Since their launch in 2018, the Green Loan Principles (GLP) have provided a foundational framework for green loans, defined as loan instruments made available exclusively to finance, refinance, or guarantee eligible green projects. These principles outline four core components that must be adhered to, ensuring that the proceeds are used for environmentally beneficial purposes.

Despite the establishment of the GLP, there has been a notable absence of market-standard drafting for integrating these principles into loan agreements. This gap has led many lenders to develop their own templates and riders with varying reporting requirements.

However, recent developments by the Loan Market Association (LMA) aim to address this lack of standardisation. The LMA has introduced two pivotal documents designed to unify the green loans market:

• Draft Provisions for Green Loans (published on 7 November 2024): these provisions propose drafting for investment-grade loans which can be adapted for real estate finance and leveraged facilities (Draft Provisions).
  
• Green Loans Term Sheet (published on 9 January 2025): this is intended to accompany the Draft Provisions and provide clarity at the term sheet stage and consistency with the Draft Provisions.
  

Recap of Green Loan Principles 

The GLP outlined the key features that distinguish green loans:

• Use of proceeds: funds must be allocated exclusively towards green projects which provide clear environmental benefits. Eligible projects include renewable energy initiatives, energy efficiency improvements and pollution control measures. 
  
• Project evaluation and selection: borrowers must clearly communicate their environmental sustainability objectives and detail how their projects will fit within GLP categories. Additionally, they must identify associated environmental and social risks. 
  
• Management of proceeds: to ensure transparency and integrity, the proceeds of a green loan should be tracked or placed in separate accounts. 
  
• Reporting: borrowers are required to maintain up-to-date information on how funds are used and to provide regular reports to their lenders, tracking both the funds flow and the environmental impact.
  

LMA’s draft provisions for Green Loans

The Draft Provisions are aligned with both the GLP and GLP guidance and include the following amendments:

• Purpose clause: a new paragraph within the purpose clause refers to the exact green project being financed or refinanced, although the LMA also contemplates instances in which a borrower might not have identified a specific project or projects prior to closing, in which case a clear description of the eligibility criteria should be included in the operative provisions or the lender should be provided with a Green Loan Framework.
• Management of proceeds clause: a new ‘management of proceeds clause’ requires the borrower to provide the lender with sufficient evidence to track, monitor and evaluate the manner in which the green loan proceeds have been applied.
• New representations: new representations from the borrower confirm that:
  (i) the information provided in relation to the green loans was true, complete and accurate in all material respects
  (ii) the process for selection of the project meets with the required criteria and
  (iii) it has established and maintains policies and procedures for evaluating and selecting potential eligible green projects, as well as identifying and managing any potential material environmental and social risks.

These representations are deemed to be repeated by each obligor on the date of each utilisation of a green loan and on the date of each Green Loan Report (see further below).

• Undertakings by borrowers: a new undertaking requires the borrower to provide information a lender may require for the allocation of proceeds and compliance with the purpose clause, the publicity clause and the GLP (amongst others). A borrower must also promptly notify the lender if any event occurs meaning that a project no longer complies with the eligibility criteria or if it breaches the GLP.
• Green Loan Report Requirements: a new undertaking requires the borrower to submit an annual report (Green Loan Report) which includes:
  (i) a description of the project and the basis on which such project complies with the eligibility criteria
  (ii) confirmation of sums drawn
  (iii) confirmation the relevant proceeds have been applied in accordance with the purpose clause
  (iv) confirmation of how each project complies with the GLP (and particularly the third core component; management of proceeds) and
  (v) reporting requirements relating to the environmental and social impact of the project. The proposed undertaking also requires the borrower to attach to the Green Loan Report, a Verification Report in which an external reviewer verifies the information submitted by the company via the Green Loan Report.

Lenders and borrowers often have strong relationships and lenders typically rely on self-certifications made by the companies (often by way of two authorised persons) so it will be interesting to see how extensively the requirement for an external reviewer will be adopted.

• De-classification mechanism: if certain events occur, the lender may de-classify any green loans. The key consequence for borrowers of a de-classification event, is that they can no longer label the relevant loan as ‘green’ or publicise the loan as a green loan. Declassification events include
  (I) any representation that has been made which proves to have been incorrect or misleading
  (II) any obligor not complying with the GLP and
  (III) the delivery of a Green Loan Report setting out the details of any non-compliance.

This is an important provision to avoid any ‘green washing’ by either party, but it should be noted that such de-classification event is not intended to trigger an event of default (which is particularly helpful if the circumstances leading to such event are outside the control of the borrower and well reflects the market position so far). The LMA makes it clear that while a declassification event will not trigger an event of default, breaches of the purpose clause and the publicity clause will be determined in accordance with the standard terms of the facility agreement (ie they may trigger an event of default).

The Draft Provisions apply to term loans, and the LMA notes further drafting would be needed for revolving facilities to be applied to a green purpose. The GLP however did not rule out the financing of green loans via revolving facilities as a revolving credit facility could meet the ‘green’ purpose requirement by including a specific green tranche or alternatively, a borrower could report to lenders on the green projects towards which the revolving credit facility is being applied, but there should be a clear mechanism in place to separate the proceeds for green loans and how they are used, which requires more bespoke drafting in the case of a revolver.

LMA term sheet

The newly published Green Loan Terms supplement the Draft Provisions by providing drafting that can be incorporated at term sheet stage containing the main characteristics of green loan related drafting in a form appropriate for inclusion in a term sheet. The drafting includes:

• the purpose of the green loan
• the process by which the lenders can monitor a green loan, ie the evidence that has to be provided to them including the Green Loan Report and other relevant information
• ‘green’ representations
• ‘green’ undertakings
• the declassification regime.

Final thoughts

The LMA’s efforts signify a commitment towards expanding sustainable finance while maintaining integrity and transparency, which are critical factors for long-term success in this sector, as standardised documentation offers consistency and boosts market-confidence.

Lenders are uniquely placed to encourage and support projects which have a positive environmental impact and borrowers are increasingly interested in greener financing solutions supporting global sustainability targets effectively, and so the latest LMA drafting is definitely a welcome step forwards.