What’s happening with green and sustainability-linked loans in 2022?
By Paul Crighton, partner at UK law firm TLT
Even if you haven’t accessed green finance yet, chances are you will do in the future.
While there are many barriers to overcome before green finance can be considered mainstream, it is widely believed that one day all finance will have an element of green.
This is being driven by the wider environmental, social and governance (ESG) agenda.
As more businesses set ESG-related targets – for example, related to greenhouse gas emissions, renewable energy, employee diversity or business ethics – demand for green finance is continuing to grow.
According to our latest report, Safety in numbers: levelling the playing field for green finance, around two fifths (39%) of financial services firms have already launched a green finance product or offering.
While one would expect this to have been driven by the government or regulators, our research reveals that individual customers, investors and shareholders are pulling harder on those strings.
Within the next year, as many as 92% of firms expect to be offering a green finance product.
However, there is currently a lack of clarity about what financial services firms should be doing and where the market is heading.
Without this clarity, and without more information sharing, the rate of progress will be slower than it could be. It will be interesting therefore to see what noises the regulators make, and what industry groups are created to support firms on their journey.
The report reveals that cost is the biggest barrier to firms adopting green finance, with 36% calling it a “critical” or “significant” barrier. When we asked what regulators and policymakers can do to help stimulate the green finance market, the top answers were tax incentives for companies and investors (61%), subsidies or grant schemes for projects (52%) and green securitisation (46%).
Key to the growth of green finance is also the appointment of qualified experts to help shape strategy and drive plans forward.
The majority (58%) of firms say they have already appointed an experienced, dedicated, C-level or non-executive expert in green finance. While this is higher (75%) for VC and PE firms, recruitment plans will see asset managers and lenders leading the way within the next year.
Qualified experts in green finance are in short supply and high demand. As firms continue to work on building a strong proposition, it will be crucial to have a strong, influential voice at the top of the business, and that this filters its way down to customer-facing teams.
Technology and data
The key priorities for financial services firms have been to set a strategy (61%), implement data gathering processes (50%) and performance measurement (42%).
Perhaps to assist with data analysis, 70% are exploring new technologies to support their green finance strategy, while a further 24% are considering doing so in the next 18 months.
Asset managers are the most likely to be exploring this (78%), followed by VC and PE firms (65%) and lenders (62%).
Technology has a big role to play in the development and rollout of green finance products. One of the big questions will be which firms spot the potential first, and build or buy the technology to enhance their offering.
The majority (69%) of financial services firms are optimistic that recent events will help to stimulate the growth of green finance in 2022. As corporates look at what the ESG agenda means for them next year, it’s a good idea to also consider the role that green and sustainability-linked loans could play.