Green and sustainable finance – Here to stay?
Twelve months ago, I wrote an article titled “Green Bonds are on the Way” following the announcement by the Chancellor of the Exchequer to issue its first sovereign green bonds. Over the last year there has been significant commentary about the future green economy and the role the finance sector has to play in helping to achieve enhanced sustainability and ultimately achieve net zero.
Finance that supports sustainability has been around for some time, but it is now unquestionably and significantly more prominent. This has been due in part to Government appetite and legislation, changing behaviours of clients and the emergence of green challenger banks and funders, but also because sustainability now (quite rightly and to my relief) has a central role in many people’s day-to-day lives.
Sustainability-linked finance has become increasingly common in the last twelve months. Put simply, this means lending on the principle that borrowing costs reduced if the borrower achieves sustainability-linked targets. Some also come with penalties if those targets are not met. At Clarke Willmott we have recently completed our first of these and are working on a number of others.
The emergence of environmental, social and governance (ESG) in the financial sector was stepped up earlier this year in the EU, with mandatory disclosure obligations required through Sustainable Finance Disclosure Regulation (SFDR) for firms operating in Europe. Whilst the regulation does not apply to the UK direct, many lenders have EU bases or headquarters, and the UK has also announced its own environmental disclosure standards. Some firms might consider this as an extension of their existing corporate social responsibility strategy, but with increasing regulation it is much more. The ESG KPIs on transactions we are working on are definitely not a paper exercise; they are precise, measurable and leave no room for interpretation.
Increasingly customers, whether private or public sector, are asking more questions about their suppliers’ commitment to sustainability. My own experience in working on tenders for legal services shows me that a few short years ago, sustainability was barely mentioned. These days, the vast majority require details about sustainability vision and values, policy, objectives and embedded programmes. Some require impact reports with supporting evidence. There is no doubt that this trend is here to stay, and it is likely that in the future, environmental considerations will carry greater weight.
The rise of green challenger banks and lenders such as Triodos Bank (established in the Netherlands in 1980 with a starting capital of just 540,000 euros) shows how times have changed. Today, Triodos operates in five European countries and now lends £8.2bn to projects across Europe, demonstrating appetite in ethical lending. Legacy banks are also reacting; for example, traditional stalwart Coutts recently achieved B-Corp status, which will have required significant investment and work – it is no rubber-stamping process. For all lenders, notwithstanding ESG requirements, the reputational upside of having a clear green and sustainable strategy can demonstrate that the business is ethical, well-lead and innovative. The upside for lenders and borrowers is clear; if a borrower is doing this well, then it is likely that they will be doing other things well too.
Just as the green revolution continues to be more prevalent in our own daily lives, green and sustainable finance will continue to gain prominence as an important part of that revolution. Increasing regulation and external certification such as B-Corp and ISO will be required to provide confidence to all. As new technologies emerge and those in existence are refined, the finance products available are likely to become more complex and tailored to suit specific sectors and asset classes. That can only be good news.
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