Green loans: guidance for green buildings and retrofit


Buildings are responsible for approximately 40% of energy consumption and 36% of CO2 emissions in the EU. Green buildings, however, have huge potential to mitigate climate change. There is also an increasing global demand from businesses for green finance solutions in a lending context.  In 2019, buildings accounted for 30% of use of proceeds in relation to green bonds and we hope to see the equivalent interest in the relevant green loans as these products (and the market for them) grow and develop. 

However, there is a real danger of ‘greenwashing’ non-green assets. As a result, the Loan Market Association (LMA) produced its Green Loan Principles (GLP) in 2018 to define the parameters of green loans. In October 2020, the LMA, the Loan Syndications and Trading Association and Asia Pacific Loan Markets Association published guidance (the GLP Guidance), which explains how the GLPs apply in a Real Estate Finance (REF) lending context. The GLP Guidance is significant and necessary. In this article we draw out a few of the key points we think will shape the use of green loans.

Green projects

In order to utilise a green loan, the proceeds need to be used for an eligible ‘green project’. To allow for flexibility there is no overarching definition of a green project in the GLP or the GLP Guidance. Instead, the lender(s) needs to determine this using:

  • internal standards or eligibility criteria i.e. a green finance framework
  • an external assessment/review
  • technical screening criteria by reference to external standards; and/or
  • a case-by-case determination.

Examples of real estate green projects include: (i) the acquisition of a green building; (ii) the refinancing of a green building; and (iii) the financing of capital expenditure to improve the energy efficiency of a building (known as ‘retrofitting’). Additional determining factors can include the in-use performance of a building (i.e. energy or water consumption) and the use of green leases, both of which can be included within the reporting requirements of the loan.

The sustainability rating of the borrower itself is not the focus of the green project eligibility criteria (only the specific green project). Having said that, the GLP recommends borrowers communicate their overall environmental sustainability objectives and proposed climate risk management to the lender(s) as part of the credit approval process.

How can a green building be identified?

There is no universal standard to classify a green building, but the World Green Building Counsel states that it is “a building that, in its design, construction or operation, reduces or eliminates negative impacts, and can create positive impacts, on our climate and natural environment”.

There are also a number of external standards and certifications that can be used to determine whether a building is ‘green’ including, amongst others:

  • alignment to the EU taxonomy requirements
  • the Energy Performance Certificates for a building
  • the BREEAM rating of a building
  • the LEED certification of a building
  • Better Building Partnership Real Estate Environmental Benchmark.

How does a retrofit project qualify as a green project?

A retrofit project qualifies as green if there is “material improvement in the energy efficiency of, and result in a material reduction in the carbon emissions associated with, the building”. A number of certifications are available to determine the ‘greenness’ of a retrofit including the provision of: (i) a BREEAM Refurbishment and Fit-Out rating, (ii) a RICS SKA (used in connection with non-domestic building retrofits); (iii) a PAS 2035 (used in connection with domestic retrofits); and (iv) a TrustMark.

The GLP Guidance acknowledges there are data gaps relating to the energy performance of buildings, but there has been an increase in the data available which can be utilised to set required thresholds to satisfy the criteria for RERF. This data can also identify and target the buildings in a portfolio that would benefit most from a retrofit. The GLP Guidance suggests that, in certain scenarios, retrofitting an existing building may be more environmentally sustainable than demolishing and rebuilding, due to the carbon emissions associated with the demolition and construction processes.

Retaining the ‘green’

The building or project will need to remain ‘green’ (i.e. adhere to the green project criteria) for the life of the loan and all loan proceeds earmarked as green must be used for an eligible green project. If not, this will be a ‘green breach’ and (subject to expiry of remedy periods) the loan will be reclassified to a ‘traditional’ loan from the date of such green breach. The details and consequences of such green breach can vary depending on the requirements of the lender(s) and the nature and severity of the green breach.  The consequences (and potential remedies) will need to be considered ahead of entry into a facility agreement and documented accordingly.

How are green proceeds managed?

Loan proceeds are most easily identified and tracked by use of a designated account alongside a comprehensive suite of representations and undertakings. If a designated account is not possible, a detailed funds flow, third party verification, additional conditions precedent or the provision of detailed invoices can be used to track the use of the loan proceeds.

It is wise for borrowers to ensure that the proceeds can be easily tracked by internal governance processes, and the information is kept up to date for annual provision to the lender until the loan is fully drawn (and thereafter as necessary). This distinction and the need for the delineation of proceeds is particularly important to maintain transparency and integrity where there are both green and non-green tranches within a facility.

If you are looking for more information on the world of green finance, visit our green finance hot topic page or contact one of the team directly.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Get in touch

Related insights & events

View all

Hot topics

Related services