Green finance: a new trend here to stay?

The recent publicity surrounding COP26 and the UK government’s ambitions for London to become the world’s first net zero financial centre has seen a lens turned on the global financial sector.

It is widely held that “green” finance can lead the way in providing the liquidity necessary to combine economic growth with sustainability and the delivery of net zero.

However, with ambitious environmental, social and governance (ESG) pledges being the flavour of the month and worries of “green washing”, the question remains for businesses whether “green” finance is a temporary fad or a commitment to a new trend that will change the way financial institutions deploy their capital.

While no commonly agreed definition exists, at its grass roots level, “green” finance is used to label the two-way interaction between finance and the environment. The aim is to use investment to mitigate and manage environmental risks, whilst aiding the transition to a sustainable, low carbon global economy.

These aims are achieved via a broad range of sustainable finance products, including green loans and sustainability linked bonds, which can, for example, allow for loans purposed for specific green projects, as well as more nuanced positions whereby the pricing of a loan is based on a borrower’s ESG and sustainability achievements, with it benefitting from favourable interest rates if it achieves its sustainability targets (and suffering from a corresponding higher rate if it fails).

Although COP26 has shone a spotlight on the industry, there has for some time been a growing focus in financial markets on climate change mitigation and adaptation. Green and sustainability linked loans originated back in 2014 and since then have seen a fivefold increase in issuance. The EMEA region has traditionally led the way on this, however volumes are rapidly rising in APAC and AMER, proving this is a truly global market.

With over $130 trillion dollars (or 40% of the world’s financial assets) now committed by financial institutions to align with the climate goals of the Paris Agreement, it is expected “green” finance products will soon become more standardised as the market, driven by increased consumer demand, settles on an agreed framework of requisite principles for “green” finance.

In its role as president of the G7 and host of COP26, the UK is a strong advocate for international standards for sustainability reporting and is leading the way in driving forward the “green” finance agenda. Not only through government investment, on items such as green bonds for clean energy projects, but also in setting a road map for the development of a “green” finance driven economy.

This will see a three-stage process whereby: (i) decision-useful information on sustainability will be made available to financial market decision-makers; (ii) this information will be mainstreamed into business and financial decisions; and (iii) financial flows across the economy will be shifted to align with a net zero, sustainable economy.

As such, businesses seeking and utilising “green” finance will increasingly be required to place environmental sustainability at the heart of their strategy and update their reporting procedures to be able to readily evidence and substantiate the impact of developments and projects to which “green” finance proceeds have been allocated.

A recent example of this is the sustainability-linked £200m revolving credit facility granted to the housebuilder, Hill Group, from a group of UK bank lenders, whereby the borrower will benefit from a lower interest rate as they meet certain sustainability criteria, including operational carbon reduction and biodiversity net gain.

(BN COMMENT: sources  https://www.developmentfinancetoday.co.uk/article-desc-8887_Hill%20secures%20%C2%A3220m%20sustainability-linked%20loan%20from%20Lloyds,%20NatWest,%20HSBC%20and%20Santander and  https://www.insidermedia.com/news/south-east/the-hill-group-completes-220m-ssl-deal).

The alignment of increased consumer demand with the political focus on incentivising the transition to a low carbon global economy and the development by financial institutions of novel and standardised suites of “green” lending products, will likely see “green” finance become a trend that is here to stay, long after the politicians have departed from Glasgow.

To start preparing your business, the UK government road map can be found here.