One of the most significant developments in the loan markets over the past year or so has been the rapid increase in the use of green and sustainable financing products. These include sustainability-linked loans, green loans, social loans and green bonds.
This uptake in 'green finance' (using the umbrella term) is part of a broader movement where corporates are committing to adopt strong environmental, social and governance (ESG) principles in the conduct of their businesses. And conversely banks and other financial institutions are under intense pressure from institutional investors and NGOs to green their loan and bond portfolios. In view of the increasing focus on ESG issues globally, we expect the adoption of green finance only to grow in the future.
In view of the increasing focus on ESG issues globally, we expect the adoption of green finance to only grow in the future.
While the use of green finance is entirely voluntary and there are differing approaches to implementation, standard market norms are developing. Especially notable is the promulgation of guidance by leading industry bodies such as the Asia Pacific Loan Market Association (APLMA).
When done properly, green finance has numerous benefits for corporate borrowers – aside from the obvious one of incentivising improved ESG outcomes, the products can also, thanks to strong demand, offer lower pricing and increased access to capital, not to mention reputational advantages. However, there are some risks, which we consider below.
We explore the several different product types, drivers, risks and benefits of green and sustainable finance in further detail below, together with how a borrower might approach raising green finance and some of the current live commercial and documentation issues.