Eligibility for Green Loans: Understanding the Criteria

This guide provides a brief overview of the key eligibility criteria for SMEs to access green financing. Green financing is designed to support sustainable projects and initiatives and SMEs can tap into these funds through a variety of sources, including financial institutions, governments and non-profit organisations.

What is a Green Loan?

A green loan is a type of loan specifically earmarked for financing projects that aim to have a positive impact on the environment. These loans are typically tailored to fund initiatives focused on sustainability, energy efficiency, renewable energy, pollution prevention, and other eco-friendly endeavors.

Loan Market Association Definition: “Green loans are any type of loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) made available exclusively to finance, re-finance or guarantee, in whole or in part, new and/or existing eligible Green Projects”

‍Example

An illustration of a green loan in action is when a commercial real estate company secures funding to retrofit their properties with energy-efficient technology and sustainable infrastructure. This not only reduces the carbon footprint of the buildings but also aligns with the company's commitment to environmental responsibility.

However, the specific criteria for sustainable finance and ESG programs may vary depending on the nature of the product or program. While some financial institutions have additional prerequisites or criteria that SMEs need to fulfill, others may prioritize providing loans as long as the initiative is deemed sufficiently green. Each loan request is typically evaluated on a case-by-case basis, ensuring a personalized approach to meet the unique needs of SMEs.

Green Loan: Core Principles

Many Financial Institutions have aligned their green lending proposition with the Loan Market Association's (LMA) Green Loan Principles. The LMA's Green Loan Principles are a set of voluntary guidelines that aim to facilitate and support environmentally sustainable economic activity. In addition to meeting all applicable national and international laws and regulations, the GLP is designed to provide a framework for all market participants to understand the characteristics of green lending.

The framework is based on four core components:

1. Use of Proceeds: The proceeds of a green loan must be used for eligible green projects or investments. Eligible green projects or investments are those that have a positive environmental impact and contribute to sustainable development.
2. Process for Project Evaluation and Selection: Green loans must be used to finance the procurement of goods and services that have a positive environmental impact.
3. Management of Proceeds: Based on the nature of the project, Financial Institutions may require one, ore more of the following as evidence (*Refer to Tese Certificates Guidelines for more info)
   • Renewable Energysome text
     • CEEQUAL (Good and above), or any other Civil Engineering label of equivalent standard (optional)
   • Climate Change Adaptationsome text
     • Climate Change Risk / Vulnerability Assessment by issuer / third-party to determine the needed enhancements for climate change adaptation and resilience purpose.
   • Eco-Efficiencysome text
     • Evidence project has met Regional, National or Internationally recognised eco-label or environmental certification (applicable to development of environmentally friendlier products)
     • Lifecycle assessment report to demonstrate quantifiable improvements related to, for example, recyclability or the use of recyclable or plant-based inputs
   • Green Buildingssome text
     • Evidence project has met Regional, National, or Internationally recognised standards or certifications such as LEED (Gold Platinum), BREEAM (Excellent and higher), HQE (Excellent), CASBEE (A- Very Good / S- Excellent), HQM (4 star), or CEEQUAL (Good and higher) for civil engineering projects.
     • Note: Bank may consider other additional equivalent internationally recognised certification schemes on a discretionary basis.
   • Energy Efficiencysome text
     • Evidence relating to (clean) energy efficiency and production / low environmental impact provided in some text
       • Planning permission submission (if required); and/or
       • A report by engineers; and/or
       • Pre-Standard / Certification assessment report.
   • Other Categoriessome text
     • Copies of back up/supplier invoices and where relevant proof of payment directly relating to the assets (and agreed qualifying costs).
   • Pure Play Greensome text
     1. Where a business derives 90% or more of revenues from activities in Eligible Sectors it is considered as ‘Pure-Play Green’ and is eligible for green financing. In these instances, Use of Proceeds can be used by the business for purposes, so long as this financing does not fund expansion into activities falling outside of the Eligible Sectors.
4. Reporting: Compliance Report from the Borrower on an annual basis, or until the loan is fully drawn. The Compliance Report should include details of Green projects which the loan has been allocated to, and the amount allocated, along with the expected environmental impact. The GLP recommends using qualitative indicators in reports, and, where feasible, quantitative performance indicators together with disclosure of the underlying methodology and assumptions.
   
   Borrowers should keep readily available up-to-date information on the use of proceeds, which can be assessed at annual review if necessary, and thereafter in the event of material developments.

By aligning its green lending proposition to the GLP, SMEs can demonstrate their commitment to sustainable business models.

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Download Eligibility Criteria

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Tese’s Tips

To understand the eligibility criteria for banks granting green finance to SMEs, Tese recommends SMEs to first:

1. Familiarize themselves with the specific requirements. The green finance product or program's eligibility criteria can typically be found on the website of the financial institution or government program offering the financing, and then;
2. Gather relevant documentation to demonstrate that their projects or initiatives meet these criteria. This documentation may include project plans, environmental impact assessments, and financial projections.

If SMEs find the requirements complex, they should consider working with a financial advisor who can provide guidance on the eligibility criteria and assist in preparing the necessary documentation. Accessing green finance may require patience, as the process can take time.

The below roadmap outlines not only the quantitative requirements, but also the qualitative attributes and strategic vision that banks expect from these environmentally conscious enterprises. By following (or finding inspiration from) the Eligible Green Projects, SMEs can align themselves with well-established sustainability standards, positioning themselves favorably to secure the financial support they need for their sustainable business endeavors.

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