electric bill, whereas with a standard loan, they are not.
Lenders say they have a “rule of thumb” that the cost of the loan should never exceed the cost of the energy saved.
Green loans can be used, for example, to remodel your house, buy and install solar panels or even simply to cover roofing costs.
There is a type of landscaping called green landscaping, which takes care of only using your aesthetic land without using dangerous chemicals, and to carry out this type of landscaping a green loan also qualifies.
Most of the popular green loans offered in the US include:
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- Empower
- Upstart
- LightStream
- SoFi
What makes a loan a Green Loan?
Mainly and generally, for a loan to be called a green loan, it must be aligned with the principles of green loans because these principles establish an international standard based on the following:
Use of proceeds:
Projects that are presented as green must provide environmental benefits, which must be presented by the borrower.
Project evaluation and selection:
It goes through a process whereby the borrower of a green loan must communicate clearly and concisely how he is organized to evaluate and select projects that will receive loan funds.
In addition, the borrower also has to explain how the environmental and social risks of eligible projects will be managed.
Earnings management:
It is important to know that the earnings generated from a green loan have to be credited to a dedicated account.
Or in another case, there is also the option for the borrower to follow up to maintain transparency and promote the integrity of the product.
Reports:
The principles of green loans recommend making use of qualitative performance indicators and, where possible, quantitative performance measures (for example, energy capacity, reduction of greenhouse gas emissions, electricity generation, among others.)
Although they are not the same, the Green Lending Principles are based on and referenced to the Green Bond Principles, so that there can be consistency in green financial markets.
These Principles are charged with addressing the instructions needed to implement income-based financing through bonds and loans.
Advantages of Green Loans
Borrower benefits
1 – Improved sustainability management
Working on green loans can help the process of developing governance, strategy, and risk management structures related to sustainability within an organization, such as a business.
In addition, the business value increases and improves the ESG assessment in the medium and long term of the borrower.
2 – Public acceptance to demonstrate a willingness to promote Green Projects
By promoting green projects that also work with green loans, the project could gain much more public acceptance.
3 – Consolidation of financial bases
Once you get a green loan, you have the opportunity to strengthen your financing foundations by building new relationships with financial institutions that take ESG loans into account and value.
Lender benefits
1 – Serving as ESG loans
If the borrower keeps up with the loan payment, green loans can provide a stable cash flow for lenders.
Also, in turn, lenders can demonstrate that they are actively involved in green projects, which tend to have a lot of support from public opinion.
2 – Achieve return on investment and at the same time environmental and other benefits through loans
By providing Green Loans, lenders can support the realization of the environmental benefits that contribute to creating a sustainable society, while also making a profit from their loans.
Benefits for the environment
1 – Contribution to the conservation of the environment
If green loans increase, private funding for green projects will also increase, which could substantially reduce GHG emissions and also promote the prevention of the degradation of natural capital.
2 – Sensitize people who deposit in financial institutions that offer green loans
An increase in green loans and green deposits could improve people’s knowledge of green loans.
This in turn will motivate financial institutions, which are holders of people’s assets, to actively lend Green Loans.
3 – Contribution to solving social and economic problems through the promotion of Green Projects
Many of the problems in some areas worldwide come from the lack of green projects. For example, green projects can reduce energy costs, revitalize the regional economy, strengthen energy security, and also improve resilience in the event of disasters.
