IFC Begins Applying Green-Loan Principles to Spur Growth of $33 Billion Green-Loan Market

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In a first for a global development institution, IFC has begun offering its investment clients the option of structuring loans in accordance with the Green Loan Principles.

The International Finance Corporation IFC was established in 1956, IFC is owned by 184 member countries who collectively determines its policies. Through a Board of Governors and a Board of Directors, member countries guide IFC’s programs and activities. The President of the World Bank

Since 1956, IFC has leveraged $2.6 billion in capital to deliver more than $285 billion in financing for businesses in developing countries.Group is also President of IFC.

What are Green Loans?

Green loans are any type of loan instrument made available
exclusively to finance or re-finance, in whole or in part, new
and/or existing eligible Green Projects.

What are the Green Loan Principles?

The principles, which are modeled on the Green Bond Principles, specify how loan proceeds should be used and how projects should be selected in order to qualify for green-loan status. This can help businesses attract additional financing and enhance their reputation among shareholders,clients, and communities.

The growth of the green lending market is crucial to help emerging markets shift to a low-carbon development and mitigate the adverse impacts of climate change,” said Alzbeta Klein, Director of IFC’s Climate Business Department. “By offering our clients a green-loan label, IFC seeks to play a catalytic role in growing green loans across emerging markets.”

Among international development banks, IFC is a leading provider of climate-related financing. In the fiscal year that ended in June 2018, it committed $8.4 billion in such financing to businesses in emerging markets—including a record $4.5 billion mobilized from other investors. This financing accounted for a record 36 percent of IFC’s overall investments for the year.

In accordance with the Green Loan Principles, IFC clients would be required to establish a management system to track, manage, and report on the use of proceeds of a loan for dedicated green projects and have it verified by a third party. IFC will support its clients’ efforts to meet these requirements. The principles allow for self-certification by a borrower in some cases.

The Green Loan Principles, developed by the Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA), and the Loan Syndications and Trading Association (LSTA), were adopted in March 2018 and extended in December 2018. They are voluntary guidelines that seek to provide clarity and consistency on what constitutes a green loan.

Developing countries currently account for just $1.6 billion of the estimated $33 billion in outstanding green loans. But the market is expected to grow rapidly, outpacing the growth of the green-bond market in the near term.

Green Loan Principles

1. Use of Proceeds
The fundamental determinant of a green loan is the utilisation
of the loan proceeds for Green Projects (including other related
and supporting expenditures, including R&D), which should be
appropriately described in the finance documents and, if
applicable, marketing materials. All designated Green Projects
should provide clear environmental benefits, which will be
assessed, and where feasible, quantified, measured and reported
by the borrower.

2. Process for Project Evaluation and Selection
The borrower of a green loan should clearly communicate to
its lenders:
– its environmental sustainability objectives;
– the process by which the borrower determines how its projects
fit within the eligible categories set out in Appendix 1; and
– the related eligibility criteria, including, if applicable, exclusion
criteria or any other process applied to identify and manage
potentially material environmental risks associated with the
proposed projects.

3. Management of Proceeds
The proceeds of a green loan should be credited to a dedicated
account or otherwise tracked by the borrower in an appropriate
manner, so as to maintain transparency and promote the integrity
of the product. Where a green loan takes the form of one or more
tranches of a loan facility, each green tranche(s) must be clearly
designated, with proceeds of the green tranche(s) credited to a
separate account or tracked by the borrower in an appropriate
manner.

Borrowers are encouraged to establish an internal
governance process through which they can track the allocation
of funds towards Green Projects.

4. Reporting
Borrowers should make and keep readily available up to date
information on the use of proceeds to be renewed annually until
fully drawn, and as necessary thereafter in the event of material
developments. This should include a list of the Green Projects to
which the green loan proceeds have been allocated and a brief
description of the projects and the amounts allocated and their
expected impact.