The growing demand for financial products that support sustainable economic, social and environmental development has created a need for tools such as green loans, which allow companies to finance initiatives that have a clear environmental impact.
Green loans are governed by the same principles as green bonds – the Green Bond Principles, which promote integrity in this market and contain the norms established for these financial products: for example, which categories of investment qualify to use the funds, or how their environmental impact should be measured.
For a loan to be considered “green,” its objective must be to promote environmental sustainability. However, it also has to be certified by an external agency. Environmental consultants such as CICERO, Vigeo Eiris, Oekom research o Sustainalytics, perform this service by awarding a “green certificate,” confirming that the debt instrument really complies with the environmental, social and governance criteria (ESG) and is aligned with the Green Bond Principles.
There are four types of green loans:
- Green bilateral loan, with a corporate guarantee, formalized between the company and the bank.
- Green syndicated loan, in which a group of banks finance an operation, with one of them acting as green agent, in charge of managing and centralizing the relevant documentation with the certification agency.
- Green revolving credit facility, whose objective is not to finance green projects or investments – since the vocation of this line of credit is that it not be used – but which is still based on environmental, social and governance criteria. The interest rate charged depends on the ESG score given by the environmental agency: the higher the score, the lower the interest rate, and vice-versa. This is a totally new approach in the loan market.
- Green project finance, based fundamentally on long-term cash flows generated by a project or portfolio of projects, taking as a collateral guarantee the assets associated with those projects. The real differentiating element in project finance is that it is structured on the long-term predictability of its cash flows, which come from businesses that are regulated or have fixed contracts with their clients, suppliers, etc. Many projects are eligible to obtain the “green” certification, beyond just the energy sector.
BBVA, leader in sustainable finance
The struggle against climate change and the transition to a low-carbon economy present a major challenge to society, in which financial institutions play an important role. Already, some European financial institutions are working individually to integrate social and environmental considerations into their strategies and business models. BBVA is already a reference in this field.
The bank has the ability and the knowledge to provide its clients with superior advisory on sustainable financing solutions, both in loan and bond format, and is playing a key role in the development of this market. The Bank has been the most active Spanish bookrunner in the green bond market in 2016 and is already a leading player in the booming green loan market, having closed different landmark transactions in 2017.
Some good examples of these are the concession of the first green loan to an energy company and the largest worldwide, which BBVA signed with the Spanish utility Iberdrola at the start of the year; the sign of the first green loan with a project finance structure worldwide with Italy's Terna; or the loan granted to Novo Hospital de Vigo, wich was the first green project finance in Spain.