Latest iteration of popular guidelines continue with voluntary, market-driven approach.

By Paul A. Davies and Aaron E. Franklin

The annual update of the Green Bond Principles (now also including the Social Bond Principles, and the Sustainability Bond Guidelines, collectively, the Principles) on June 14, 2018 created few surprises. The Principles, highly influential in the sustainable finance space, are subject to annual revision by an executive committee comprised of a set of underwriters, issuers and investors (with the support of the International Capital Market Association (ICMA) as secretariat). Each year, members and observers of the Principles (including Latham & Watkins) submit proposals for amendments to the Principles, with the final amendments formally announced at an annual conference. This year’s conference was held in Hong Kong, in a move to highlight the importance of Asian markets for sustainable finance and the global reach of the Principles.

As has been the case since the inception of the Principles in 2014, the bedrock idea behind the Principles is that the market decides what counts as a green bond. Third-party assurance or review is “encouraged”, but the emphasis remains on issuer communication to enable informed decision-making by investors. This emphasis takes the form of four core components that an issuer should disclose as part of its offering documents: (i) the use of the bond’s proceeds (i.e., what are the eligible green projects?); (ii) the process for project evaluation and selection; (iii) management of proceeds and (iv) reporting. As they have in prior editions, the Principles continue to discourage the green bond label on green bonds that do not otherwise follow the core components (including “pure play” green bonds).

The Green Loan Principles may help sustainable investment growth

By Paul A. Davies and Aaron E. Franklin

The Loan Market Association and the Asia Pacific Loan Market Association recently announced the “Green Loan Principles” joint project. This two-page document, announced on March 21, 2018, seeks to stimulate the de minimis green loan market by following in the footsteps of the highly influential Green Bond Principles.

There have been green loans for several years, but this market has not experienced anywhere near the outstanding levels of growth of the green bond market. The reasons behind this are not clear, but, undeniably, green loans could be an effective alternative to green bonds in many cases. This could include when the amount to be borrowed would not suffice for a benchmark-sized bond, or if the borrower does not wish to comply with public reporting standards applicable to bond issuers. And although loans are far less public than widely distributed bonds, borrowers could still obtain many of the benefits associated with green bond issuance in terms of demonstrating to their stakeholders their commitment to these issues.