While all types of loans may be called green, considering that’s the colour of money, green loans are a specific type of loan. They are integral to green financing – financing toward sustainable development. The global green financing market was valued at USD 4.18 trillion in 2023 and is expected to grow at 21.25% in the next decade. 

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Green loans are powerful instruments that can have financial and environmental benefits, and thanks to government push and strong investor sentiment, such loans are growing in availability and popularity. 

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In this article, we’ll cover green loans, exploring their benefits and zeroing in on how the real estate sector, in particular, can leverage them to make sustainable buildings.  

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What is a green loan? 

A green loan is a type of loan that exclusively funds projects that are environmentally friendly and contribute to the green transition (green projects). For instance, a green loan may be used for projects that help reduce greenhouse gas (GHG) emissions. 

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In essence, green loans can finance various projects as long as they contribute to the climate targets – reducing emissions and limiting global temperature rise to 1.5 degrees Celsius by 2050. 

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Green loans, like other loans, may have specific conditions and are offered by financial institutes like banks or credit unions and can be taken advantage of by individuals and businesses. Historically, green loans have been smaller, but with the finance world prioritising green financing, the scale of lending is rapidly increasing. 

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What are the requirements for green loans?

According to the Green Loan Principles (GLP) of the International Capital Market Association (ICMA), green loans can finance or refinance new and existing green projects in part or fully. The exact requirements vary by loan type/category and lender. 

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Some green loans may be available to specific sectors, such as transportation or construction. However, many loans have flexible requirements and can fund various green projects. 

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Normally, a borrower must satisfy the lender about the project's financial soundness and how it will positively impact the environment. The former requirement is just as important because green loans are loans. So lenders want to ensure that the borrower doesn’t default and that the project merits the loan based on its potential financial and environmental outcome. 

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Many lenders also require reports on the project's progress to ensure the funds serve its intended purpose. GLP states that borrowers should be required to report annually and provide quantitative and qualitative performance indicators for the funded projects. 

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Who can apply for a green loan?

Although green loans are more popular with businesses, many lenders offer them to individuals who may use them for business or personal projects. For instance, homeowners can apply for a green loan to install solar panels on their property for clean energy. Similarly, a person may qualify for a loan earmarked for sustainable development for buying an electric car. 

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Again, who may qualify for a green loan depends on the conditions of the loan. For instance, some green loans are exclusively designed for energy-related projects. So organisations/individuals trying to switch to renewable energy can apply for such loans. 

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Benefits of green loans for borrowers and lenders

Green financing, particularly green loans, can benefit both the borrower and the lender. Of course, the environment is the big winner if these loans are utilised efficiently and transparently. 

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For borrowers

• Alignment with environmental goals: Funding green projects with money from green loans can help businesses better align their work with their environmental, social, and governance (ESG) goals. As these loans must provide environmental benefits in some form, they reinforce the importance of sustainability throughout the project development. That, in turn, helps ensure the project does what it’s supposed to. 
• Increased stakeholder and public approval: Companies can use green loans to fund sustainability projects, lowering their carbon footprint. This will show all stakeholders and the public the company’s commitment to the environment and its part in mitigating the climate crisis. 
• Favourable terms: Some green loans may have favourable conditions, such as lower interest rates or long repayment periods, simply because the funding positively impacts the environment. 

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For lenders

• Reduction in financed emissions: Banks and other financial institutions can use green loans to reduce their financed emissions. Although indirect, financed emissions are responsible for significant global emissions. Green loans can help lenders divert their investments toward eco-friendly projects. 
• ESG reporting and compliance: Green loans can positively reflect the lender’s ESG reports at the end of the year, demonstrating their willingness to promote sustainability. Similarly, by investing in green projects, they may also be able to comply with environmental regulations and bring their emissions down. 
• Financial and environmental returns: Lenders can profit from the returns on green loans while helping reduce environmental damage. It’s a classic two-birds-with-one-stone situation; lenders can play their part in the green economic transition. With changing consumer sentiment and increasing awareness, sustainable projects are likely to succeed now more than ever.

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Green bonds vs. green loans

Green bonds should not be confused with green loans. While both are financial instruments for funding environmentally friendly projects, they differ in scale and operation. 

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Green bonds are fixed-income securities issued by corporations, municipalities, or governments and sold to investors to raise capital for environmental projects. They may be listed on a public exchange or sold privately to institutional investors. 

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Money from these bonds may help banks and other lenders issue green loans to businesses and individuals. Unlike green bonds, green loans involve actual borrowers who will use the money for green projects. So, there’s direct engagement with borrowers. 

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Both green bonds and loans essentially offer financial returns for issuing institutions, albeit accompanied by environmental benefits. So, it’s safe to say that green bonds and green loans are complementary financial instruments that help power sustainability initiatives; they help redirect capital toward projects that can mitigate climate change. 

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Green bonds have become a sought-after financial offering, which means more green loans in the future. The European Union (EU) dominates green bond issuance. Its standardised green bonds have seen impressive growth of 50% year-on-year since 2015. In 2022, they amounted to 1.7% of the total GDP (Euro 266 billion). 

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Green loans for real estate: How can they be used to reduce emissions?

Green loans present many opportunities for the real estate sector, including developers, architects, and building managers. These loans can be leveraged to construct sustainable buildings and infrastructure projects. But that’s not all – green loans can also provide funding for making existing buildings greener. 

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Many green loan schemes specifically target real estate development and retrofit projects. The proceeds from these loans can be used to make a building more energy-efficient or improve its waste management. For such projects, meeting the environmental requirements of the loan can be easy. If, as a borrower, you’re able to demonstrate the environmental impact of the new construction or renovation, you’re likely to get approved and get better conditions. 

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If used strategically, companies can pay back these loans without any cost. For example, using the funds to lower energy consumption and cost can enable the borrower to pay off the loan from the savings. These loans can minimise emissions for both new and existing buildings. That, of course, is great for the environment and helps reduce the borrower's carbon footprint. Funds from green loans can also be used to meet any regulatory requirements for buildings, such as energy or water consumption. 

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When discussing green loans for buildings, it’s important to mention certifications. Green certification may be a core requirement of certain loans, such as BREEAM, DGNB, or LEED. Such certificates prove the building’s structure and operation's eco-friendliness.

Seize the opportunity!

Green loans can make a big difference if used properly. While they’re a financial instrument for profit, their impact on the environment makes them a worthy option. For small businesses and corporations, green loans can power initiatives that reduce GHG emissions and promote sustainability. Plenty of green loans are readily available in Denmark, other Nordic countries, and the EU. So take advantage of them to make your real estate portfolios more eco-friendly!

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FAQs

What are the four principles of a green loan?

The four principles of a green loan, as per the GLP, are:

• Use of Proceeds: Funds must be used exclusively for eligible green projects
• Project Evaluation and Selection: Clear communication of environmental objectives and criteria for project selection
• Management of Proceeds: Proceeds should be tracked and managed to ensure they are allocated to green projects
• Reporting: Annual updates on using proceeds and the environmental benefits achieved, with relevant qualitative and quantitative metrics

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What are ESG loans?

ESG loans incorporate environmental, social, and governance (ESG) criteria into the lending process. They are designed to promote sustainable and responsible business practices by aligning the borrower’s performance with ESG standards. Green loans and sustainability-linked loans are types of ESG loans. 

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How much can you borrow with a green loan?

The amount you can borrow with green loans varies widely and depends on several factors, like the lender's policy, the borrower’s creditworthiness, and the nature of the green project. Green loans range from small amounts for individual projects to large sums for major infrastructure or corporate initiatives. As such, there’s no standard borrowing limit.