The pressure to put green development and Environmental, Social and Governance (ESG) criteria at the heart of corporate decision-making has led to the creation of two new types of loans, Green Loans and Sustainability Linked Loans.
The basic principles of both types of loans were created by the EU Loan Market Association. More specifically:
In February 2020, the French bank BNP Paribas issued an ESG-based loan to JetBlue Airways. The interest rate on the loan is linked to the airline’s ESG rating, as calculated by Vigeo Eiris Home, a UK-based ESG research and services provider.
by Thanos S. Chonthrogiannis
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The Malta Development Bank has also integrated social and environmental factors into the investment assessment and risk assessment process and has identified the financing of green projects as one of its strategic pillars.
The European Investment Bank has turned at least 25% of its annual investment program into green projects and since the EU Commission has adopted an ambitious €1bn mobilisation plan for green investments.
Sustainability-related loans are in the process of being developed, while the Commission has set three general objectives for financing sustainable development:
1. The reorientation of capital flows towards sustainable investment.
2. Managing the economic risks arising from climate change.
3. Environmental degradation and social issues.
4. Enhancing transparency.
Specific changes such as EU Taxonomy, a classification system that provides businesses and investors with a common basis for calculating economic activities considered environmentally sustainable, will begin to take effect in the coming months.
The ESG criteria to be applied by enterprises are specific and demanding (Sustainable development publications are not considered by businesses together with their annual financial report as a satisfactory indication that the passport will be given for the company to receive loans).
To obtain financing at low interest rates, companies will have to deal more systematically and incorporate the demanding ESG criteria into their operation if they are interested in operating in a sustainable way.
The same applies to banks which will have to integrate the ESG criteria into their operation and, on the other hand, change the overall model of lending to adapt to the new European data and legislation that come to follow and not to fall behind the changes that come at high speed and change the traditional way of operating retail banking.
