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Can green loans help businesses retrofit their properties?

Our partner, TLT LLP, advises on how businesses can navigate the green loan market

It's widely reported that buildings account for a huge 40% of global energy consumption and 33% of greenhouse gas emissions; that’s why it’s crucial that businesses consider the environmental impact of their buildings and how they are using them.

That last part is important – just because a building has a good Energy Performance Certificate (EPC), for example, doesn’t necessarily mean this is enough to tackle climate change. And for many businesses, moving into a newer, more energy efficient building simply isn’t feasible, so they have to look at what can be done to their existing premises, whether they own or lease the space.

You can read the costs and benefits of each of the most popular green tech options in our guide to eco-homes.

Here, our partners TLT LLP explain how businesses can take advantage of specialist support to upgrade their green credentials.

Favourable loan terms

“Retrofitting” buildings to make them more energy efficient is a huge part of the journey to net zero. Indeed, Bristol’s new climate and ecological action plan says 250,000 homes and 8,000 other properties need to be retrofitted in the next eight years to meet its carbon neutral ambitions.

If retrofitting is on the agenda, then the business could qualify for a green loan i.e. a financial product that’s specifically designed to fund green projects (as defined in the Loan Market Association’s (LMA’s) Green Loan Principles). The benefits for businesses include accessing more favourable terms, which lenders are using to incentivise borrowers to spend on sustainability improvements.

Not only is a more energy efficient building better for the environment, the business also stands to benefit from reduced energy bills - and it can even help with recruitment and retention!

The green criteria

We’ve seen more lenders offering green finance products in recent years – such as green loans, green mortgages or sustainability-linked loans – and according to Bloomberg, a significant proportion of lending is now tied to ESG goals.

While there is no globally recognised eligibility criteria for green loans, guidance suggests that a retrofit project may qualify as green if there is “material improvement” in energy efficiency, and a “material reduction” in the carbon emissions associated with the building.

The building or project will need to remain green (i.e. adhere to the green project criteria) for the life of the loan, and all loan proceeds earmarked as green must be used for an eligible green project. If this isn’t the case, this will be a “green breach” and (subject to the expiry of remedy periods) the loan will be reclassified to a traditional loan from the date of the breach.

The details and consequences of a breach can vary, depending on the requirements of the lender(s) and the nature and severity of what happened. The consequences (and potential remedies) will need to be considered ahead of entry into a facility agreement and documented accordingly.

According to our latest research, more lenders are planning to launch green finance products in 2022, and the use of green loans is expected to rise as more businesses wake up to the urgent need for retrofitting and commence eligible projects.

From a legal perspective, while the LMA’s Green Loan Principles provide a foundation for green lending, we also hope to see greater agreement and transparency on the criteria for green loans, and consolidation and alignment on how the criteria should be applied to relevant projects and assets.

Find out more ways to transform your business into a carbon-neutral organisation here.