Sustainable Finance – Developments in the sustainable financing of companies

Legislators have assigned banks in particular a key role in promoting ESG issues. This is increasingly reflected in the granting of loans to companies. The common forms of sustainable corporate loans and current developments on the market are briefly described below.

Due to its massive influence, the financial sector plays a central role when it comes to implementing the sustainability goals of the Paris Agreement and the 2030 Agenda. Under the term “sustainable finance”, various financial players are developing different approaches that aim to steer financial flows towards more sustainable economic activities. In particular, German financial institutions are guided by the requirements of the EU Taxonomy Regulation and the environmental, social and governance (ESG) criteria. In the context of sustainable finance, ESG criteria act as parameters that can be used to determine and measure how sustaina­ble financing really is. Although the granting of so-called sustainable loans is not taken into account in the EU Taxonomy Regulation, they nevertheless represent a not insignificant and increasingly important approach to achieving and implementing sustainability or ESG goals.

Two different models of sustainable credit have emerged: 

Neither is subject to any specific legal requirements, meaning that financial institutions are free to define the specific sustainability aspects of the contracts. However, there is agreement on how the two loan models differ from one another.

 

ESG-linked loans are not a new type of loan. Rather, standard loan agreements are supplemented by special sustainability-related financing incentives. The purpose of the financing itself can be independent of any sustainability aspects, but the interest rate is usually linked to the achievement of certain sustainability targets. Lenders and borrowers agree on certain ESG targets in advance and on interest bonuses, for example, if these targets are achieved by the borrower. Whether the targets are actually achieved is usually confirmed quarterly or annually by an external sustainability or ESG consultant commissioned by the borrower.

 

A common case in practice, for example, is to link the amount of interest on a loan to the extent to which the borrower succeeds in reducing their CO2 emissions during the term of the loan. 

 

Green or social loans, on the other hand, are earmarked loans that are granted exclusively for the financing of green or social projects. 

Green projects include projects related to renewable energies, such as the construction of renewable energy plants, or renovation measures to improve energy efficiency. Social projects, on the other hand, focus on the creation of affordable housing, for example.

 

The interest rate is not linked to the achievement of an agreed target, but is agreed in advance with regard to the general purpose of the project, usually below the usual market interest rate.

 

The market for ESG-linked loans and green/social loans is currently still relatively small. This is due in particu­lar to the fact that private financial institutions do not yet receive any state subsidies to grant such financing and the interest bonuses granted are therefore manageable.

Nevertheless, it can be assumed that these issues will become more significant in the future. It is quite concei­vable that the ECB will offer financial institutions reduced interest rates in future, which they will pass on to borrowers as part of ESG-linked loans or green/social loans.

Furthermore, it is already foreseeable that the aspect of sustainability will play a more important role in the rating of borrowers at banks. It is advantageous for this rating if the borrower uses an ESG-linked loan, for example, to improve its sustainability and thus indirectly also its rating.