November 30, 2020

Green and Sustainability Linked Loans in a Mining Context


The introduction of a sustainable or "green" element into a loan agreement is becoming a hot topic across all industries, including mining, following their popularity in the bond market. These types of loan products can bring significant benefits to borrowers and lenders alike, such as reputation enhancement and improved credibility, better and stronger values-based relationships with stakeholders and potential access to new markets.  Many investors now have sustainability requirements to be met in their lending portfolios.  Equally, many borrowers have internal environmental, social and governance ("ESG") targets to fulfil, or are being pressured to improve their ESG performance by investors. 

This note looks at 'Green Loans' and 'Sustainability Linked Loans' ("SLL") from a mining perspective. 

Regulatory framework

In the US and Europe there is currently no formal regulatory framework to govern these types of loans and standards are ad-hoc. This means there is a degree of uncertainty as to whether loans qualify as green or sustainability linked.  Here we use the term "Green Loans" to refer to where loan proceeds are committed to specific environmental or climate projects. "Sustainability Linked Loans" are often more general in application but the pricing is linked to the borrower's performance against certain sustainable performance indicators. 

Typically, lenders and borrowers are guided by the Green Loan Principles ("GLP") and the Sustainability Linked Loan Principles ("SLLP"), both developed and published jointly by the Loan Syndication & Trading Association, Loan Market Association and the Asia Pacific Loan Market Association. 

The EU's Taxonomy

Separately, the European Union has made good progress in putting into place a wide-ranging series of measures relating to sustainable finance.  This includes increased disclosure obligations and changes to benchmark-related and other financial services legislation.  However, the initiative also includes a "Taxonomy" which entered into force in July 2020 and which is intended (in the EU at least) to emerge as a de facto standard on qualifying "green" activities. The Taxonomy establishes an EU classification system for "environmentally sustainable economic activities".  Pressure may lead to the Taxonomy being used beyond the EU borders.  A notable initial use of the Taxonomy is that green bonds issued under the EU's "Green Bond Standard" are required to comply with the Taxonomy.  The EU has not promoted an equivalent standard relating to Green Loans at this stage.   

What is green?

In the meantime, a notable risk caused by lack of certainty in respect of what is "green" or "sustainable" is that lenders or borrowers may promote a loan as being used for green or sustainable purposes, when in reality the underlying project or corporate activity may have insufficient or dubious credentials.

The term 'greenwashing' is a word we are hearing more commonly in the market as the popularity and obvious benefits of making a loan 'green' have pushed some parties into holding out their project or business as having green credentials, where in fact these claims are misleading, inaccurate or over-exaggerated.

How might this work in the context of mining?

The mining industry is potentially in a strong position when it comes to "Green Loans" or SLL, because it is a sector in which a range of environmental and social improvements can be made with the use of green or sustainable loan proceeds, be that for a specific project or for a more general improvement in corporate performance. The mining sector is also a key producer of a swathe of strategic materials which are essential for the development of low-carbon technologies which in turn assist governments and the private sector in achieving a more low carbon future. Mining companies that are looking to carry out these activities in a more sustainable way are likely to be well placed to tap into Green Loans and SLLs. 

For example, the processes engaged in the mining sector require the use of significant amounts of energy.  There are therefore a number of opportunities to use "green" loan proceeds to implement new renewable energy and energy efficiency strategies.  On the  sustainability side, there are opportunities for improved ESG performance of mining companies that are likely to be attractive to SLL-based lending. Many mining companies have committed to such improvements by signing up to standards such as the Mining Principles published by the International Council on Mining and Metals. 

Examples of SSL in use in the mining sector include Rusal’s recent USD1bn sustainability-linked syndicated pre-export finance facility, and Polymetal’s sustainability-linked loans signed in 2018 with ING and 2019 with Société Générale and Polymetal's Green Loan provided by Société Générale in November 2020.

Green Loan Principles (GLPs)

There are four core criteria that need to be met in order for a loan to be categorized as a 'Green Loan' under the GLPs. These are:

  1. the utilisation of loan proceeds has to be for green projects. Indicative categories of eligibility of 'Green Loan Products' are listed in Appendix 1 of the GLP, which lists, for example, renewable energy, but also novel water solutions, circular economy adapted products, air pollution prevention and even projects that significantly improve the efficiency of utilisation of fossil fuels are potentially eligible;
  2. project evaluation and selection (ensuring the project is consistent with the sustainability strategy of the borrower);
  3. management of proceeds; and
  4. reporting (using qualitative and quantitative measures).

It is possible to have a green tranche of a loan, which is specifically to be used for a green project and other elements of a loan being used for non-qualifying aspects.

A ‘green breach’ would occur where, for example, the use of proceeds is not for green projects, or are no longer being used for green projects during the term of the loan. This would normally trigger an event of default under the facility agreement, but effectively the loan is no longer considered to be a 'Green Loan' from the point of breach. As such, Green Loans under the GLPs are best suited to specific projects which will give rise to a quantifiable environmental improvement.  An example of this could be a mining activity that reduced water use in a measureable way relative to business as usual, or a novel means of extraction that has a reduced environmental impact.  Use of the loan proceeds would need to be able to be traced, and the project's environmental objectives will need to be monitored and verified. Third party review is encouraged.

Sustainability Linked Loan Principles (SLLP)

The SLLPs do not require a specific use of proceeds, rather the essence is to have a loan product which includes sustainability targets (Sustainability Performance Targets ("SPTs")). These would be agreed between the borrower and lender at the outset and could be contained within a schedule of covenants/targets or included in the undertakings to a loan agreement. Including the SPTs is intended to incentivise the borrower to increase its efforts to improve its sustainability profile as the borrower will benefit from reductions in pricing if the SPTs are met.

SLLs are sometimes referred to as ESG- linked loans or Sustainable Development Goals ("SDG")- linked loans. This is because the SPTs used to identify the loan are often tied to one or more ESG considerations which may in turn look to the SDGs. Seventeen SDGs were adopted by all United Nations Member States in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.  They have also been "adopted" by a number of private sector companies who often demonstrate how they are committed to achieving certain SDGs in their ESG reports.

It is key that the performance metrics chosen in SLLs are meaningful and ambitious, showing that the borrower will expend significant effort to achieve them.

An SLL would typically be more appropriate for a mining company seeking finance for its general corporate purposes, but would require that company to have committed to overall improvements in its sustainability. 

Measuring and policing the targets

In the case of a 'Green Loan', the proceeds for the loan would often be deposited in a specified account and the borrower would only be permitted to withdraw funds from that account with certain certifications from external consultants verifying that the project met an agreed standard.

Both types of loan (ie. Green Loans and SLLs) would contain provisions that require borrowers to meet specific milestones, regular ESG and environmental reporting third party verifications or self-certifications of environmental requirements or the SPT.

Having a recognised external provider monitor SPTs provides more kudos, trust and confidence in the borrower's behaviour and as a result there is now a flourishing industry of service providers in this area. In the green bond sector, which is more mature than the green loan arena, the majority of green bonds are issued with a third party "green" opinion.

Mining companies are already accustomed to engaging with principles such as the Equator Principles.  They are therefore used to increased transparency and disclosure, and do not necessarily see it as a burden.  This may make green and sustainable finance more attractive to mining companies than corporates that are less familiar with transparency and external scrutiny.

Tightening standards

It is worth noting that, with time, environmental and social standards applicable to green and sustainable finance are likely to tighten.  For example, the EU's Taxonomy is more demanding in terms of environmental and social performance than many are accustomed to.  The Taxonomy sets performance thresholds (referred to as ‘technical screening criteria’) for economic activities which make a substantive contribution to one of six environmental objectives (climate change mitigation; climate change adaptation; sustainable and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems).  Further, an activity will not be environmentally sustainable unless it also does "no significant harm" to the other five objectives.  It must also meet minimum "social" safeguards (e.g., the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights). Much of the screening criteria remains in development. 

As such, if the Taxonomy was integrated with green loan frameworks, then a mining activity seeking to be categorised as "green" because of, for example, improved emissions, must not, at the same time, do significant harm to one of the other objectives (for example, if the activity gave rise to a significant increase in water use, then it may not satisfy the "no significant harm to sustainable and protection of water" requirement). 


The mining industry does have to make significant progress in order to change perceptions about its impact on the environment, as well as social impacts. However, it is worth noting that the sector is playing an important role in the transition to a lower-carbon economy.  As mines become more sustainable, their products will contribute to the development of a sustainable future for us all.  Utilising Green Loans or SLL will help this progress.

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