Sustainable finance – the future rewritten

Arran Taylor is Yorkshire and North-East Energy Transition Leader with Deloitte.

Recently the Yorkshire Climate Action Coalition, co-chaired by Deloitte and Walker Morris, held an event at in Leeds to discuss sustainable finance and how to finance Yorkshire’s green transition.

Arran Taylor

Green Finance is a hot topic, but not one that’s widely understood. The world is asking business to change and the message is clear – meet higher expectations on responsibility and show the world you mean it. Customers are demanding that businesses embrace change. Employees and investors expect it and increasingly, regulators mandate it.

However, significant investment will be needed to meet business’ commitments, and this will need to be financed.

Some key learnings from the event were:

What are Sustainable Business Loans?

Broadly speaking there are two types of loans that have a direct link to environmental considerations:

  • Green loans: These are loans where there is a specified purpose that has an agreed environmental benefit. By their very nature Green Loans are restricted to specific projects and investments and generally aligned to situations where companies are looking to spend capex to reduce carbon emissions and/or make an investment that has a direct environmental benefit.
  • Sustainably linked loans: These are ‘normal’ corporate loans but include specific ESG KPIs which are linked to a margin ratchet where the borrower is rewarded or penalised based on achievements against these measures. These loans have evolved rapidly from being a relatively niche portion of the lending environment, to something more mainstream. It allows businesses to reduce their cost of borrowing in return for achieving agreed ESG measures.

Lender Insights

Lenders have capital ready to deploy. However, the key to success is for businesses to have credible transition plans so that investors and lenders can complete their diligence. This will ensure the choice and structuring of financing can be aligned to those areas which maximise the positive impact.

Lenders want and need to work more closely with business borrowers to identify and mitigate some of the inherent uncertainties of decarbonisation initiatives. Multi-party solutions, such as public-private partnerships, have an essential role to play in sharing the risk and enabling the ‘crowding in’ of lenders and investors.

Lenders must strike a balance between data-driven analysis and human-based decision making when lending for decarbonisation initiatives, since there is not the same body of historical data to support the decision-making process.

There is work to be done on greater standardisation amongst the financing community of sustainability linked KPIs. Lenders need to work together to form a more consistent view of relevant measures for different industries or types of business.

Borrower Insights

Education is key for businesses to better understand evolving regulatory frameworks, sources of finance and changing expectations of lenders.

Borrowers need to be ready to assess and report to their lenders on new and different KPIs which are linked to their underlying sustainability objectives. However, the cost benefits of doing so can be worthwhile through access to reduced borrowing costs.

Proactive collaboration with lenders can deliver commercial advantages. An industry example is how the Real Estate community is wrestling with energy inefficient buildings that are at risk of becoming obsolete. Some lenders are working closely with customers who hold property portfolios and equity investors to explore retrofit or alternative use options to minimise these risks for all parties.

Where next?

Companies with a clear strategy and demonstrating leadership on ESG are already benefitting from increased liquidity, reduced borrowing cost and greater capacity to raise debt through green finance.

High standards on ESG are becoming a binary, non-negotiable, diligence item for lenders as they assess credit opportunities. Green finance is becoming a part of mainstream commercial finance.

There are shared benefits of businesses and lenders working closely together to navigate the rapidly evolving customer, regulatory and reporting environment. Education and collaboration will help lenders and borrowers to make better informed decisions about which sources of finance best align to specific decarbonisation objectives, and make accessing and servicing green finance more efficient and cost effective.

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