'Green Finance' enters the mainstream

25 June 2019. Published by Edward Colville, Partner

With the UK's recent commitment to cut emissions to net zero by 2050, the financial sector is looking to 'green finance' to encourage investment in sustainable and environmentally-friendly businesses. Recent examples, like Nokia's €1.5 billion credit facility announced last week, show that environmental impact is becoming a key consideration for lenders and borrowers.

The legal framework

The Climate Change Act 2008 set out a framework for the UK to tackle climate change, and UK greenhouse gas emissions have fallen steadily since it was passed. On 11 June, Theresa May announced a proposal to speed up that process, by amending the Act to commit the UK to "net zero" greenhouse gas emissions by 2050. This was a move welcomed by many, including environmental groups, but implementing these changes will take input and innovation from all major industries.

Last year, the FCA released a discussion paper entitled Climate Change and Green Finance, scrutinising the UK's transition to a greener economy and the specific FCA actions which might assist the change. More recently, the PRA published a report on the financial impact of climate change for insurers, assessing the physical climate change risk and giving some recommendations for future development. 

In June 2019, the Treasury Committee launched an inquiry entitled Decarbonisation of the UK Economy and Green Finance into the role green finance can play in decarbonising the British economy.  The Committee will investigate both how the private sector is embracing sustainable finance and which steps regulators are taking to boost investments in green assets. The Inquiry will cover five key areas:

  1. The economic opportunity that decarbonisation presents for the UK, and the potential of the green finance sector.
  2. HM Treasury's strategy in facilitating clean growth and its response to the Committee on Climate Change's net-zero recommendations.
  3. The role of the Spending Review in facilitating net-zero emissions.
  4. The role that financial services firms are currently playing in financing the transition to net-zero.
  5. The 'green' financial product landscape and their associated regulatory environment.

The deadline for submissions to the Treasury Committee is 26 July 2019.

The loan market's response - Sustainability Linked Loans

Before the launch of the Treasury Committee's inquiry, the Loan Market Association issued a paper on 'Sustainability Linked Loan Principles' (the LMA Principles). The LMA Principles represent a first step by some of Europe's largest banks to promote sustainable development by incentivising borrower companies to adopt green policies and improve their carbon footprint. 

The broad idea behind the LMA Principles is to test borrowers on their performance against pre-agreed Sustainability Performance Targets (SPTs) during the term of their loan.  If the borrower company hits its SPTs, it can receive more favourable terms from its lenders (e.g. reductions in margins payable to the lenders).  There are four key components to the LMA Principles:

  1. understanding the relationship between specific SPTs and a borrower's (i) environmental, social and governance strategy and (ii) corporate social responsibility strategy
  2. measuring the sustainability of a borrower, either against the borrower's internal sustainability strategy or an external third party's rating criteria
  3. requiring reporting obligations on behalf of a borrower to demonstrate compliance with its SPTs
  4. encouraging independent review of a borrower's compliance with its SPTs

The LMA Principles are voluntary guidelines, which will only be applied where appropriate on a deal-by-deal basis, but the parties to a loan may choose to include them if they are appropriate for the underlying characteristics of the transaction. 


The LMA Principles are not yet a market standard, and the LMA has not yet incorporated specific sustainability wording into its standard form documents.  However, press reports of substantial loans linked to the performance of sustainability targets are increasing, including:

  • Nokia's €1.5 billion loan, announced on 19 June.A key performance target in the loan is that Nokia must reduce its greenhouse emissions by 41% by 2030, failing which the margin of their facility will increase.
  • Argent's £400m development facility on behalf of the King’s Cross Central Limited Partnership from Wells Fargo, HSBC UK and Helaba to support the development of two low carbon office buildings in Kings Cross (including Facebook’s new UK headquarters).
  • Dutch agricultural commodity group Louis Dreyfus Company's renewed US$750m revolving credit facility announced on 28 May, with margin tied to targets for CO2 emissions, electricity consumption, water usage and solid waste sent to landfill.

While these types of "positive incentive loans" may still be running behind green bonds in terms of popularity, recent political announcements and legal changes suggest their use will increase in years to come.  As banks strive to prove their own environmental credentials, and start to see the financial benefits of green finance, sustainability targets may become a standard part of commercial loans.

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