Under The World Bank Group's International Finance Corporation (IFC) terms, green lending is defined as a form of financing that enables borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective.
David O'Mahony, partner, finance and capital markets, Matheson, believes a broader definition may be more helpful, however. He suggests that it can encompass anything from large project financings to construct a wind farm to small loans to consumers to retrofit their homes.
“What lies between the two extremes is lending to corporate borrowers for the purpose of financing or refinancing a particular green project. This is an area that has seen growth in the past number of years, and we would expect this to continue. Green lending has all the hallmarks of traditional lending with the important added requirement that the purpose for which the loan is made will ultimately be beneficial for the environment,” says O’Mahony.
Conor Holland, director, ESG assurance, KPMG in Ireland, sees the benefit in aligning green objectives.
“Green loans contribute to aligning lending and environmental objectives and can be obtained at a discount relative to traditional lending. Borrowers can obtain a cheaper cost of credit, while simultaneously advancing their environmental objectives,” says Holland.
The importance of green lending is underlined by Ireland's pillar bank AIB's determination to convert 70 per cent of all new lending to be green or transition by 2030. AIB defines green lending to fund activities that are low carbon at the time of borrowing, for example wind farms. It also includes transition lending which funds activities that contribute to the transition to a net zero carbon economy, for example hybrid vehicles.
In 2021 at AIB, green and transition lending already soared by 37 per cent to €2 billion.
Future-proofing
Paul Travers, head of energy, climate change and infrastructure at AIB says: “It’s about future-proofing our lending decisions today and doing the right thing at the same time as we all collectively work to reduce our carbon emissions and protect our fragile planet.
"We aim to play a significant role in helping our customers to lower their carbon emissions and to support the Government and the European Union in the delivery of their carbon reduction targets as we collectively tackle the challenge of climate change."
The International Monetary Fund (IMF) has estimated the investment required to finance the transition to a low carbon economy is about €20 billion per annum for Ireland over the next decade, much of which will come from the private sector.
Siobhan Carlin, a banking and finance partner at William Fry, points to the highlights in the recent Intergovernmental Panel on Climate Change (IPCC) report, where climate change is one of the most pressing issues in the world today and the ever-increasing demand for green lending and sustainability-linked loans reflects these concerns.
“By engaging in green lending, financial institutions can positively contribute to environmental and climate related issues while also tapping into an ever-increasing market of potential borrowers and investors. With ESG and sustainability high on the agenda of most board rooms, corporate entities have to be able to demonstrate to their shareholders and investors that ESG and sustainability is being embedded in the business,” she says.
Brian Haugh, corporate finance and sustainability advisor, at BDO in Ireland, points to his company's focus on assisting clients in obtaining green finance. "We advise them through the borrowing process where we see increasingly that lending institutions and funds are dedicating pools of funding specifically to provide finance to environmentally sustainable projects. In order to get these loans, borrowers must demonstrate the sustainability bona fides of their project as well as meeting traditional borrowing metrics such as debt service cover."
Rates
The upsides to green lending is the cost to borrower. As Haugh explains: “In many cases green finance does come with preferential rates. Many banks take their role in our global net zero ambitions seriously and want to support projects that are aligned with this ambition, however, beyond that, ‘green’ projects are often seen as lower risk because the cost savings in energy reductions and carbon tax are somewhat easier to predict than the cash flows of say launching a new product line.
"Another critical factor is the bank's ability to obtain its own funding for these green lending products at lower rates through the issuance of 'green bonds' and through access to European Investment Bank funding for sustainability projects. If they can borrow at a lower rate, they can on-lend to customers at a preferential rate."
Travers supports that view and points out that AIB offers discounted green products to personal and business customers to incentivise them to take action to lower their carbon emissions.
“On the individual side, these include attractively priced green mortgages to support customers seeking to buy energy-efficient homes and green personal loans for reasons such as buying an electric vehicle, upgrading home insulation or installing renewable energy systems.
“While on the corporate side, AIB offers Sustainability Linked Loans (SLLs) to eligible corporate customers. These loans, which are available where the relevant criteria are met, offer firms a reduced rate of interest linked to the achievement of ambitious, pre-determined sustainability targets,” says Travers.
The benefits are obvious for both environmental and reputational impacts for borrowers with O’Mahony pointing to them getting the improved interest rates but also to allow companies to embed ESG policies in their culture.
David O’Shea, senior associate in the banking and finance department at William Fry sees this trend only growing: “It is reported that the demand for sustainability-linked loans surged by 300 percent in 2021.
“As the market for green and sustainable lending grows, we are likely to see a significant uptick in both as well as the development of new, environmentally and socially conscious forms of lending. Already, we have seen the development of products such as social bonds, where the proceeds are applied to social projects or activities that achieve positive social outcomes. As appetite grows for more socially conscious lending, we are likely to see more and more distinct products develop in line with that.”
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