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The new Green Loan Rider14 May 2025

The LMA published its Green Loan Rider (the “Rider”) in November last year (alongside a term sheet for Green Loans).

Background

As a reminder, Green Loans are different from Sustainability-Linked Loans (SSLs) in that Green Loans are intended for a specific project, and must be used for that project, whereas the SSLs are linked to achieving improved sustainability related performance levels of the Borrower, often at group level, and do not require a project-specific use of proceeds (but do require monitoring of specific KPIs).

The primary requirement for a Green Loan is its utilisation for “Green Projects”. So the “use of proceeds” is the test requiring particular attention.

The LMA Green Loan Principles set out a non-comprehensive list of what may constitute “Green Projects”. These include energy efficiency, pollution prevention and control (including the reduction of air emissions), terrestrial and aquatic biodiversity conservation (including the protection of coastal, marine and watershed environments), clean transportation (such as electric, hybrid, public, rail, non-motorised, multi-modal transportation, infrastructure for clean energy vehicles and reduction of harmful emissions) and green technologies (such as carbon extraction technologies and energy storage systems).

Clearly, for the shipping space this means, improved technologies for the main propulsion, add-ons like wind generated propulsion or the treatment of hulls are all capable of being considered for green loans, to name but a few examples.

It is important to note that according to the Green Loan Principles, a Green Loan can be combined with other financings, so could be one tranche of a larger facility. It can also be made by way of a revolving facility, although this would require careful monitoring of the use of proceeds.

Apart from the use of proceeds test, there are three more requirements for Green Loans:

  • before the Green Loan is entered into, the identification of the environmental sustainability objective and what category of Green Project this objective fits into, together with an explanation of the process by which any environmental or social risks associated with the project are identified and managed. Both the project and such process may well be embedded in the Borrower’s existing environmental sustainability strategy and the Borrower should give the full context of its strategy, the criteria applied in selecting the project and how it can be benchmarked against official or market-based taxonomies;
  • the next requirement is the management of proceeds. Meaning, the proceeds should be credited to a particular account or otherwise be able to be tracked, and the Borrower able to account for their use. In the context of ship financing, where the Green Project may for example consist of a technologically advanced main engine, the funds will typically be paid directly to the yard at delivery and therefore this test is relatively straightforward to deal with; and
  • the final requirement is the reporting on the use of proceeds. Where the loan has not been fully disbursed, e.g. where various tranches are available, the reporting must be continued until the loan is fully disbursed or in the case of an RCF, until maturity. Again, in the context of a ship financing transaction where the Green Loan consists in the funding of a technologically advanced ship and is made upon delivery, this requirement will be of a short duration.

Whilst not strictly speaking a Green Loan requirement, there is a strong recommendation by the LMA that the Borrower should appoint an external review provider to assess the alignment of their Green Loan with each of the four above mentioned components. In the shipping space, we have seen classification societies undertake this review and building up teams offering specialist advice for this purpose.

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"The Rider is a drafting guide to cover a term loan scenario."

The LMA Green Loan Rider

The Rider is a drafting guide to cover a term loan scenario. It does not extend to revolving credit facilities, even though these can be structured as Green Loans outside the rider. Also, the Rider is designed to cater for different structures, so users will have to think about which options to incorporate or indeed amend.

For example, the Green Loans can be determined by reference to eligibility criteria or to a list of green projects attached as annex, which is useful where there is more than one tranche and not all tranches constitute green loans. In the context of ship financing transactions, where often the entire facility would constitute a green loan, the draft provisions can be much abbreviated.

Some points to note in relation to the Rider:

  • The Agent

It is the Agent that is given the central role of receiving all information for passing on to the lenders, including for monitoring use of proceeds. This is not a function allocated to the Green Loan Coordinator. The Agent receives all reports and other relevant information and liaises with the Borrower in ensuring the Green Loan Principles are met.

The relevant provisions include:

  • management of proceeds – clause 3.2 of the Rider requires the Borrower to provide evidence to the Agent to enable the tracking, monitoring and evaluation of the manner in which the proceeds have been applied;
  • reporting by the provision of a Green Loan Report to the Facility Agent – clause 22.8 of the Rider requires an ongoing reporting throughout the lifetime of the Green Loan. Its content is to be agreed between the parties upfront and can also include details of any changes to existing policies and procedures and expected or achieved environmental and social impacts of the relevant green project and can also incorporate a periodic verification report by the external review provider. In the context of the financing of a one-off payment for the purchase of a (suitably enhanced) ship, the reporting in the period falling after the disbursement to the yard can arguably be kept to a minimum; and
  • information – according to clause 22.9 of the Rider this comprises information requested by a Lender through the Agent and notifications to the Agent of certain events, in particular a declassification event or failure by the Borrower to comply with any Green Loan Provisions.

Interestingly, the Rider accords the Green Loan Coordinator a special treatment. Even though its function essentially ends at signing, given that all reporting is done to and through the Agent, the Green Loan Coordinator is granted an indemnity by the Borrower under the Rider. This presents an odd contrast to how the role of an Arranger is treated, where the relevant LMA provision simply states that the Arranger has no obligations of any kind to any other party under or in connection with any Finance Document. There seems to be a perception that the Green Loan Coordinator needs better protection than the Arranger.

"Crucially, neither the Green Loan project ceasing to fulfil the Green Loan criteria nor a breach by the Borrower of (most) Green Loan provisions will lead to an Event of Default."

  • No Event of Default

Crucially, neither the Green Loan project ceasing to fulfil the Green Loan criteria nor a breach by the Borrower of (most) Green Loan provisions will lead to an Event of Default. The Rider suggests the inclusion of a new clause 25.3 (c) stating that no Event of Default will occur by reason only of the Borrower’s failure to comply with a “Green Loan Provision”.

Instead, the only consequence is a “Declassification Event”. This means, the Green Loan is no longer treated as such and the parties must stop referring to it as such, including in their marketing materials.

This also means that the additional Green Loan representations and undertakings provided for in the Rider, will, if they end up being included in the facility agreement, be less critical for the Borrower.

Having said that, there is an exception: Clause 3.1, the purpose clause dealing with the all-important use of proceeds of the Green Loan, is not included in the definition of “Green Loan Provisions” and is therefore not caught by the exemption in the Events of Defaults clause 25.3 (c). Therefore, a breach of the use of proceeds clause will lead to an Event of Default under the Rider provisions.

"The Rider has the option of making the Borrower's "Green Loan Framework" the benchmark of how the relevant green loan project is selected."

  • Green Loan Framework

The Rider has the option of making the Borrower’s “Green Loan Framework” the benchmark of how the relevant green loan project is selected, with clause 24.7 of the Rider referring to the selection of projects in accordance with, compliance with and no amendments to, the Green Loan Framework.

The Rider does not give much guidance as to the contents of the Green Loan Framework. Instead, it assumes that the Borrower will already have developed a strategy for an improvement of its environmental impact on which the decision for the relevant green project is based. At least in this respect this blurs the lines distinguishing Green Loans from Sustainability Linked Loans a little.

Again, this is an option that may not always be relevant.

In summary, the Rider is a useful tool with plenty of optionality. It is not meant to, and does not, replace the need to negotiate and agree provisions that fit the relevant transaction.

Click here to view the articles in our Maritime Matters: Finance and Beyond series

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