Exploring “green” finance offerings, part 1

Promoting sustainability in the finance sector is not just about doing the right thing—it’s now essential for meeting customer demand. We believe that the rise of green financing and especially sustainability-linked finance offerings signal the early stages of a fundamental shift in the wider economy.

In this four-part blog series, we share insight on key “green” finance offerings and why banks should pay attention to them, concluding with a pinnacle view of the future of green financing. We hope that you’ll come away with a fuller appreciation as to why banks will play a critical gatekeeper role when it comes to businesses advancing their climate change pledges and reducing greenhouse emissions.

The pressure to go green

Banks are facing increasing pressure from customers, shareholders, employees and regulators to be more sustainable in their operations and service delivery. Society at large is demanding that banks commit to environmental, social and governance (ESG) priorities, placing banks in the unique position of safeguarding the climate while also serving their customers. One of the ways banks can meet these demands is by basing pricing, credit and capital decisions on a corporate customer’s sustainability activities—a concept that is becoming increasingly mainstream.

What is green financing?

At its simplest, green financing is any structured financial activity—for example, a product or service—developed to ensure a positive environmental outcome. It includes an array of loans, debt mechanisms, and investment vehicles that encourage stakeholders to address climate change.

Green financing is an attractive concept for bank products and services. Around the world, governmental and/or jurisdictional incentives are being developed to drive more sustainable activity in finance. These incentives often directly benefit banks by, for example, helping them to launch or expand existing green offerings.

From green bonds to green loans

The rise in green financing includes the evolution from green bonds to green loans. A green bond is a fixed-income instrument earmarked specifically to raise money for climate and environmental projects. The green bond market has experienced exponential growth over the past decade. In December 2020, it reached its most significant milestone yet—one trillion USD in cumulative issuance since its inception in 2007. 

While the very first green bond was issued in 2007, it wasn’t until 2014 that the market took off. For each year since, the market has closed at record all-time highs. You can view updated cumulative totals on the climate bonds page for the Green Bond Market. 

Green financing has moved beyond green bonds to green debt instruments, including green loans. As of late, 67 nations and numerous large international institutions have introduced green loans.

As the name suggests, a green loan is a loan instrument to finance green projects. In March 2018, the Loan Market Association (LMA), together with other industry bodies, released its Green Loan Principles, which state that the “fundamental determinant of a green loan is the utilization of the loan proceeds for green projects.”

Trade finance banks are increasingly interested in issuing green loans in response to a growing number of requests from their customers. However, one of the key challenges hampering the growth of green loans, and sustainable finance in general, is the lack of standards. This is why the LMA issued its Green Loan Principles. The LMA’s aim is to promote the development and integrity of green loans by establishing a framework of market standards and guidelines.

Barclays is one such bank that offers a dedicated green trade working capital product, which was launched in the UK in 2018. Under the scheme, the bank provides facilities a minimum of £250,000 for eligible green initiatives.

Barclays, in fact, has its own Sustainable Green Solutions Framework, which was developed in 2017 with specialist research firm Sustainalytics. This framework includes the methodology and guideposts required to accurately assess a green financing request. The good news is that an ever-increasing number of other banks have launched or are similarly exploring similar frameworks and initiatives.

Join us for the next blog in this series, which will cover sustainability-linked loans and, our favorite, sustainable supply chain financing. If you’d like to discuss this first blog, sustainable finance in general, or CGI’s work in this area across the globe, contact either nancy.amert@cgi.com or andy.schmidt@cgi.com.