Policy & Regulation

07 Feb 2023

Green Loans: The Sustainable Business Move

07 Feb 2023  by   

In recent news, it has emerged that global banks are failing to invest in renewables in line with commitments made at Paris COP21. With 93% of overall energy funding going towards fossil fuel projects and only 7% funneled into sustainability projects, the numbers, unfortunately, speak for themselves.

In contrast, at a local level, businesses of all sizes continue to step up, with commercial investment in renewable energy growing rapidly. Installation of rooftop solar is booming in developed markets, as businesses seek to protect themselves from skyrocketing fossil fuel-generated energy prices.

Many of these renewable energy projects are self-funded by capital expenditure, but a significant proportion is supported by green loans and their equivalents. Access to funding is a key factor in our transition to a greener, cleaner energy future, and there are several fintech companies rising to the challenge to meet this need.

What are green loans?

Green loans are funding solutions designed to meet the needs of organizations that are undertaking projects with proven environmental benefits. They differ from traditional loans because they come with particular guidelines which guarantee the funds will be used for environmental initiatives only.

Some examples of projects often funded by green or ‘sustainability-linked’ loans include commercial solar power, battery walls, electric vehicle chargers, and other sustainable assets.

Those offered by major banks come with a set of stringent principles and reporting requirements and are often only offered to exist customers. There are also alternative lenders which finance environmentally-friendly projects with less red tape, making the process an easier proposition for busy business owners.

What’s under the green loan umbrella?

Green loans, sustainability-linked loans, and specialty decarbonization payment solutions are all different products, but the term “green loan” is often deployed as an umbrella term for all three.

The defining feature of a true green loan is that the proceeds are used for green purposes, as determined by four key criteria - use of proceeds; the process of green project selection; management of proceeds; and reporting.

Specialty payment solutions aim to solve the same problems as green loans do, but in a more flexible and business-friendly way. A recent comparison of green loans and Australian fintech company Smart Ease’s products reveals that less paperwork, faster turnaround time, and a marked lack of reporting requirements are key differences. This type of agile, 100% online green financing is taking off as a result of improved accessibility for organizations of all sizes and stripes.

Why is interest in investor-funded renewable energy growing?

There are several factors at play here. Inflation remains high globally, hitting 9.2% in January 2023 marking. Organizations are feeling the pinch from rising energy prices, interest rates, and supply costs. Those with savings can afford to ease energy expenditure by generating their power by harnessing solar or - to a lesser extent - wind energy. Those without capital need an alternative, and green financing has stepped in to fill this gap.

Secondly, in recent years there’s been a strong push toward decarbonization in the commercial world. This is being driven by two things: public perception and support of companies based on their green credentials, and Environmental, Social, and Corporate Governance (ESG) measures. Companies without a plan to tackle climate change have a lower ESG profile and this means they are seen as being at a higher risk by potential investors.

The takeaway

Expectations are high for businesses to lead the charge on decarbonization. Consumers are becoming smarter at spotting ‘greenwashing’ - making exaggerated or false environmental claims to score brand brownie points - so the days of simply paying lip service to environmental responsibilities are numbered.

Green loans and specialty funders who invest in decarbonization projects support real-world actions that produce real-world impact. By financing rooftop solar, EV charging stations, energy-saving ‘smart tech’ and more, these lenders make it possible for their business customers to lead the charge in reducing fossil fuel dependency, one organization at a time.

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