The Green Loan Principles (GLPs) are a set of voluntary and recommended guidelines that establish a framework for loan instruments exclusively designated to finance or re-finance “Green Projects.” GLPs’ defining legal characteristic is the strict application of its proceeds for environmentally beneficial purposes. The GLPs are structured around four core components, which serve as foundational requirements for a loan to be classified as “green”.
The first requirement is through showing use of proceeds, whereby loan funds must demonstrably be allocated to projects yielding clear environmental benefits. The second requirement is the process for project evaluation and selection whereby borrowers bear the obligation to transparently articulate their environmental sustainability objectives to lenders. This includes justifying how selected projects align with eligible green categories and identifying associated environmental and social risks. The third requirement is management of proceeds, which seek to ensure integrity and prevent commingling of the funds; green loan proceeds must be subjected to a robust, transparent tracking mechanism. Finally, reporting is required, whereby borrowers are contractually expected to furnish regular reports to lenders detailing the application of proceeds. Where feasible, reporting should also include quantifiable environmental impact metrics of the financed projects.
The GLPs were developed to foster the growth and maintain the integrity of the green loan market. They provide a standardized framework for financial institutions to identify, assess, and finance environmentally beneficial projects. This standardization is critical as it provides a clear criterion for what legitimately constitutes a “green” use of funds. As previously mentioned, GLPs remain voluntary guidelines, that being in Kenya too. There is currently no specific national legislation that mandates adherence to the GLPs or directly regulates them.
That notwithstanding, their pervasive adoption by leading financial institutions globally, including those with a significant presence in Kenya, effectively establishes them as de facto market standards. While Kenyan regulators, such as the Central Bank of Kenya (CBK) and Capital Markets Authority (CMA), do not directly enforce the GLPs, they actively promote broader sustainable finance practices. This regulatory encouragement implicitly supports adherence to principles like the GLPs to ensure market credibility and align with evolving global best practices, notably through initiatives like the draft Kenya Green Finance Taxonomy(KGFT), which aims to provide a standardized classification system for environmentally sustainable economic activities.
The application of Green Loan Principles (GLPs), while instrumental in advancing sustainable finance, presents some shortcomings that warrant consideration within the legal and market framework, such as the definitional ambiguity surrounding what precisely constitutes “green.” Despite indicative categories provided by GLPs, the absence of a universally binding or nationally legislated green taxonomy leads to fluid interpretations across diverse industries and jurisdictions, thereby posing a significant challenge for stringent classification and consistent application. All in all, the GLPs serve as a step in the right direction in bolstering preservation and conservation of the earth, providing an avenue for environmental beneficial projects, and as such, advancing sustainable finance.