The transition to a sustainable economy requires not only innovation and decisiveness, but also smart financing solutions. Two instruments that are playing an increasingly important role in this regard are green bonds and sustainability-linked loans (SLLs). In this blog, we explain what these forms of financing entail, what the legal considerations are and how we support our clients in this regard.
What are green bonds?
Green bonds are bonds whose proceeds are used exclusively for sustainable projects. Examples include the construction of a wind farm, making real estate more sustainable or investing in clean public transport. The issuer – often a company, bank or government – contractually commits to spending the money raised only on these green projects.
A practical example: A Dutch developer issues a green bond to finance the construction of a new solar park. Investors, including local entrepreneurs and even private individuals, can thus be sure that their money is contributing to the (local) energy transition. Each year, the developer reports on progress and environmental gains, such as the amount of green electricity generated.
What are sustainability-linked loans (SLLs)?
SLLs are loans in which the interest rate or other conditions are linked to the borrower’s achievement of sustainability targets. What makes them special is that the borrowed money can be spent freely, but the borrower commits to achieving specific ESG targets, such as reducing CO2 emissions or increasing the proportion of women in management.
Real-life example: An international manufacturing company takes out an SLL with a bank. The loan agreement stipulates that the interest rate will fall by 0.2% if the company manages to reduce its CO2 emissions by 15% within three years. If the target is not achieved, the interest rate will increase. This creates a financial incentive to do business sustainably.
Legal considerations
With both forms of financing, it is essential to set out the agreements clearly and in a verifiable manner. This includes:
- Clear definitions of ‘green’ projects or KPIs;
- Independent assessment and reporting; Consequences of not achieving the targets;
- Transparency towards investors and regulators.
Our ESG team
The lawyers in our ESG team are happy to advise on drafting and assessing these contracts, structuring the financing and complying with the increasingly stringent regulations in the field of sustainability.
Our ESG project team combines in-depth knowledge of financing law with up-to-date insights into sustainability legislation. We advise on setting up green bonds and SLLs, from the initial exploration to closing and post-closing reporting.
Want to know more?
Would you like to know what green bonds or SLLs can do for your organisation, or do you have questions about the legal aspects? Feel free to contact our ESG project team. We are happy to work with you to find sustainable financing solutions that work in practice.
