Go Green: Why Green Loans Are More Common Than Ever

As companies around the world move towards the target of Net Zero, sustainability has become something of a buzzword for large corporations and SMEs alike. In today’s climate, the public expects that your business will operate in an environmentally responsible way – and doing so can have huge reputational and commercial benefits.

Green loans and bonds have been supporting companies around the world finance their sustainability drives, and are promising to reshape the world of corporate sustainability.

Charlotte Enright, Renewables Specialist at Anglo Scottish Asset Finance, explores the rules and regulations surrounding green loans and why they have become so lucrative for businesses looking to increase their sustainability.

What is a green loan?

Sometimes referred to as a sustainability loan, a green loan is just one way in which businesses can finance their green initiatives. Green loans must be used for projects that make a positive contribution to the environment, enabling businesses to raise the capital to run these projects.

Green bonds are also sometimes referred to as green loans, and are another viable way for businesses to raise capital for environmentally beneficial projects. In most cases, a green bond is larger than a green loan, has higher transaction costs, and may be listed on an exchange or privately placed.

Both green loans and green bonds are subject to a global set of rules, which dictate how the money must be spent and set out a transparent reporting framework to ensure the money is allocated correctly. The Green Loan Principles (GLP) consists primarily of four key pillars:

Use of proceeds

All designated Green Projects should provide clear environmental benefits, which will be assessed by the borrower.

Process for project evaluation and selection

The borrower should clearly inform the lender about their sustainability objectives, how their project is eligible for a green loan, and provide information on any potential risks associated with the project.

Management of proceeds

The borrower must be transparent with any money raised as a result of the green loan – to maintain transparency and integrity.

Reporting

The borrower should make and keep an up-to-date record of the use of proceeds.

Green bonds have their own set of rules and principles, which can be found here.

Why have green loans become more popular?

The viability and usage of both green bonds and loans has grown significantly in the last decade. Reuters has noted a substantial increase in the total value of green finance – “global borrowing by issuing green bonds and loans, and equity funding through IPOs targeting green projects” – in the last decade.

The total value of the world’s green finance sat at $5.2bn in 2012, and reached $540.6bn by 2022. The value of the UK’s green finance experienced a similar boom within the same period. Between 2012 and 2021, the value of green bonds issued in the UK grew from $1.1bn to $37.4bn.

This growth is fairly unsurprising, given the growing focus on environmentally-friendly operating practices and the expectation of the public that businesses should act sustainably wherever possible. As such, ESG (Environmental, Social, Governance) has become a core concern for businesses in both the public and private sectors.

Sustainability consulting has become a huge growth sector in line with the rising importance of green operations – worth $6.24bn in 2021, the market is expected to be worth $16bn by 2027. Now, businesses outsourcing their sustainability drive is far more common.

How can businesses benefit from a sustainability strategy?

However, while it would be great to believe that corporations are adopting sustainability strategies out of the goodness of their hearts, the fact remains that it’s smart business. By operating sustainably, businesses can streamline their operational efficiency by limiting their material spend and reducing wastage.

One-third of businesses who have introduced a sustainability strategy cited ‘lowering costs’ and ‘improving operational efficiency’ as the primary reason for doing so. Sustainability strategies can also help your business appear more lucrative to potential hires, with People Management stating that 40% of millennials had chosen one company over another based on a green operating plan. Sustainability can even boost staff retention – the same survey found that 70% of millennials were more likely to stay at a company with a robust sustainability plan.

As ever in the corporate world, greenwashing – when companies performatively stress their green credentials while actually failing to benefit the planet – remains a problem. The GLPs have done something to help alleviate this. By forcing loanees to transparently manage the loan’s allocation and impact, the GLPs ensure that actual environmental goals must be at the strategy’s core. Both the GLP and the GBP state that 100% of the proceeds from the loan must be used for green-eligible activities.

Corporate social responsibility is not new, but the way firms are becoming socially responsible is. Green loans have helped legitimise sustainability strategies which require significant working capital to actually implement. By identifying a set of principles to which sustainability spending must adhere, green loans have helped limit the likelihood of greenwashing occurring.

For SMEs, green loans can make all the difference when it comes to implementing a sustainability strategy. And, if they mean the big corporations have to act a little more transparently, then they must be a good thing. It feels as though green loans are only just getting started – expect to see a growing number of businesses using these in the coming years.