As lockdown begins to ease in the UK, an increasing number of business leaders, government officials, not to mention the European Union, have called for green economies to become the ‘new normal’. However if we dig a little deeper into sustainable investing, it becomes clear that this is not a new phenomenon. A 250% increase of sustainability-linked loans year on year since 2017; a record 479 green bonds issued last year; and Germany’s announcement to move to entirely renewable energy by 2038, all demonstrate that the sustainability wheels are fully in motion. Sandra Seah, Chelsea Chan and Eef Gerard Van Emmerick spoke to Max Latchmore in our London Sustainability Group to discuss LYS Energy’s (LYS) recent Green Loan run through our Singapore office. We had the pleasure of advising LYS on this transaction and hope to share with readers some key points which will be of interest to companies seeking green loans, ESG financing and investment more generally. Let’s start with the basics: what are green loans? Green loans are a subset of ESG lending (ethical, social and governmental), being any type of loan instrument made available exclusively to finance Green Projects. Green loans typically (although not always) will involve:
a commitment that the loan proceeds will be utilised in accordance with the LMA's Green Loan Principles, or that some similar targets will be met, in deploying the funds towards an environmentally beneficial activity; and,
The funds will be held transparently, the funds must be traceable, and borrowers more generally must communicate key information and intentions for the funds to lenders on an on-going basis.
Although green loans have been available for some time, they have recently flourished as a popular form of lending. This is in no small part down to prevailing investor trends – investor demand in ESG funds is up 72% on last year - and the gradual but seismic shift in governmental policy towards sustainable economies forcing banks to re-think their lending models. The case study: LYS Energy Group LYS Energy Group (LYS) obtained a S$14 million green loan from United Overseas Bank (UOB) under its Green Infrastructure Framework as part of the Bank's U-Solar programme — the first solar industry ecosystem in Asia focusing on the development and adoption of renewable energy across Southeast Asia. The financing will be used to fund LYS’ solar energy assets in Singapore and to support the Group’s expansion as it seeks to drive the adoption of clean energy in the commercial and industrial sectors across the region. Having advised LYS through the entire deal-cycle, the following three points stood out to us: Commitment to the criteria United Overseas Bank’s (UOB) commitment to ESG-based lending criteria was apparent from the out-set. A dedicated pool of funds set aside for ESG projects by financiers presents a fantastic opportunity for sustainable companies who can exhibit themselves as capable of efficiently fulfilling the requisite criteria for deployment of these funds in their business. UOB were committed to identifying specific ESG factors for the loan, and the bank placed great importance on the ability to closely evaluate key performance indicators, review long-term operational and executive business goals, and to oversee the management and monitoring of ESG factors via the loan documents to the extent possible. Lenders will also seek step-in rights in the event of default if the criteria of the loans are not being fulfilled. In the context of green loans, step-in rights will allow the lenders to take over power generation equipment, facilities and capabilities of sustainable energy producers. As such, companies seeking to obtain green financing by way of loan should ensure that agreements with offtakers contain assignment rights. Notices to offtakers in respect of security taken for on-site equipment will be a pre-requisite to close of the transaction. Expect financers to seek extensive security for green financing Financial institutions, particularly those operating in the Singapore market, will seek extensive security documentation. Some of these are tied to the nature of green financing, and others are required to pass the bank's internal loan committee's approval, and to clear standard internal processes of banks. As is market standard in the Singapore lending market, financing banks will also seek personal guarantees from key management or founders, and, an assignment of key man insurance from the borrower to the financer. Is ESG finance the right structure for you? ESG was the perfect way for UOB and LYS to synergise their interests, but the flip-side of banks’ commitment to criteria is that these loans can be complicated if the criteria are bespoke. Project finance structures can result in heavy documentation. It is also common for third party oversight to be required under the terms of ESG loans, which in turn increases the time and financial cost associated with the loan. Singapore's market provides ripe opportunities for ESG investment, with the number of ESG investments rising steadily over the years and strong support from the Monetary Authority of Singapore (MAS) to encourage green financing locally and in the region. In November 2019, the MAS announced a US$2 billion green investments programme (GIP) as part of its "Green Finance Action Plan" to invest in public market investment strategies that have a strong green focus, with a view of promoting environmentally sustainable projects in Singapore and in the region. Smaller green energy companies with sustainability goals, which may not have sufficient funds for traditional project financing, may also consider alternative sources of funding such as grants or small-medium enterprises (SME) loans made available by the MAS or other government agencies. We anticipate an increasing trend towards ESG investments as more companies begin to pursue sustainability goals. Is ESG financing the way to go? It is clear that ESG financing and green and sustainably linked loans will be at the forefront of financing for the foreseeable future, as environmental concerns become a more central point in determining short, medium and long-term economics. Companies must react to:
Governmental pressures, as sustainability and climate discussions come to dominate political discussion. The Committee on Climate Change (CCC) made clear that ministers should ensure that funds earmarked for the post-COVID-19 economic recovery period should go to firms that will reduce carbon emissions. Companies (and therefore borrowers) must adapt to this new direction if they are to thrive in the ‘new normal’.
Internal pressure applied by shareholders; shareholder activism has become a wide-spread and readily used tactic in creating change in organisations – a great example of which is the recent suspension of Polish Ostroleka C coal-fired plant following legal action citing the build as a ‘stranded asset in the making [which] would destroy value for shareholders’ following changes in EU climate policy and European Investment Bank financing policies; and
Investor and lender pressures, as investors and lenders look to incorporate ESG principles as part of their investment and loan agreements as discussed above.