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12 Mar 2020

Sustainability-linked loans and green loans in the real estate finance market


Given our experience of sustainability-linked finance and green loans, and in light of increased queries on the topic from a number of our lender clients, we thought it helpful to produce a bulletin on these types of loans in the real estate finance market. 

What is a sustainability-linked loan?

 Recently, the volume of sustainability-linked loans has grown exponentially, outstripping volumes of more traditional “green loans”.

The concept of a sustainability-linked loan is a broad one. The Sustainability Linked Loan Principles (published by the Loan Market Association, in association with the Asia Pacific Loan Market Association and the LSTA in March 2019) make it clear that the use of proceeds is not a determinant in the categorisation of a sustainability-linked loan. Instead, the goal of a sustainability-linked loan is to improve a borrower’s sustainability profile, with the loan terms linked to the achievement by the borrower of environmental, social and governance (“ESG”) targets in respect of their lending. These ESG-related targets can be flexible and can cover a wide variety of sustainable activities from ensuring there is gender equality within a business, to investing in sustainable farming or limiting plastic use in the office.

The sustainability-linked loan presents opportunities for borrowers who do not necessarily operate in the green sector, or who do not have the resources or appetite to invest in green projects.

Nonetheless, the longer-established green loan still lends itself well to the real estate finance market, so green loans remain a popular option in this sector.

What is a green loan?

 Whilst green loans are a rapidly developing concept, there is not yet a universal definition as to what constitutes a green loan. However, it is generally accepted that green loans relate to any type of loan instrument used to finance or refinance “Green Projects”. 

There is also an increasing emphasis on enabling borrowers to reap the reward of price discounting on a loan for partaking in a “Green Project”.

Development of the Green Loan Principles and their use in real estate finance

The Green Loan Principles (“GLPs”) were published in March 2018 by the Loan Market Association (in association with the Asia Pacific Loan Market Association and the LSTA) and provide guidance to both borrowers and lenders on what it means for a loan to be green. The GLPs offer four main framework components which are intended to provide some clarity and uniformity as well as ensuring the integrity of the green loan market is preserved going forward.

The four framework components are as follows:

1.       Use of proceeds

How the proceeds of a loan are used is essential in demonstrating its green eligibility. The purpose clause in a green loan document should therefore accurately describe how the proceeds will be applied towards a “Green Project” and any marketing materials in connection with the project should also cover this. If there are several tranches of a loan facility then the tranche that is to be applied toward a “Green Project” must be clearly specified.

Based on our experience of acting for lenders and the GLP’s list of eligible “Green Projects”, some examples of “Green Projects” in the real estate finance arena are:

  • installing renewable energy on site;
  • recycling waste used at the property;
  • building environmentally friendly buildings (e.g. properties built using timber from sustainably managed forests);
  • ensuring green buildings meet regional, national or internationally recognised standards or certifications; and
  • ensuring a building is occupied by a certain percentage of “green leases” (e.g. leases whereby the landlord and tenant agree specific responsibilities and obligations with regards to the sustainable operation of the building).

2.       Process for evaluation and selection

Borrowers are encouraged to communicate their sustainability objectives to their lenders as well as the process by which it considers its project to fit within the eligible “Green Projects” list of categories.

3.       Management of proceeds

The GLPs state that green loan monies should either be credited to a specific bank account or tracked by the borrower so as to maintain transparency. The GLPs recommend that a borrower should establish its own internal governance process so they are able to track their funds.

4.       Reporting

Borrowers should annually update their information relating to the use of green loan proceeds. The information should include details of the relevant Green Projects to which proceeds have been allocated.

How can you ensure a loan is green?

In order to maximise transparency within the green loan market and ensure “green washing” and box ticking exercises do not take place, it is important that the borrower’s activity is monitored to ensure it is indeed “green”. Whilst this can be done by third party appointments (e.g. consultant review, third party audits, ratings agencies etc.) it is a common borrower concern that the costs of employing third party checks will outweigh any green lending cost savings. Therefore, a self-certification process (provided it is robustly drafted and sufficiently prescriptive in the loan agreement) can often be a good compromise.

Advantages and disadvantages of green loans for lenders


Lenders are increasingly coming under more and more public pressure to show that they are behaving in a socially and environmentally responsible manner. Developing a green lending portfolio, and thus supporting green initiatives, is one way of demonstrating this.

A further particular advantage of green lending in the real estate finance sector is that “green buildings” (or buildings being made green as a result of the loan) may achieve a higher valuation that a non-green competitor building, thus improving the value of the lender’s security.


The current lack of standardised green loan documentation means that lending institutions often do not have their own internal green loan documents and initiatives. Our experience working with green loan documentation means we are able to assist banks with agreeing terms and drafting making the green loan process more cost effective for both lender and borrower.

Two-way pricing is becoming increasingly popular in the green lending market. If a borrower does not hit its green targets, as set out in the relevant loan documentation, then the borrower may see its margin increase rather than decrease. A lender who enforces two-way pricing if its borrower fails to meet green targets may be viewed less positively if that lender is perceived to be profiting from a sustainability failure. It is therefore important to document two-way pricing in a way which rewards green behaviour, rather than in a way which suggests penalties for non-performance.


Lenders and borrowers are not yet subject to any mandatory requirements in respect of sustainability-linked or green loans. However, increased regulation seems likely in the future.  This, plus the recognition of the need to move to a world of net zero emissions, the shift towards ESG and sustainability principles and the growth of real estate green loans means that green and sustainability linked-lending is rising higher on the agendas of both borrowers and lenders.  Increasingly, lenders are becoming more committed to addressing environmental and sustainability issues, by choosing who they lend money to and for what purpose.  Also, borrowers can use the fact they chose a green or sustainability-linked loan product to help demonstrate their commitment to enhancing their green or sustainable credentials.

Consequently, we expect to see the number of green and sustainability-linked loans in the real estate space to continue to increase in the months and years to come.