Gaining popularity of green loans in Singapore

Gaining popularity of green loans in Singapore

Doreen Sim

Doreen Sim

September 23, 2019 11:11 PM

1. Introduction

Green loans are increasingly gaining prominence in the corporate lending market in Singapore. We observed that the changing corporate social responsibility (CSR) direction of both banks and borrowers have contributed significantly to such growth.

A key feature of a green loan facility is the “green” purpose clause, whereby proceeds of the facility can only be used to finance or re-finance green projects which deliver environmental benefits. For instance, the development of commercial or residential properties with environment-friendly features can be financed by green loans.

Notably, a S$1.2 billion syndicated green loan facility was granted to an indirect wholly-owned subsidiary of Frasers Property Limited (Frasers) in September 2018. The facility was a first of its kind in Singapore, and used by Frasers to refinance its existing loans related to the development of Frasers Tower and an adjacent three-storey cascading retail podium. Frasers Tower is a 38-storey Premium Grade A office tower located in the Central Business District of Singapore, and utilises recycled water for irrigation purposes.

With the Building and Construction Authority of Singapore’s (BCA) goal of ensuring 80% of the buildings in Singapore are certified “green” by 2030, the real estate sector could potentially be a key beneficiary of green financing.

We are acting for DBS Bank in its grant of a S$300 million multi-currency sustainability-linked loan to CapitaLand. Whilst this is not strictly a green loan, the five-year term loan and revolving credit facility is the first and largest sustainability-linked loan in Asia’s real estate sector. It is also Singapore’s largest sustainability-linked financing provided by a sole lender. The multi-currency loan is linked to the developer's listing on the Dow Jones Sustainability World Index, which tracks established firms in areas such as environmental, social and governance efforts. Unlike green loans, where the funds are used for certain types of projects, CapitaLand is able to use the loan for general corporate purposes.

This article seeks to provide a brief overview on the general principles applicable to green loans and the key reasons spurring its demand in Singapore. Potential limitations that may hinder the development of the green loan market are also highlighted.

2. Green Loan Principles – a useful benchmark

The Green Loan Principles (GLP) was jointly released by the Loan Markets Association and Asia Pacific Loan Market Association in March 2018. The GLP includes a non-exhaustive list of eligible green projects and provides guidance on the characteristics of a green loan. This facilitates the growth of the green loan market in a coherent manner by having a consistent framework in place for parties to adopt.

The GLP is based on four core components, namely: -

  1. use of proceeds;
  2. process for project evaluation and selection;
  3. management of proceeds; and
  4. reporting.

Essentially, there has to be clear specification on the use of loan proceeds for green projects only and the loan proceeds should as far as possible be credited to a designated projected account. The borrower’s environmental sustainability objectives should also be clearly communicated to the lender(s).

Additionally, the borrower should perform regular reporting to the lender(s) regarding how the loan proceeds are being used or allocated. This allows consistent monitoring on the usage of loan proceeds, thereby maintaining the integrity of the overall green loan market.

3. Reasons for demand in green loans

Corporate borrowers’ perspective

Many large corporates are motivated to exhibit responsible corporate behaviour as this leads to long term reputational enhancement. “Green” culture is growing prevalent as each organisation seeks to reduce its carbon footprint in a bid to mitigate the effects of climate change. This translates to a greater alignment between the business decisions made by large corporates with environmental and sustainability goals.

Large corporates are increasingly keen to take up green loans as they value the intangible benefits of tying their ecologically responsible behaviour with their funding options. By securing green loans, it is an effective way to display the company’s commitment towards improving environmental sustainability. Portraying itself as a responsible “green” corporate citizen will also be a positive credential which can be shared with shareholders and relevant stakeholders.

Banks’ perspective

Over the years, banks have gradually shifted their focus towards building a sustainable future whilst promoting the banks’ performance and business growth. Banks recognise that by providing green financial solutions, it would be a great opportunity to create a positive impact in the global collective effort towards mitigating climate change. The provision of green financial solutions also aid banks in the diversification of their portfolios to a more sustainable one.

Furthermore, the Monetary Authority of Singapore takes into consideration the bank’s sustainability practices as part of its supervisory assessments over banks licensed in Singapore. This will invariably influence the manner in which banks conduct their businesses and the development of their financial products.

4. Potential limitations

It bears noting that the integrity of the “green” label can only be maintained if market players are disciplined in adopting and adhering to the GLP. Whilst market players are encouraged to adopt the GLP in the structuring of a green loan facility, it is still subjected to the agreement between the parties.

With the growth of the green loan market, it also carries the risks of green-washing. Green-washing refers to incidences where projects have the appearance of bringing about environmental benefits, but in substance do not. The current green loan market is largely self-regulated and the lack of a unified “green” definition poses the risk of green-washing occurring.

Further, green covenants such as regular review and reporting requirements are not typically stipulated as events of default in green loan documentation. In the event of a failure to comply with these covenants, it will only lead to a declassification of the facility. As such, accountability of how loan proceeds are utilised throughout the loan tenor may remain an issue.

5. Conclusion

Moving forward, we expect the growth of the green loan market to accelerate with increased worldwide environmental awareness. Banks and corporate borrowers ought to continuously monitor the progressive development of market principles, which will shape the way in which green loan facilities are structured in future.

Related Articles

Blurred Lines

by Andrew Kirby

Where does responsible lending end and unconscionability begin? Australian courts have come to vastly different conclusions. An overview of current case law.

Australian Courts Assess Loan Repayment

Trending Articles

The Real Camille: An Interview with Johnny Depp’s Lawyer Camille Vasquez

by Rebecca Blackwell

Camille Vasquez, a young lawyer at Brown Rudnick, sat down with Best Lawyers CEO Phillip Greer to talk about her distinguished career, recently being named partner and what comes next for her.

Camille Vasquez in office

Announcing The Best Lawyers in The United Kingdom™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from the United Kingdom.

The Best Lawyers in The United Kingdom 2023

Johnny Depp and Amber Heard: The Best Lawyers Honorees Behind the Litigation

by Gregory Sirico

Best Lawyers takes a look at the recognized legal talent representing Johnny Depp and Amber Heard in their ongoing defamation trial.

Lawyers for Johnny Depp and Amber Heard

Announcing The Best Lawyers in France™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from France.

Blue, white and red strips

Announcing The Best Lawyers in Germany™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Germany.

Black, red and yellow stripes

Education by Trial: Cultivating Legal Expertise in the Courtroom

by Margo Pierce

The intricacies of complex lawsuits require extensive knowledge of the legal precedent. But they also demand a high level of skill in every discipline needed to succeed at trial, such as analyzing technical reports and deposing expert witnesses.

Cultivating Legal Expertise in the Courtroom

Announcing The Best Lawyers in Belgium™ 2023

by Best Lawyers

The results include an elite field of top lawyers and firms from Belgium.

Black, yellow and red stripes

Announcing the 2022 Best Lawyers® in the United States

by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

Announcing the 2022 Best Lawyers™ in France

by Best Lawyers

The results include an elite field of top lawyers and firms, including our inaugural Best Lawyers: Ones to Watch recipients.

Announcing the 2022 Best Lawyers™ in France

Choosing a Title Company: What a Seller Should Expect

by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller

We Are Women, We Are Fearless

by Deborah S. Chang and Justin Smulison

Athea Trial Lawyers is a female owned and operated law firm specializing in civil litigation, catastrophic energy, wrongful death and product liability.

Athea Trial Law Female Leadership and Success

Announcing the 2022 Best Lawyers™ in Germany

by Best Lawyers

The results include an elite field of top lawyers and firms, including our inaugural Best Lawyers: Ones to Watch recipients.

Announcing the 2022 Best Lawyers™ in Germany

U.K. Introduces Revisions to Right-to-Work Scheme and Immigration Rules

by Gregory Sirico

Right-to-Work Scheme and Immigration Rules in

Destiny Fulfilled

by Sara Collin

Was Angela Reddock-Wright destined to become a lawyer? It sure seems that way. Yet her path was circuitous. This accomplished employment attorney, turned mediator, arbitrator and ADR specialist nonpareil discusses her career, the role of attorneys in society, the new world of post-pandemic work and why new Supreme Court Justice Ketanji Brown Jackson represents the future.

Interview with Lawyer Angela Reddock-Wright

Famous Songs Unprotected by Copyright Could Mean Royalties for Some

by Michael B. Fein

A guide to navigating copyright claims on famous songs.

Can I Sing "Happy Birthday" in Public?

What the Courts Say About Recording in the Classroom

by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?