In response to growing concerns over climate change and global warming, companies are increasingly looking at ways to minimise and mitigate their impact on the environment.

Companies are now identifying environmental, social, or governance (ESG) risks associated with their business activities, such as the use of fossil fuels or other polluting goods and services within their supply chains.

By better understanding those risks and their potential reputational, credit, and regulatory impacts, companies can play an active role in creating sustainable trade and encouraging sustainable practices, and can assist in the global implementation of sustainability policies and standards.

Green loan

As the name suggests, a green loan is a loan that is taken out to finance green projects.

The term ‘green loan’ was first introduced in March 2018, when the UK-based Loan Market Association (LMA) and several other industry bodies published a report known as ‘Green Loan Principles’.

In the report, as green loan is defined as follows: “The fundamental determinant of a green loan is the utilisation of the loan proceeds for Green Projects (including other related and supporting expenditures, including R&D), which should be appropriately described in the finance documents and, if applicable, marketing materials.

“All designated Green Projects should provide clear environmental benefits, which will be assessed, and where feasible, quantified, measured and reported by the borrower.”

As such, green projects could refer to those in sectors like renewable energy, waste reduction, and clean transportation, and can also cover related and supporting expenditures like research and development (R&D).

At present, one of the biggest challenges for the sustainable financing industry is its lack of common standards, and that’s why the LMA and its partner organisations published the ‘Green Loan Principles’, which attempts to set out market standards and guidelines.

Other industry bodies, such as the International Chamber of Commerce (ICC), are also currently in the process of introducing a draft framework of globally accepted standards and definitions for sustainable trade and trade finance, which would also cover green loans.

Within the trade finance industry, major banks are already issuing green loans, and their numbers continue to grow.

This year, for example, UKEF announced a £430 million green loan –  first-ever government-backed green transition loan to engineering and consultancy firm Wood to seize new clean growth export opportunitiesfirst.

Sustainability-linked loan

In 2019, the LMA and several partner organisations published the ‘Sustainability Linked Loans Principles’, as a follow-up to the ‘Green Loan Principles’ mentioned above.

According to the 2019 report, sustainability-linked loans are defined as “loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) which incentivise the borrower’s achievement of predetermined sustainability performance objectives”.

In contrast to green loans, a sustainability-linked loan can be issued for non-green purposes, such as the financing of general business operations.

Specifically, a sustainability-linked loan could link conditions such as the term or price of a loan to the borrower’s performance against particular sustainability targets.

As such, these targets are usually negotiated and agreed on by the borrower and the lender for each transaction.

And finally, it should also be noted that a loan can be structured using both green loan and sustainability-linked loan principles simultaneously.

Sustainable supply chain finance

Sustainable supply chain finance refers to financial practices and techniques that incentivise sustainable behaviours among parties to a transaction.

In practice, sustainable finance supply chain finance rewards suppliers for integrating ESG priorities into their supply chain.

Sustainable shipment letter of credit (SSLC)

A sustainable shipment letter of credit (SSLC) is a green financing product that was developed specifically for trade finance.

It was first launched in 2014 by the International Finance Corporation (IFC) – which is part of World Bank Group – and the Banking the Banking Environment Initiative (BEI).

The BEI is a group of global banks that aims to promote a more sustainable economic future.

It was convened in 2010 by the Cambridge Institute for Sustainability Leadership in the UK, with the shared goal of expanding the global trade of sustainably-sourced commodities.

Like a regular letter of credit, an SSLC allows for discounted financing for trade transactions, but unlike a regular letter of credit, it is only issued based on specific sustainability criteria.

To qualify for an SSLC, a supplier must provide evidence that their product meets internationally-recognised sustainability criteria, and that is usually done in the form of a sustainability stamp that is specific to the supplier’s industry.

For example, the first use of an SSLC was for a shipping of palm oil backed by a Roundtable on Sustainable Palm Oil (RSPO) certificate, which guarantees that no forests or communities were harmed during the extraction of the oil.