An Introduction to the World of Eco-Friendly Loan Programs
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- Jun 30, 2020 10:58 am GMTJun 30, 2020 12:01 am GMT
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Green loans provide companies and individuals with financing for their environmental initiatives. The term is typically reserved for business-related financing of environmental projects and green upgrades, but the term can be adapted to include individual financing as well.
In most cases, the money provided from green loans is used for sustainable energy projects, such as the construction of hydropower plants, solar power infrastructure, or expanding wind power projects. Although green loans have been primarily used in Europe to fund larger corporate green initiatives, the concept has caught on worldwide.
Green loans are now available for a variety of eco-friendly energy alternatives and green projects for individuals and businesses of all sizes. Take a closer look at what makes a loan “green” and some of the eco-friendly loan programs available for businesses and consumers.
Green Loan Standardization
Green loans are a relatively new financing product. In order to standardize how loans work across borders, three organizations came together to establish and outline some universal standards. The organizations involved were the Asia Pacific Loan Market Association (APLMA), the United Kingdom-based Loan Market Association (LMA), and the Loan Syndications and Trading Association (LSTA) based in the U.S. They formulated and released a list of Green Loan Principles (GLP) that define green lending.
The clear and detailed guidelines are meant to help lenders, investors, and companies understand what characterizes a Green Loan. The four principal GLP components are:
1. Use of Proceeds
Projects funded using the proceeds from a green loan should clearly provide environmental benefits. The applicant can also use the funds for supporting expenditures, such as research and development, as long as the company can document how the use is benefiting the environment.
Applying for a green loan requires extra work. The borrower has to detail in a written report how the company plans to use the funding and what benefit it will have on the environment. According to the GLP, some of the qualifying areas a business can refer to targeting include, the depletion of natural resources, air, water and soil pollution, and climate change.
2. Process for Project Evaluation and Selection
Besides reporting how a borrower will use the loan proceeds in ways that reduce the company’s impact on the environment, the business will also have to explain its environmental strategy and why it chose to fund it. They’ll need to detail how they discovered the company’s impact on the ecosystem and the company’s environmental objectives to correct the issue.
3. Management of Proceeds
According to the GLP, green loan funding should be managed in a way that maintains transparency. The funds should be deposited to a dedicated account and managed appropriately to avoid intermingling of the funds with other non-environmentally related expenses.
The Green Loan Principles suggest that borrowers take the necessary steps to promote integrity on what the funds are used for. Companies should produce and maintain readily available reports outlining the green projects, how the proceeds were allocated, and if possible, the impact of the funding on the projects. The reports should be renewed annually until the funding is fully drawn.
U.S. Green Loans for Businesses
As the popularity of green loan programs grow and spread worldwide, the U.S. has adopted its own eco-financing programs that help small and large businesses nationwide fund their sustainable projects. The green loans benefit the companies seeking financing, the environment, and the community at large. The programs include:
SBA 504 Loan Program
The U.S. Small Business Administration (SBA) has made allowances for small businesses looking to finance greener initiatives through its 504 Loan Program. The stipulations instruct lenders and banks to work with loan applicants interested in greener initiatives who meet certain conditions. Among the recommendations, the SBA advises that lenders consider green loans when:
The project the small business wishes to borrow for reduces the company’s energy consumption by 10%.
The borrower will use sustainable designs that reduce the company’s carbon footprint and greenhouse gas emissions, applying principles from the Leadership in Energy and Environmental Design (LEED).
A low-impact design using renewable energy sources that minimizes environmental impact.
Upgrading of facilities, equipment, or processes using renewable energy sources for production.
Micropower projects for the small-scale production of energy for individual buildings or communities.
Are renewable fuel producers, such as biodiesel or ethanol producers.
Title 17 Innovative Energy Loan Guarantee Program
The Department of Energy (DOE) has a Loan Programs Office (LPO) to finance large-scale alternative efficient energy and renewable energy projects. The program has awarded $1.69 billion in loans to four U.S. commercial-scale wind projects in New Hampshire, Maine, Hawaii, and Oregon, in the last 10 years. The Loans Program Office has $4.5 billion available to support innovative energy projects that are “catalytic, replicable, and market-ready.”
Besides the SBA-backed 504 loan program and the DOE’s Title 17 Innovative Energy Loan Guarantee Program, private lenders are also providing green loans for businesses. Because private loans are for-profit, the interest rates may be much higher. It may be best to turn to federal or state programs that provide loans with better terms or tax credits, before applying for a private loan.
Business Tax Credits for Green Initiatives
Besides the federally funded green loan programs, small businesses and corporations can take advantage of green tax breaks from the Internal Revenue Service (IRS). Among the most popular, businesses may qualify for the Solar Investment Tax Credit. The original program provided a 30% tax credit to companies upgrading to solar power, but the program was designated for only a certain amount of time. Congress extended the program in 2015, although it will slowly phase out by 2022. The tax credit for commercial and utility-scale businesses that begin construction of solar power projects is:
2019 — 30%
2020 — 26%
2021 — 22%
2022 — 10%
Indirect Tax Credits from Power Purchase Agreements (PPAs)
A green energy power purchase agreement allows a company to purchase power from a specific energy provider. According to the Environmental Protection Agency (EPA), they’re a good solution for non-profit organizations that “cannot take advantage of federal tax credits to purchase their own renewable energy system.” When a non-profit contracts renewable energy through a PPA, the non-profit can take advantage of the savings from tax-credits indirectly — through lower-priced electricity.
Green Loans for Individuals and Households
Besides the green loan programs and tax savings for small businesses and larger corporations, there are a variety of financing options for individuals who want to upgrade their homes by using more sustainable energy sources. One of the most popular ways homeowners turn to cleaner power is by converting their home’s electrical use to solar energy.
Environment America reports that the United States has enough solar power panels installed to power nearly one in every 11 homes in the country, with California, and specifically Los Angeles, leading the country. But solar power systems aren’t cheap, and for most Americans, financing is needed to foot the bill.
Many sustainable energy industries are passing federal incentives on to customers or providing creative solutions, such as leasing solar equipment vs. borrowing to purchase it. In either case, the homeowner has a lower buy-in to a solar power system. Financing is also attractive because it makes financial sense. The money the homeowner will save in utility bills each month can be applied towards their loan payment, reducing the risk of raising a homeowner’s monthly expenses. The electricity bill savings essentially offset the monthly loan payment due.
Besides solar power financing, the Department of Energy (DOE) runs the Tribal Energy Program. The program provides financial help in the form of loans and grants, as well as technical assistance to tribes. The assistance can help applicants develop and install renewable energy resources, such as wind turbines, or other forms of clean energy, on tribal lands.
Eco-Friendly Green Loans — Here to Stay or Passing Fancy?
The real question when it comes to green loans is whether this type of loan is a passing trend or gimmick or a signal of the direction our society is heading towards. As more companies adopt sustainability and environmental stewardship as a necessary and beneficial aspect, it’s likely that green loans will grow in demand and become a standard finance offering at every bank and federal agency.
Providing affordable and accessible loans to consumers, small businesses, and corporations is essential to push the country (and society as a whole) towards a more sustainable future. It’s likely that most individuals and companies are willing to adopt new and more efficient technologies that can save businesses and consumers money while reducing the impact on the environment. The main obstacle to adopting new approaches is usually funding.
A recent study found that half of all homeowners in the southern U.S. states are considering solar power. The majority say their reasoning is two-fold — to save money on utilities (96%) and to help the environment (87%). Providing affordable green loan programs that can make cleaner energy more accessible for all is a win-win for everyone involved, as well as the environment.