Green and sustainability-linked loans have provided Asian loans bankers with the rare opportunity to book assets this year, boosting otherwise tepid volumes. The market has welcomed not just different sectors but different countries, too. Borrowers including Vietnam Prosperity Joint Stock Commercial Bank, Thailand’s World Asset Corp and Korea’s M&G Real Estate Asia all tapped the green loan market earlier this year.
But green loans are still far from being a big source of business in Asia. That has made bankers push for changes to the market in the hope that new rules will bring new supply. These changes include moves to tip the economics in favour of green loans through a mix of government grants for borrowers and capital relief for banks.
Those aims are both understandable, albeit ambitious. But, perhaps inevitably, some bankers are going further.
The existing green and sustainability-linked loan principles, issued by the Asia Pacific Loan Market Association (the APLMA), the LMA and the Loan Syndications and Trading Association, have requirements on the use of proceeds and on best practices for reporting. Green loans can only be used for explicit green projects that provide clear environment benefits. Although sustainability-linked loans can be used for general corporate purposes, they must include ESG targets that are “ambitious” and “meaningful”.
The principles also recommend that a third party reviews the green projects and any ESG performance indicators, although borrowers that have demonstrated sufficient internal expertise can go it alone.
Bankers are now pushing for more relaxed guidelines, to give companies more flexibility on use of proceeds and reduce the cost of hiring a third-party opinion provider, among other things.
It is hard to blame bankers for their wishlist but a move to loosen the green loan principles would be a mistake.
These rules may not be binding but they are important. For one thing, bankers say having green loan principles to follow makes marketing deals much easier. But even leaving aside concerns about syndication, the principles have an important signalling function. They represent the nearest we have to a consensus among loans bankers, not just about what the market looks like now but what it should look like in the future.
It is too easy to ignore the question marks around green financing, in both the bond and the loans markets. Banks, finally given a chance to do something that even their harshest critics will admit has clear environmental and social benefits, can be forgiven for only wanting to emphasise the good news. But bankers privately admit that there is still room to improve standards in Asia’s green loan market.
For example, there are questions about the myriad interpretations of ‘green’ borrowing, which can cover everything from property to palm oil. Lumping everything into a generic ‘green’ basket is probably the right approach at the beginning of the market but, as it matures, it would make sense for the APLMA to clarify gradations of green loans, identifying which deals will have the biggest environmental impact.
There are also some doubts about the quality of monitoring. There is a risk that, once a loan has been extended and bankers have moved on to the next hot deal, monitoring standards might be allowed to deteriorate. This is particularly a risk because borrowers and their bankers have a wide range of choices when it comes to third-party opinion providers, if they even choose to use one in the first place.
None of this means the APLMA and other bodies should be tightening the rules. But they should be wary about going in the other direction.
Those concerned about short-term deal flow clearly have reason to push for looser requirements; it is their rational self-interest. But stewards of the long-term health of the market, like the APLMA, should be cautious. The broad rules are already good enough. The important next step will be clarifying, not loosening.