Green loans are increasingly gaining prominence in the corporate lending market in Singapore. We observed that the changing corporate social responsibility (CSR) direction of both banks and borrowers have contributed significantly to such growth.
A key feature of a green loan facility is the "green" purpose clause, whereby proceeds of the facility can only be used to finance or re-finance green projects which deliver environmental benefits. For instance, the development of commercial or residential properties with environment-friendly features can be financed by green loans.
Notably, a S$1.2 billion syndicated green loan facility was granted to an indirect wholly-owned subsidiary of Frasers Property Limited (Frasers) in September 2018. The facility was a first of its kind in Singapore, and used by Frasers to refinance its existing loans related to the development of Frasers Tower and an adjacent three-storey cascading retail podium. Frasers Tower is a 38-storey Premium Grade A office tower located in the Central Business District of Singapore, and utilises recycled water for irrigation purposes.
With the Building and Construction Authority of Singapore's (BCA) goal of ensuring 80% of the buildings in Singapore are certified "green" by 2030, the real estate sector could potentially be a key beneficiary of green financing.
We are acting for DBS Bank in its grant of a S$300 million multi-currency sustainability-linked loan to CapitaLand. Whilst this is not strictly a green loan, the five-year term loan and revolving credit facility is the first and largest sustainability-linked loan in Asia's real estate sector. It is also Singapore's largest sustainability-linked financing provided by a sole lender. The multi-currency loan is linked to the developer's listing on the Dow Jones Sustainability World Index, which tracks established firms in areas such as environmental, social and governance efforts. Unlike green loans, where the funds are used for certain types of projects, CapitaLand is able to use the loan for general corporate purposes.
This article seeks to provide a brief overview on the general principles applicable to green loans and the key reasons spurring its demand in Singapore. Potential limitations that may hinder the development of the green loan market are also highlighted.
2. Green Loan Principles – a useful benchmark
The Green Loan Principles (GLP) was jointly released by the Loan Markets Association and Asia Pacific Loan Market Association in March 2018. The GLP includes a non-exhaustive list of eligible green projects and provides guidance on the characteristics of a green loan. This facilitates the growth of the green loan market in a coherent manner by having a consistent framework in place for parties to adopt.
The GLP is based on four core components, namely: -
- use of proceeds;
- process for project evaluation and selection;
- management of proceeds; and
Essentially, there has to be clear specification on the use of loan proceeds for green projects only and the loan proceeds should as far as possible be credited to a designated projected account. The borrower's environmental sustainability objectives should also be clearly communicated to the lender(s).
Additionally, the borrower should perform regular reporting to the lender(s) regarding how the loan proceeds are being used or allocated. This allows consistent monitoring on the usage of loan proceeds, thereby maintaining the integrity of the overall green loan market.
3. Reasons for demand in green loans
Corporate borrowers' perspective
Many large corporates are motivated to exhibit responsible corporate behaviour as this leads to long term reputational enhancement. "Green" culture is growing prevalent as each organisation seeks to reduce its carbon footprint in a bid to mitigate the effects of climate change. This translates to a greater alignment between the business decisions made by large corporates with environmental and sustainability goals.
Large corporates are increasingly keen to take up green loans as they value the intangible benefits of tying their ecologically responsible behaviour with their funding options. By securing green loans, it is an effective way to display the company's commitment towards improving environmental sustainability. Portraying itself as a responsible "green" corporate citizen will also be a positive credential which can be shared with shareholders and relevant stakeholders.
Over the years, banks have gradually shifted their focus towards building a sustainable future whilst promoting the banks' performance and business growth. Banks recognise that by providing green financial solutions, it would be a great opportunity to create a positive impact in the global collective effort towards mitigating climate change. The provision of green financial solutions also aid banks in the diversification of their portfolios to a more sustainable one.
Furthermore, the Monetary Authority of Singapore takes into consideration the bank's sustainability practices as part of its supervisory assessments over banks licensed in Singapore. This will invariably influence the manner in which banks conduct their businesses and the development of their financial products.
4. Potential limitations
It bears noting that the integrity of the "green" label can only be maintained if market players are disciplined in adopting and adhering to the GLP. Whilst market players are encouraged to adopt the GLP in the structuring of a green loan facility, it is still subjected to the agreement between the parties.
With the growth of the green loan market, it also carries the risks of green-washing. Green-washing refers to incidences where projects have the appearance of bringing about environmental benefits, but in substance do not. The current green loan market is largely self-regulated and the lack of a unified "green" definition poses the risk of green-washing occurring.
Further, green covenants such as regular review and reporting requirements are not typically stipulated as events of default in green loan documentation. In the event of a failure to comply with these covenants, it will only lead to a declassification of the facility. As such, accountability of how loan proceeds are utilised throughout the loan tenor may remain an issue.
Moving forward, we expect the growth of the green loan market to accelerate with increased worldwide environmental awareness. Banks and corporate borrowers ought to continuously monitor the progressive development of market principles, which will shape the way in which green loan facilities are structured in future.
Dentons Rodyk thanks and acknowledges practice trainee Ashlyn Toh for her contributions to this article.
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