Climate change awareness and global sustainability efforts have fueled interest in the green bond market in recent years. In Asia the product has taken off, with banks, corporate issuers, regulators and investors all assessing how they can further the market. But options in the green bond market are naturally limited.
Enter green loans. Last week, Hong Kong-listed property developer New World Development went green by converting a HK$3.6bn ($459m) old borrowing, signed in 2016, into a green loan. Beijing Jingneng Clean Energy, meanwhile, launched its debut green loan into syndication.
Having a green loan option is hugely beneficial for borrowers. For starters, using loans as an alternative to green bonds will allow companies to consider smaller deals. Bond issuers typically have to sell reasonably sized trades to entice the buy-side, who treat size as a gauge of likely secondary market liquidity.
Often, borrowers can have their green bond ambitions hampered by the need to define their use of proceeds too broadly. But loans can be applied to smaller projects, cutting out the need to raise hundreds of millions of dollars through a bond if the company has no need for it.
Likewise, loans present a viable option amid a volatile market. The Asian bond market — in primary and secondary — has recently taken a hit because of global volatility and an overwhelming pipeline of issuance to come. But the loan market has proven over the years that it is resilient in times of turbulence. If the bond market does shut, or begins looking too expensive for borrowers, ample liquidity in the bank market is theirs to tap.
This means that for companies considering green financing options, it will be important to develop a broad green financing framework. As it stands, most bond issuers have established green bond frameworks that do not include options for choosing green loans in the future.
Issuers can look to NWD as an example. When it went green last week, it established a “green finance framework”. Referencing the United Nations Sustainable Development Goals, as well as the company’s long-term strategy, the framework broadly encompasses the use of green bonds and loans for fundraising. The framework otherwise looks much the same as green bond frameworks put in place by existing issuers such as Beijing Capital Group, Indian Railway Finance Corp and Power Finance Corp, although these companies only make a reference to bond issuance.
There is also little difference when it comes to third party certification for green bonds and loans. For instance, Hong Kong Quality Assurance Agency, which provides certification, says that both debt products are eligible.
Governments need to take note. Earlier this month, the Hong Kong government announced a green bond grant scheme to subsidise the cost of getting certification for green bond issuers. While this effort is laudable, it is limiting the growth of the market by focusing only on green bonds. Loans should be equally encouraged as the city, and others, rely on private money to fund green related projects. For those needing a bit of guidance, there are now international guidelines for green loans, thanks to the Loan Market Association and the International Capital Market Association.
In addition, green loans aren’t just a win for the borrowers; they’re advantageous for banks as well. A major reason companies issue green bonds is the public relations benefit. The press releases, media coverage and the attention firms get for going green are hugely positive. Green loans will offer the same benefits for lenders, too. As green loans are even newer than green bonds, participation in such transactions will automatically capture the market’s attention.
Green loan programmes also make sense for banks as a way of putting funds to use. Banks, particularly from China, have formed a large part of the green bond issuance universe in Asia. Bank of China, for instance, has sold three green bonds totaling about $5bn in less than two years. Proceeds from green bond sales need to be put to work with eligible green projects. Green lending is a natural fit for that.
Now that NWD and Jingneng Clean Energy have opened the green loan market, more such transactions will likely follow, as green loans are a natural next step for a market that is already comfortable with green bonds. It is a welcome step — and only the beginning of a broader view of financing options within the green universe.