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Understanding Green Loans: Financing for Eco-Friendly Projects

Borrowers can use green loans to fund environmentally beneficial projects

By

Carrie Pallardy

Updated November 19, 2025

Fact checked by

Maddy Simpson

Father and child in front of home — Halfpoint Images/Getty Images

Key Takeaways

Green loans adhere to Green Loan Principles (GLPs) for environmentally beneficial projects.
Individuals and businesses can use green loans for projects like solar panels or green buildings.
Green loans align with ESG strategies and help demonstrate sustainable commitments.
Financial institutions, including green banks and some government programs, offer green loans.Green loans are distinct from traditional loans, focusing specifically on environmental impacts.

What Is a Green Loan?

A green loan is financing specifically dedicated to projects that benefit the environment. It’s available to both individuals and businesses. Guided by the green loan principles (GLPs), these loans ensure the money is used for verified eco-friendly purposes. Common examples include installing solar panels, upgrading to energy-efficient systems, or constructing environmentally sustainable buildings.

Understanding the Mechanics of Green Loans

Green loans are intended to finance or refinance environmentally focused projects, also referred to as green projects. Green loans can be any type of loan instrument, such as a term loan or revolving credit facility, that adheres to the GLPs.

A variety of financial institutions, including banks and credit unions, offer green loans to individuals and businesses. Borrowers can also work with green banks, or financial institutions that focus on financing driven by the mission to fight climate change.

The U.S. government also offers loan programs that businesses can leverage to fund green projects. For example, the Green Lender Initiative was established to add more climate lenders to the Small Business Administration (SBA) loan programs.

Both individuals and businesses can become green loan borrowers. Qualification requirements for a green loan will depend on the lender or loan program and the details of the project.

Green loans offer borrowers a way to demonstrate their commitment to green initiatives, such as sustainable practices or reducing carbon emissions.

For lenders, green investing supports projects that have a positive environmental impact.

Essential Green Loan Principles (GLPs)

The GLPs are a framework that helps lenders and borrowers understand what can be considered a green loan. The four principles are:

Use of Proceeds

The first principle relates to how borrowers can use the loan funds. Borrowers should demonstrate the project to be funded has clear environmental benefits, such as conservation or climate change mitigation.

Process for Project Evaluation and Selection

Under the second GLP, borrowers should communicate the environmental objectives of the green project they wish to have funded. Borrowers are also encouraged to identify and communicate any potential risks and mitigations for negative environmental or social impacts.

Management of Proceeds

Once a green loan is funded, borrowers are expected to track the use of the proceeds and maintain transparency in that process.

Reporting

In accordance with the fourth GLP, borrowers are expected to report on the use of the loan proceeds and the actual impact of their projects' goals. The reported information is typically reviewed annually until the loan is fully drawn.

Real-World Examples of Green Loans

The definition of a green project can vary. These are some examples:

Personal Green Loans

Personal green loans can fund projects such as:

Eco-friendly home remodeling
Residential solar panel installation
Purchase of an electric vehicle

Business Green Loans

Businesses may seek green loans for purposes such as:

Developing green, LEED-certified buildings
Purchasing green tech, such as electric vehicles or alternative energy
Restoration of natural habitats

Advantages of Choosing Green Loans

What are the benefits of green loans for the stakeholders involved?

For Borrowers

Green loans can help borrowers:

Secure funding for environmentally beneficial projects
Demonstrate a commitment to ESG principles
Meet regulatory targets related to environmental concerns

For Lenders

Offering green loans can help lenders:

Build a positive, environmentally friendly reputation
Align investing with environmentally focused values
Gain access to new markets

For the Environment

Green loans have the potential to fund projects that:

Drive energy efficiency
Reduce carbon emissions
Reduce waste
Improve air and water quality
Preserve biodiversity

Are There Any Special Requirements to Get a Green Loan?

Borrowers must adhere to the green loan principles (GLPs) to secure a green loan. That includes using the proceeds to fund a green project and meeting specific reporting requirements.

How Is a Green Loan Different From a Traditional Loan?

A traditional loan, such as a business or personal loan, typically has more open-ended guidelines for how the funds may be used. Lenders offer green loans specifically to fund environmentally focused projects.

Is a Green Loan the Same as an ESG Loan?

ESG loans are a broader category than green loans. ESG loans typically do not have limitations on the use of the proceeds. Instead, this type of loan incentivizes borrowers to improve their ESG performance. If borrowers demonstrate improvement on certain ESG metrics, they can potentially reduce the price of the loan.

What Are Green Bonds?

Green bonds and green loans can serve similar purposes, but green bonds tend to be larger and have higher transaction costs. Green loans are executed privately, while green bonds may be executed privately or placed on an exchange.

What Is Greenwashing?

Greenwashing refers to the deceptive practice of promoting a project as green when it is not. A company may be accused of greenwashing if it does not use the proceeds of a green loan to fund an environmentally friendly project or if it does not clearly report on the funded project's environmental impact.

The Bottom Line

Anyone can apply for a green loan, as long as they use the funds in line with the GLPs. When applied properly, these loans can meaningfully support environmentally beneficial projects. But if borrowers or lenders don't follow the GLPs, they risk accusations of greenwashing. This can damage their credibility and undermine the loan’s intended purpose.

Article Sources

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World Bank Group. "What You Need to Know About Green Loans."
Loan Market Association. "Guidance on Green Loan Principles."
Coalition for Green Capital. "What Is a Green Bank."
U.S. Small Business Administration. "Biden-Harris Administration Opens SBA Loan Programs to New Green Lenders to Help Small Businesses Meet Climate Goals."
International Bar Association. "Green Financing: A Fast-Growing Trend."
Loan Market Association. "Green Loan Principles."
U.S. Green Building Council. "Major Companies Use Green Financing to Build Their LEED Portfolios."
Center for Economic and Policy Research. "Green Versus Sustainable Loans: The Impact on Firms' ESG Performance."