Sustainability-linked Loans In Hungary

• Published date: 19 June 2023
• Subject Matter: Finance and Banking, Environment, Energy and Natural Resources, Financial Services, Energy Law, Environmental Law, Renewables, Climate Change
• Law Firm: Schoenherr Attorneys at Law
• Author: Mr Gergely Szalóki and Bodó B'lint

Introduction

Sustainability is crucial for ensuring the long-term wellbeing of the planet and future generations. It encompasses responsible practices that preserve natural resources, mitigate climate change, and promote social and economic balance, ultimately creating a harmonious
and sustainable world for all.

Financing plays a pivotal role in upholding sustainability by providing the necessary resources to implement and support environmentally friendly practices and initiatives. Accessible and targeted financing enables businesses, governments and organisations to adopt sustainable practices, develop innovative solutions and mitigate the negative impact of human activities on the environment.Moreover, financing also facilitates research and development efforts, promotes education and awareness campaigns, and fosters collaboration between stakeholders, all of which are crucial for achieving long-term sustainability goals.

Sustainable financing

Green loans

A "green loan" is specifically designed to finance projects or activities that have positive environmental impacts. It provides funding for projects focused on:

• renewable energy;
• energy efficiency;
• pollution prevention;
• sustainable transport; or
• other environmentally friendly initiatives.

The borrower is typically required to use the loan proceeds exclusively for eligible green projects and may need to provide periodic reporting on the environmental impact of the funded activities.

Social loans

A "social loan" is geared towards financing projects or activities that generate positive social outcomes. It aims to address social issues such as:

• poverty alleviation;
• healthcare access;
• affordable housing;
• education; or
• community development.

The borrower utilises the loan funds to support projects that have a demonstrable social impact. They may be required to report on the progress and effectiveness of their social initiatives.

Sustainability-linked loan

A "sustainability-linked loan", on the other hand, is a broader financing instrument that incentivises borrowers to achieve predetermined sustainability performance targets. Unlike green loans and social loans, the use of proceeds is not restricted to specific green or social projects. Instead, the borrower's interest rate or other loan terms are linked to the achievement of pre-agreed sustainability performance targets.

As a result, the proceeds may be used to finance any kind of business activities that the borrower is pursuing, regardless of whether...