What Is a Green Loan?

Borrowers can use green loans to fund environmentally beneficial projects

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Carrie Pallardy
Carrie Pallardy
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Carrie Pallardy has more than nine years of experience writing about a range of topics, including healthcare and cybersecurity. Her expertise includes personal finance, insurance, real estate, and investing. She has a bachelor's degree from University of Illinois Chicago.
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Updated August 26, 2024
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What Is a Green Loan?

A green loan is a loan from a government or financial institution to fund a project that is expected to have a positive environmental impact. These loans must adhere to four green loan principles (GLPs), a set of guidelines administered by the International Capital Market Association (ICMA). Companies can use them as part of their overall environmental, social, and governance (ESG) strategy.

Key Takeaways

  • Green loans are a specific type of financing that adheres to four principles collectively known as the GLPs.
  • Businesses and individuals can apply for green loans to finance projects with expected environmental benefits.
  • Companies may secure a green loan to fund the development of green buildings, for example.
  • Individuals may apply for a green loan to finance a project such as solar panel installation.
  • Green loans can help both borrowers and lenders demonstrate their commitment to their ESG goals.

How a Green Loan Works

Green loans are intended to finance or refinance environmentally focused projects, also referred to as green projects. Green loans can be any type of loan instrument, such as a term loan or revolving credit facility, that adheres to the GLPs.

A variety of financial institutions, including banks and credit unions, offer green loans to individuals and businesses. Borrowers can also work with green banks, or financial institutions that focus on financing driven by the mission to fight climate change.

The U.S. government also offers loan programs that businesses can leverage to fund green projects. For example, the Green Lender Initiative was established to add more climate lenders to the Small Business Administration (SBA) loan programs.

Both individuals and businesses can become green loan borrowers. Qualification requirements for a green loan will depend on the lender or loan program and the details of the project.

Green loans offer borrowers a way to demonstrate their commitment to green initiatives, such as sustainable practices or reducing carbon emissions.

For lenders, green investing supports projects that have a positive environmental impact.

Green Loan Principles (GLPs)

The GLPs are a framework that helps lenders and borrowers understand what can be considered a green loan. The four principles are:

Use of Proceeds

The first principle relates to how borrowers can use the loan funds. Borrowers should demonstrate the project to be funded has clear environmental benefits, such as conservation or climate change mitigation.

Process for Project Evaluation and Selection

Under the second GLP, borrowers should communicate the environmental objectives of the green project they wish to have funded. Borrowers are also encouraged to identify and communicate any potential risks and mitigations for negative environmental or social impacts.

Management of Proceeds

Once a green loan is funded, borrowers are expected to track the use of the proceeds and maintain transparency in that process.

Reporting

In accordance with the fourth GLP, borrowers are expected to report on the use of the loan proceeds and the actual impact of their projects' goals. The reported information is typically reviewed annually until the loan is fully drawn.

Examples of Green Loans

The definition of a green project can vary. These are some examples:

Personal Green Loans

Personal green loans can fund projects such as:

  • Eco-friendly home remodeling
  • Residential solar panel installation
  • Purchase of an electric vehicle

Business Green Loans

Businesses may seek green loans for purposes such as:

  • Developing green, LEED-certified buildings
  • Purchasing green tech, such as electric vehicles or alternative energy
  • Restoration of natural habitats

Benefits of Green Loans

What are the benefits of green loans for the stakeholders involved?

For Borrowers

Green loans can help borrowers:

  • Secure funding for environmentally beneficial projects
  • Demonstrate a commitment to ESG principles
  • Meet regulatory targets related to environmental concerns

For Lenders

Offering green loans can help lenders:

  • Build a positive, environmentally friendly reputation
  • Align investing with environmentally focused values
  • Gain access to new markets

For the Environment

Green loans have the potential to fund projects that:

  • Drive energy efficiency
  • Reduce carbon emissions
  • Reduce waste
  • Improve air and water quality
  • Preserve biodiversity

Are There Any Special Requirements to Get a Green Loan?

Borrowers must adhere to the green loan principles (GLPs) to secure a green loan. That includes using the proceeds to fund a green project and meeting specific reporting requirements.

How Is a Green Loan Different From a Traditional Loan?

A traditional loan, such as a business or personal loan, typically has more open-ended guidelines for how the funds may be used. Lenders offer green loans specifically to fund environmentally focused projects.

Is a Green Loan the Same as an ESG Loan?

ESG loans are a broader category than green loans. ESG loans typically do not have limitations on the use of the proceeds. Instead, this type of loan incentivizes borrowers to improve their ESG performance. If borrowers demonstrate improvement on certain ESG metrics, they can potentially reduce the price of the loan.

What Are Green Bonds?

Green bonds and green loans can serve similar purposes, but green bonds tend to be larger and have higher transaction costs. Green loans are executed privately, while green bonds may be executed privately or placed on an exchange.

What Is Greenwashing?

Greenwashing refers to the deceptive practice of promoting a project as green when it is not. A company may be accused of greenwashing if it does not use the proceeds of a green loan to fund an environmentally friendly project or if it does not clearly report on the funded project's environmental impact.

The Bottom Line

Any type of borrower has the opportunity to apply for a green loan, but they must adhere to the GLPs when using the funds.

Green loans can have a positive impact on the environment when used in accordance with the GLPs. If borrowers and lenders do not adhere to green principles, they run the risk of being justifiably accused of greenwashing.

Article Sources
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  1. World Bank Group. "What You Need to Know About Green Loans."

  2. Loan Market Association. "Guidance on Green Loan Principles."

  3. Coalition for Green Capital. "What Is a Green Bank."

  4. U.S. Small Business Administration. "Biden-Harris Administration Opens SBA Loan Programs to New Green Lenders to Help Small Businesses Meet Climate Goals."

  5. International Bar Association. "Green Financing: A Fast-Growing Trend."

  6. Loan Market Association. "Green Loan Principles."

  7. U.S. Green Building Council. "Major Companies Use Green Financing to Build Their LEED Portfolios."

  8. Center for Economic and Policy Research. "Green Versus Sustainable Loans: The Impact on Firms' ESG Performance."