The new provisions aim to standardise documentation, enhance clarity, and uphold the integrity of green loan facilities across the market. The LMA has also released its green loan term sheet, which supplements the model provisions for green loans on 9 January 2025. These terms are designed to promote clarity and consistency in the structuring and negotiation of green loans and ensure alignment with established market standards.
As the market for green loans continues to evolve, these standardised provisions and term sheet are poised to play a crucial role in facilitating the growth and integrity of sustainable finance.
This is the first time the LMA has released GLP-aligned model provisions and term sheet, even though it has previously published model provisions and term sheet for sustainability-linked loans (see our previous blogs: term sheet for sustainability-linked loans and model provisions for sustainability linked loans).
Although these provisions and term sheets differ in certain aspects, both serve a shared goal: to enhance consistency in drafting, simplify negotiations, and ensure the documentation complies with and accurately represents the guidelines that form the foundation of the respective product markets. In this blog we will take a look at the key features of the green loan provisions and term sheet model for green loans.
Green loans are designed to finance or refinance projects with clear environmental benefits
Green loans are designed to finance or refinance projects with clear environmental benefits. According to the GLP, updated in February 2023, a green loan’s proceeds must be exclusively allocated to eligible green projects. The GLP outlines four core components:
- Use of proceeds: funds should be directed solely toward projects that offer environmental benefits.
- Process for project evaluation and selection: borrowers must clearly communicate the project’s environmental objectives and the criteria for selecting eligible projects.
- Management of proceeds: borrowers should track the allocation of funds to ensure they are used as intended.
- Reporting: regular updates on the use of proceeds and the environmental impact of the financed projects are essential.
Key features of the LMA’s green loan provisions
The LMA’s green loan model provisions serve as a template for incorporating green loan clauses into standard facility agreements. They are designed to fit into the LMA’s investment grade facility agreement template, however they can also be adapted for other facility agreements. Notable aspects of these provisions include:
- Applicable facilities: The green loan model provisions assume that the green loans are term loans. The drafting will need to be adapted if the green loans are to be drawn under a revolving credit facility
- Eligibility and management of proceeds: The facility agreement must clearly define eligible green projects and specify criteria for any future projects financed by the loan. The borrowers are required to provide evidence demonstrating the tracking, monitoring, and evaluation of how the green loan funds are utilised. This ensures transparency in fund allocation and aligns with the GLP.
- Representations and undertakings: The borrowers must make specific representations, including confirming that all information provided is accurate and not misleading, and that the green projects meet the agreed eligibility criteria. Additionally, the borrowers are expected to maintain policies and procedures to evaluate and select potential eligible green projects and manage any associated environmental and social risks.
- Breach of green loan provisions: The new provisions specify that non-compliance with a green loan provision does not constitute an event of default. Instead, it results in a “Declassification Event”. The term “Green Loan Provisions” encompasses all provisions related to the facility being classified as a green loan, excluding, however, the restrictions on the use of proceeds and publicity restrictions. By excluding these restrictions from the definition of “Green Loan Provisions,” a breach of these terms remains categorised as an event of default.
- Reporting requirements: The provisions include the requirement to deliver a green loan report in the form agreed and scheduled to a facility agreement and detailing compliance with the core components of a green loan. Such report is more comprehensive than compliance certificates and serves to enhance the integrity of green loan facilities.
- Avoiding Greenwashing: In order to maintain market integrity, the borrowers are advised to consult with lenders before making any public disclosures that reference the loan as “green.” This precaution helps prevent misleading claims about the environmental benefits of the financed projects.
Highlights from the LMA’s green loan term sheet
The LMA’s green loan term sheet expands on the provisions with detailed guidance for practical application:
- Eligible Green Projects: The term sheet emphasizes the need for a clear definition of eligible projects and criteria, ensuring alignment with environmental goals.
- Green Loan Information: The borrowers must provide accurate, comprehensive data about projects and their compliance with eligibility criteria.
- Management of proceeds: A transparent tracking mechanism for fund allocation and usage is critical. The term sheet suggests robust documentation to confirm the alignment of projects with green objectives.
- Green Loan Report: Annual reports are required, detailing, among others:
– Setting out a description of each eligible green project and compliance with certain eligibility criteria.
– Allocation of funds.
– Environmental impacts of the financed projects.
– Updates to project evaluation and risk management policies. - Representations and undertakings: The obligors must confirm the accuracy of information provided, ensure compliance with eligibility criteria, and implement robust policies for evaluating green projects. Additionally, they are obligated to supply necessary reports, promptly notify agents of any non-compliance, and maintain adherence to the established criteria for green projects. These measures collectively ensure transparency, accountability, and alignment with the principles governing green loans.
- Declassification Event: Outlines conditions under which loans can lose their “green” classification, including non-compliance or misrepresentation.
- Publicity: Restrictions on disclosures about the loan’s green status post-declassification.
- Events of Default: Failure to comply with green loan provisions does not constitute an event of default.
The LMA aims for wider adoption of green loans in the market by streamlining agreements
The introduction of these model provisions and accompanying term sheet is expected to streamline the drafting and negotiation of green loan related clauses in the agreements, fostering greater consistency and efficiency in the market. They also highlight the critical need to avoid “greenwashing” by ensuring all claims about environmental benefits are substantiated. By providing a standardised approach, the LMA aims to reduce complexities and promote wider adoption of green loans.
However, it’s important to recognize that these provisions and term sheet are not one-size-fits-all but serve as a foundational framework that can be tailored to the specifics of each transaction. Customisation is essential to address the unique aspects of each transaction, including sector-specific considerations and the nature of the projects being financed.
A pivotal step toward standardising and promoting sustainable finance practices
The LMA’s publication of model provisions and term sheet for green loans represents a pivotal step toward standardising and promoting sustainable finance practices.
By aligning with the GLP, these provisions offer a robust framework for structuring green loans, enhancing transparency, and ensuring that funds are directed toward projects that contribute positively to environmental objectives. By embedding transparency, accountability, and consistency into green loans, these tools are well-positioned to support the growth of green lending practices.
