Is Green the New Black?: Why green bonds & sustainability-linked loans are the new sexy

March 16, 2020

2 min read

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What's going on here?

According to Linklaters’ 2019 data, green bond borrowing reached a global all-time high, having raised a total of US$185bn worldwide. The Financial Times further reports sustainability-linked loans have seen similar growth rates, with a whopping 250% increase in global loan borrowing last year.

What does this mean?

Green bonds and sustainability-linked loans are two new types of financial products introduced by banks and other lending institutions. They are intended to satisfy a growing demand from investors looking to put their money in economically robust but eco-friendly projects. 

Green bonds and sustainability-linked loans are two distinct products. The former is benchmarked against a strict sustainability market criteria called the Green Loan Principles. This says that proceeds from these bonds are to be used to support certain initiatives (such as renewable energy or clean transport). For sustainability-linked loans,  a simpler market criteria called the Equator Principle is adopted. This looks at how these loans measure up against pre-set environmental, social and governance [“ESG”] criteria – but it is not restricted by rules on its use or purpose.

What's the big picture effect?

Given green bonds and sustainability-linked loans are relatively new products on the financial market, law firms will have an important role in monitoring the legal and regulatory developments on ESG policies across Europe, Asia and USA’s respective banking landscapes. 

This is important given that, to date, there are no globally accepted legal standards for what exactly green finance is, thereby increasing risks of “greenwashing” investors, i.e. the process of conveying a false impression as to the positive environmental impacts of a company’s products. Also, there isn’t any true third party oversight over a firm or financial institution’s compliance with the ESG benchmarked performance over its green products. Further, the Green Loan Principle and Equator Principle are voluntary market criteria – rather than a compliance mechanism borne out of a coordinated effort between regional regulators.  As such, potential issues concerning incentive and oversight are still very much live issues.

As governments and regulators are racing to implement policies and fill in the legislative gaps after a sharp spike of investor enthusiasm around eco-friendly financing, law firms will need to keep an eye on the fast-changing regulatory landscape. This will be the first battle of many for legislators as these financial green products do not seem to be going out of fashion anytime soon.

Report written by Roslyn Lai

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