Thinking about a loan? A green option is now available

Trying to be more sustainable? You can now green up your loans as well as your investments. But what is a green loan?

Green loans are loans aimed at advancing environmental sustainability and are similar in nature to green bonds. They are any type of loan instrument made available exclusively to finance or refinance new or existing eligible green projects.

These projects include renewable energy, energy efficiency, clean transportation, green buildings, biodiversity conservation, sustainable water and waste management.

Green loans are similar to traditional loans, however as per the LMA guidelines known as the "Green Loan Principles", there are four key pillars underpinning a green loan, Alan Duffy – chief executive and head of Banking at HSBC Ireland says.

“Use of proceeds: this is the fundamental determinant of green loans whereby the entirety of the loan proceeds under a green loan must be used for a green project. Process for project evaluation and selection – the borrower of a green loan should clearly communicate to its lenders its environmental sustainability objectives and the process by which the borrower determines how its projects fit within the eligibility criteria for green projects; management of proceeds – proceeds of a green loan should be credited to a dedicated account or otherwise tracked to maintain transparency and promote the integrity of the project.

“And reporting: borrowers should keep up-to-date information on the use of proceeds including a list and description of the green projects to which the proceeds have been allocated. The Green Loan principles also recommend the use of qualitative and quantitative performance indicators, for example energy capacity, greenhouse gas emissions reduced and disclosure of the key underlying assumptions,” Duffy says.

Mark Jordan, Skillnet Ireland’s chief technologist, says these loans are available both domestically and to businesses with many of the major lending institutions now offering green loan facilities to new and existing customers in an effort to provide more competitive and cost effective access to liquidity – with the benefits of repayment flexibility and rates being typically lower than those of traditional loans.

“However, in order to qualify, applicants need to meet the respective lending institutions eligibility criteria to ensure the funds are to be utilised in a designated green project, and as we see this demand increasing, we will also see an increase on regulation and disclosure requirements for banks and lenders,” Jordan says.

All designated green projects should provide clear environmental benefits which are assessed, and where feasible, quantified, measured and reported by the borrower.

“The majority of green loans in the corporate banking space don’t provide any explicit reduction in loan interest margins, however green loans will generally see greater demand from lenders which stimulates more competition which tends to lead to lower pricing. In the personal and business banking space, a number of lenders have started to offer explicit pricing benefits, for example green mortgages,” Duffy says.

Green loans are still a relatively small part of the overall loan market with some $80.3 billion (€69.5 billion) issued in 2020, according to research from Bloomberg. However, the market is evolving quickly and there will most likely be a significant increase in green loans over the coming years, he adds.

Paul Travers, head of Energy, Climate Action and Infrastructure at AIB, says "greening our loan book and helping our customers transition their activities for their businesses and homes is key".

Despite Covid-19, AIB’s green lending activities rose to some €1.5 billion in 2020, and to €913 million for the first half of this year.

“This primarily consists of lending to windfarms and high energy-efficient buildings. But we need to do more and accelerate our efforts. Our latest initiative is the introduction of our green personal loan for consumers looking to make changes to their homes or lifestyles that help lower carbon emissions and fight climate change. We are hopeful it will act as a catalyst for greater retrofitting activity and we are therefore offering more attractive rates than standard personal loans, encouraging people to make changes that will help protect the planet,” Travers says.

How much can be borrowed?

Customers can borrow between €3,000 and €60,000 for a term of up to 10 years, depending on the amount of the loan and the purpose. “At 6.25 per cent (annual percentage rate), our green personal loan is our lowest rate on offer,” he adds.

In order to ensure that these loans are being used to support consumers reduce emissions, each application is supported with invoices or quotes showing that at least 50 per cent of the money being borrowed will be spent on going green.

These include items such as: wall, attic and floor insulation; windows and doors replacement or upgrade; ventilation systems; renewable energy systems, including heat pumps and solar panels; sustainable water systems; boiler upgrades and pipe insulation; installation of energy efficient heating controls; and electric or plug-in hybrid vehicles or home charging units. The most popular items include hybrid vehicles, window and door replacement and upgrades, and renewable energy systems.

“Green lending is considered to be key in achieving national and international climate action goals and ensuring long-term environmental sustainability. All indicators predict demand for green lending will continue to grow exponentially in the coming years as consumers and enterprises place more emphasis on greening their homes, ways of transport and adaptive business models,” Jordan says.