What are green loans and what are they for?

Currently, we see that there is a significant demand for financial products. Many of them stand out for showing strong support for economic, social and environmental development. For this reason, in this article we are going to explain the characteristics of green loans: financial operations that allow companies to finance initiatives with a clear environmental impact.

What are green loans?

Also known as green loans, they are loans that are governed by the same principles as green bonds. In this sense, it promotes the integrity of this market, including the guidelines that have been established for its products, such as the categories related to the use of funds or how to assess their environmental impact.

Which are your principal characteristics?

Regarding its characteristics, you must know that, for a loan to be considered green, its purpose must be the promotion of sustainability. Of course, it must have been qualified as such by an external body, for which there are environmental consultants (such as CICERO or Vigeo Eiris).

These entities, by granting a green seal, determine that the debt effectively complies with environmental, social and good governance criteria. Furthermore, it is in line with the principles of green bonds. Thus, we see that there are up to four main formats of the so-called green loans:

• Bilateral loan: It has a corporate guarantee formalized between the company and the bank.
• Syndicated loan: In this case, several banks agreed to finance the operation with the figure of one of them as environmental agent bank. Said entity will be in charge of managing and centralizing the corresponding documentation with the rating agency.
• Credit line: It does not have the objective of financing green projects or investments, but it is based on environmental, social and good governance criteria. It depends on the applicable interest rate of the ESG score. In this way, the higher the score, the less interest the company will pay, and vice versa. Without a doubt, this is a very new factor in the loan market.
• Project financing: It is based mainly on long-term financing, with cash flows that are generated by a project or a portfolio of projects and taking into account the guarantee of the assets associated with them. In addition, the real differentiating element of this group is that it is structured according to long-term predictions or fixed contracts. Therefore, we are talking about initiatives that are more likely to obtain the green seal and that go beyond the energy sector.

What are green loans for?

Green loan serve so that both individuals and companies have access to a type of financing that is highly conditioned by the environment. Precisely for this reason, it is sought that the projects have a real interest in the environment, also to raise awareness about the current situation of nature.

In this way, they are types of loans that seek the development of sustainable activities or that have among their objectives to generate a benefit for our environment. Always from an ecological perspective, these loans are given with the requirement of improving the current state of certain natural areas.

On the other hand, you must bear in mind that these green loans can also be acquired from the premise of modifying the production processes of a company, as long as the transformation or return to greater sustainability within the ecosystem is sought. In fact, we found that the most common areas where these projects are developed have to do with ecotourism or the implementation of clean energy and technologies.

Likewise, the granting of these loans demonstrates the commitment of the corresponding entity in environmental terms. This reinforces the corporate image of the company itself. For this reason, a large number of companies have launched to promote initiatives of this type.

In any case, the presentation of the project must comply with a series of requirements, given that the loans that are granted have a significant amount. In addition, periodic reviews are made to verify that the objectives are being met according to the premises set.

Main benefits of green loans

As we have already mentioned, these loans have advantages that are of great importance when compared to regular loans, since they seek to encourage sustainable and environmentally friendly development. For this, projects are financed under this line, which have a series of benefits:

• Sustainability Award. The interest rates are much more advantageous as the project is more sustainable and manages to generate better results in nature with its practices. In addition, other prizes are usually awarded, such as bonuses or recognition for the achievements they have obtained.
• Minor interest. These loans are characterized by offering rates with much lower interest rates compared to other types of financing.
• The environmental impact is taken into account. In a conventional loan, only the return on investment is evaluated. However, in the green ones the environmental impact has a great value. For this reason, they tend to finance projects that have not been eligible for other regular loans.