Provisions for Amendments April 2022 – Green Lending Series, Part 3 – Principles of Green Lending in Real Estate Finance | Cadwalader, Wickersham & Taft LLP
In our March issue of REF News & Views, we have focused on the four core components to qualify as a green lending product that complies with the Green Lending Principles (“GLP”). As a reminder, the GLP aims to facilitate and support environmentally sustainable economic activity by providing a framework of market standards, guidelines and methodologies that can be consistently adopted in the green lending market, the four key elements being:
- Product use
- Project evaluation and selection process
- Revenue management
While the GLP is intended to support the general expansion of the market for sustainable finance products, it is also intended for use in a real estate-specific context, and in October 2020 the LMA published two guidance documents (the “Guidance”) to specifically answer some of the most frequently asked questions about the application of GLP in real estate finance.
What is a green real estate project?
There is no qualified market definition for the term “green projects”. It is therefore up to market players to agree and clearly define the appropriate and applicable eligibility criteria for this green loan. The Guide also recommends that this be carefully documented in financial documents; doing so could also help mitigate accusations of “greenwashing”.
The Guide provides useful details on renovation projects that qualify as green projects. Ultimately, the renovation projects should result in a significant improvement in the energy efficiency of the building/portfolio of buildings financed. This should also result in a significant reduction in carbon emissions associated with that building/portfolio of buildings.
Evaluation of the real estate green project
Most green loans used in real estate finance are aimed at developing and investing in green buildings. As a “green project”, however, there is not yet a market-recognized standard definition and classification for a “green building”. The Guide therefore advises lenders to use external standards and certifications to measure the ‘green’ of buildings, and it is recommended that lenders detail these principles in financing documents so that the parameters are clear.
The Guide also notes that lenders should beware that buildings that may be classified as green at the start of a loan term may cease to meet requirements during the term of the loan. As such, it is prudent for lenders to agree on methodologies and metrics for assessing eligibility criteria not just on day one, but throughout the life of the loan; these mechanisms can be addressed in the loan documentation. This also extends to the principles mentioned above regarding the separation of green loans from non-green loans so that green loan proceeds can be appropriately tracked, progressed and enforced.
The guidelines refer to reporting, with recommendations that borrowers should strive to report at least annually on product usage and any significant developments throughout the operation. That said, it recognizes that these reporting requirements may depend on the size and nature of the transaction, the project and the borrower.
Final Thoughts on GLP
While GLP is ultimately voluntary, a growing number of national and international measures and initiatives are being discussed, created and enforced on corporate governance, climate change and sustainability that are beginning to change the way companies and financial markets operate and approach their activities. .
With growing socio-economic pressures, we expect to see continued growth in green lending, as well as evolution and development of GLP over the next few years.