- Understanding ESG
The Green Loan Agenda
Today’s institutional investors are looking for the growth stories of tomorrow and sustainable futures.
They are becoming increasingly mindful of climate change challenges over the past decade and are leading the way in encouraging corporations to create sustainable models that do not exacerbate the ecological crisis facing the planet.
According to NASA, scientists are seeing that a ‘global disaster’ is unfolding at the poles of the planet; the Arctic, for example, may be ice-free at the end of the summer melt season within just a few years. Yet other experts are concerned about Earth passing one or more ‘tipping points’ – abrupt, perhaps irreversible changes that tip our climate into a new state.1
Water scarcity in the Middle East, the Sahel, Central Africa, and East Asia could see gross domestic product (GDP) declines of as much as 6% by 2050 as a result of climate change, spurring migration and sparking unrest, notes research group The New Climate Economy (PDF,11.5MB).2
Green financing is expected to gain more traction, as governments, citizens and consumers gravitate towards companies that can help mitigate the impacts of climate change, which are now well-known and scientifically incontestable. In the absence of major action to reduce emissions, global temperature will rise by an average of 6°C (10.8 °F) by 2100, according to NASA Global Climate Change.3
FINANCING WITH IMPACT
As a result, environmental, social and governance (ESG) factors are becoming increasingly more integrated into financial services and investments. The Institutional Investors Group on Climate Change,4 featuring pension funds and asset managers including HSBC Global Asset Management, have over US$ 25.7 trillion in assets under management, mobilising capital for the low carbon transition by working with businesses, policy makers and fellow investors.
Globally, sustainable debt finance issuance reached a record US$ 260 billion in 2018, according to the Bloomberg New Energy Finance.5 The Institute of International Finance (PDF,342KB)6 estimates that total issuance in 2019 reached US$ 350 billion. Of these, green loans stood at nearly US$ 55.9 billion in 2018, according to the Institute of International Finance (PDF,197KB).7 In October 2019, International think-tank Climate Bonds Initiative calculated year-to-date global green bond and loan issuance at US$ 202 billion.8
HSBC is a key player in sustainable finance and has funded, facilitated and invested US$ 49.7 billion in clean energy and low-carbon projects as of Q3 2019 globally. HSBC placed second in November 2019 in the combined green, social and sustainability Dealogic league table and first for sustainability bonds.
“Demand for sustainable financing in MENAT is surging and bringing green loans to market for our clients is a natural extension of green financing agenda, as region seeks to transform”, says Pri McNair, Regional Head of Client Coverage, Commercial Banking, MENAT at HSBC.
Green loans have a valuable role to play when it comes to reining in the impact of climate change as they aim to provide opportunities for companies that have sustainability embedded in their business models.
The HSBC initiative adheres to the Loan Market Association’s Green Loan Principles, which developed a framework to ensure transparency and integrity in financing green initiatives.
“Their aim is to create a high-level framework of market standards and guidelines, providing a consistent methodology for use across the green loan market, whilst allowing the loan product to retain its flexibility, and preserving the integrity of the green loan market while it develops,” according to the Loan Markets Association (PDF,2.3MB).9
Green loans are suitable for projects such as renewable energy, green buildings, sustainable water management and sustainable agriculture, biodiversity conservation and clean transportation, among others.
However, the loan recipient must adhere to a transparent process that tracks the loan, provide periodic reports to lenders and clearly communicate its environmental sustainability objectives.
These principles are vital as institutional investors seek transparent processes to ensure that funds are being deployed for sustainable causes.
The advantages of burnishing their green credentials is going to be vital for companies as they seek funding through various stages of growth. Investors who are conscious about environment, sustainable and governance (ESG) will be drawn to such companies.
Apart from restoring the environment and playing a role in a healthy planet, sustainable investing also offers trillions of dollars’ worth of opportunities. The International Finance Corporation10 says emerging markets can open up US$ 23 trillion in opportunities for climate-smart investments if they choose to meet their Nationally Determined Commitment as part of their Paris Climate agreement.