Green Loans and Sustainability Linked Loans

13th January 2022


After COP 26, we thought that it would be interesting to report on the fantastic work being carried out by The Chancery Lane Project in relation to green loans and sustainability linked loans. It is important to understand the difference between these two types of loan.

A green loan can be described as a loan that has a clear requirement for proceeds to be used for a green purpose or project. Unlike a sustainability linked loan, there will not usually be a pricing adjustment mechanism.

On the other hand, a sustainability linked loan has no requirement to use the proceeds for a green purpose or project, although it should require the loan to be used in accordance with the borrower’s sustainability strategy. Instead, the loan is designed to incentivise a borrower to meet its sustainability commitments and reduce its environmental impact, usually by means of a pricing adjustment based on the borrower’s performance against agreed sustainability criteria.

The Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) have published what are known as the Green Loan Principles and the Sustainability Linked Loan Principles together with guidance notes.

These are excellent resources and should be your first port of call if you are new to this field of work.

In addition to this resource, there are some extremely useful new resources being developed by The Chancery Lane Project.

What is The Chancery Lane Project?

In their own words:  “The Chancery Lane Project (TCLP) is a collaborative effort of lawyers from around the world whose vision is a world where every contract enables solutions to climate change. Together, we create new, practical contractual clauses ready to incorporate into law firm precedents and commercial agreements to deliver climate solutions.” All their publications are free to use. The areas of contract law covered include corporate, commercial, employment, finance, construction and real estate.  Below we take a look at some of the content in the finance section.

For more information about TCLP, or if you wish to become involved, visit The Chancery Lane Project

We have picked out two of TCLP’s suites of clauses to give you an idea of their content and applicability.

Green Loan starter pack (Harrison’s clause)

This contains a suite of clauses aligned to the Green Loan Principles (GLPs), using LMA-style drafting and designed as a base to be tailored in commercial and legal negotiations.

Like all good legal documents, the pack starts with a set of green definitions (such as obvious ones like ‘Eligible Green Project’ but also some quite technical ones, such as the definition of greenhouse gas emissions). It then moves on to the substantive clauses, starting with use of proceeds.

Next up are provisions relating to project evaluation and selection which is another of the GLPs. This is followed by green loan and environmental representations, green loan undertakings, specifications relating to group bank accounts (for example there are detailed rules as to where monies can/cannot be invested by the borrower pending use on the project).

Next are the provisions relating to green loan auditing. These are followed by provisions relating to ‘declassification’. If there is a breach of the green provisions, the borrower must cease to represent internally or externally that the loan is green, and the breach may (or may not) be treated as an event of default. Finally, there are extensive provisions relating to reporting obligations, as you would expect.

Sustainability Linked Loans (Casper’s clause)

This is a suite of model clauses which can be used to convert a traditional loan agreement for lending a sustainability linked loan. Again, this starts with an extensive set of definitions, including a definition of Sustainability Performance Targets (SPTs) as set out in a SPT schedule (see below). A key definition is the Sustainability Strategy which must record the borrower’s sustainability objectives, a business plan for achieving the objectives and SPTs and so on.

Next follows a clause dealing with SPT certification and evaluation to see if the SPTs have been achieved.  These are coupled with provisions which provide for margin increase or decrease depending on the degree of achievement/failure – as noted above, financial incentive is a key feature of these loans.

There are detailed reporting provisions which include self-certification signed off by the borrower’s “sustainability committee” and the possibility for discussion with a “sustainability expert”.

Next are undertakings in relation to the Sustainability Strategy, delivery of energy performance certificates (if applicable) and reporting on adverse environmental, social and corporate governance incidents. There are events of default relating to breach of the sustainability-related undertakings or under-achievement in relation to the SPTs. A schedule of conditions precedent includes delivery of a signed Sustainability Strategy and a report from a sustainability expert. Finally, there is a schedule containing a set of indicative SPTs.


The above are just two examples from the treasure trove of green and sustainability linked clauses which is being built up by TCLP. It must be emphasised that they should be used as a starting point for tailoring to the particular requirements of a lender and borrower. They are well thought through and well-drafted and will be an excellent resource for those working in this area.

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