A green loan is a form of a loan that enables borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective. 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. A green loan is similar to a green bond in that it raises capital for these green eligible projects, however, a (green) loan is typically smaller than a bond and offered in a private operation (The World Bank, 2021).
Green loans must align with the four core components of the Green Loan Principles (GLP) by the International Capital Market Association (ICMA) / Loan Market Association (LMA) which are:
Use of Proceeds: Utilization for green projects
Process for Project Evaluation and Selection: Clear communication to lenders of sustainability objectives, eligibility criteria
Management of Proceeds: Transparently credited to a dedicated account or otherwise tracked
Reporting: Annual, readily available, updated
Green loans should not be considered interchangeable with loans that are not aligned with the four core components of the GLP. All designated Green Projects should provide clear environmental benefits, which should be assessed, and where feasible, quantified, measured and reported by the borrower to deter greenwashing (ICMA Group).
Advantages: Dedicated capital for climate neutral projects may make it easier for municipalities to access capital, as it increases transparency of funding uses and often meets creditors objectives to meet reporting and KPI targets of financing activities that meet environmental objectives. This is in line with EU reporting directives and sustainable finance goals, such as the EU Taxonomy, NFRD, SFDR (s. also NZC EU Policy Framework).
Disadvantages: The disadvantages are similar to other loan instruments. The borrowed capital would need to be repaid with interest within a set period of time. However, in the case of green loans the increased reporting and transparency requirements can pose an additional challenge, as they bring more complexity.
Green Mortgages are loans with lower interest rates as an incentive for investing in energy-efficient homes. These loans are aimed at investments in energy-efficient certified buildings and at investments for refurbishment of existing buildings to energy efficiency standards. The borrower benefits from lower repayment instalments, lower energy bills, higher property value, and a reduced carbon footprint. Green mortgages can be an important tool for a municipality to promote retrofitting of private households and business establishments.
Loan Market Association (2018). Green Loan Principles
W. P. Pauw, L. Kempa, U. Moslener, C. Grüning & C. Çevik (2022) A focus on market imperfections can help governments to mobilize private investments in adaptation, Climate and Development, 14:1, 91-97, DOI: 10.1080/17565529.2021.1885337
The World Bank (2021) What You Need to Know About Green Loans.