Corporate Governance

Shearman & Sterling LLP The Rise of the Green Loan Market | 35 GREEN WASHING A chief concern for green loan participants is greenwashing. Greenwashing, where lenders or borrowers promote a loan as green-linked when the projects and assets underlying it could have dubious green credentials, is a fundamental risk of participating in the largely unregulated green and ESG-linked loan financial markets. Industry-Driven Initiatives In part to combat the danger posed by greenwashing, many financial institutions have adopted internal green vetting and performance standards. It is recognized, however, that relying on individual banks' internal standards lends itself to potential market confusion by introducing multiple standards. To foster consistency, industry groups have promulgated voluntary and now widely followed green standards. The two highest profile guidance documents, issued by the Loan Syndication & Trading Association, Loan Market Association, and Asia Pacific Loan Market Association, are the Green Loan Principles (GLPs), published in March 2018, and the Sustainability-Linked Loan Principles (SLLPs), published in March 2019. The GLPs and SLLPs have much in common. Both set out four core components, all of which must be satisfied for a loan to be deemed green-linked or ESG-linked. For green loans, (1) the proceeds should be used for green projects that address green concerns, e.g., climate change, natural resources depletion, loss of biodiversity and air, water and soil pollution; the projects should be described in the loan documents and marketing materials; and the borrower should assess, quantify, measure and report the green benefits of the project, (2) the borrower should communicate to the lender its environmental objectives, and how its project fits within eligible categories of green projects, (3) the proceeds should be credited to a dedicated account and (4) relevant information, including qualitative performance indicators and quantitative performance measures, should be reported to lenders. For ESG loans, (1) the borrower should describe to the lender its sustainability objectives and strategies and how they align with PSTs, and should disclose any standards or certification to which it seeks to conform, (2) the borrower and the lender should negotiate the PSTs, (3) the borrower should make information regarding its sustainability targets readily available, provide such information to institutions participating in the loan at least once a year and perhaps share the information publicly, such as in its annual reports and (4) the borrower should seek an external review of its performance against the PSTs, especially if the information is not publicly disclosed or if there is no assurance statement made by the borrower to the lender. Neither the GLPs and SLLPs provide a black-and-white test on third-party review and verification. The GLPs suggest third-party review when appropriate, indicating that third-party experts could simply be consulted or, more robustly, could be retained to verify, certify or rate the green loan or green loan framework. The GLPs also, however, note the relationship-driven nature of the loan market and suggest that self-certification by a borrower may be sufficient. Similarly, the SLLPs indicate that borrowers could seek a third-party opinion regarding the appropriateness of its PSTs and verification, at least annually, of whether it is meeting the PSTs, and that any such external reviewer should be agreed to by the lenders. The SLLPs also contemplate circumstances where the borrower has the internal expertise to evaluate the PSTs and its performance and communicate this expertise to the lenders.

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