Green loans: Sustainable finance the best enabler of climate action

Borrowers can now get a green loan for everything from an electric car to a house to an offshore wind farm; indeed, such lending is one of the strongest levers Ireland has in the transition to net zero.

“Sustainable finance is the greatest enabler of climate action and has a pivotal role to play in building a more sustainable economy and society,” says Cathy Bryce, managing director of capital markets at AIB.

Despite this, climate finance globally is running significantly below what is required to support the Paris agreement.

“We all need to accelerate the pace on the required transition by identifying new ways of doing business and, in parallel, new products and services,” says Bryce.

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Green lending focuses on the key three decarbonisation areas of electricity, heat and transport. At AIB that encompasses everything from major investment in energy and climate action infrastructure to supporting customers with discounted mortgages to buy energy-efficient homes, and green personal loans to fund retrofits or electric vehicles.

Among other measures that fall under green lending at the bank is finance for renewable energy generation through its multidisciplinary energy, climate action and infrastructure team. It supports sector-specific initiatives to aid carbon transition, such as the Teagasc Grass10 multiyear initiative for farmers and the Signpost programme which promotes 100 demonstrator farms and their sustainable farming practices.

Last year AIB appointed Foresight Group, an SME and sustainable infrastructure investment manager, to manage a new SME equity fund. The AIB Foresight SME Impact Fund backs businesses helping to accelerate Ireland’s transition towards a low-carbon economy.

“Green products and services are driving steady growth in AIB’s green lending book,” says Bryce. “Our ambition is that green or transition lending accounts for 70 per cent of overall new lending by 2030, therefore playing a significant role in helping the Government and European Union to meet their carbon reduction targets.”

Green growth

In the first half of this year green lending accounted for 20 per cent of new lending at AIB, while its green mortgage product represented 24 per cent of new mortgage lending in Ireland. Moreover, in the past three years, AIB has raised €5 billion from the issuance of green and social bonds, having become the first Irish bank to issue a green bond, and just the 19th bank globally.

“Green bonds are a key part of the transition finance toolkit as they enable capital to be directed towards key green and transition activities,” says Bryce. “The more green lending AIB does, the more green capital it can attract to support further lending to build the climate action and energy infrastructure of the future.”

The supply chain is, and will be, the most impactful and relevant means of effecting decarbonisation

—  Cathy Bryce, AIB

For businesses, overhauling supply chains is important too. “We have been thinking beyond just green lending for some time and, for a lot of our customers, it will be about incremental transition first,” adds Bryce. “Our customers are involved in transitioning to a low-carbon economy in every aspect of their business and this is presenting both opportunities and challenges – we are continuously adapting so that we can effectively support our customers.

“Through Brexit and Covid, the last five years have highlighted how all supply chains are interlinked and interconnected. The supply chain is, and will be, the most impactful and relevant means of effecting decarbonisation.”

For this reason AIB is also funding activities in the circular economy. “We are deploying capital into manufacturing supply chains, which in turn feed into the renewables sector; we are supporting all economic sectors to adopt more sustainable operating practices; we are focused on the requirements around retrofitting and upgrading the existing built environment; and we are encouraging businesses who are adopting the best science-based approaches to deliver on progressive emissions reduction targets,” says Bryce.

“This is what is required of us in the move towards a low-carbon economy, so the work involved expands well beyond just funding green assets.”

Lending restrictions

Banks are used to imposing lending restrictions, so insisting that more and more loans are used to finance environmentally friendly projects is just another one, says Kevin Gam, assistant professor of finance at UCD’s Smurfit Business School.

If a project is designed to reduce carbon or other greenhouse gas emissions, the decision to lend will be driven by documentation to support a project’s green credentials at application stage, says Gam. After that, protections are put in place to ensure such products are not taken advantage of, including ongoing monitoring.

“If the borrower doesn’t meet the criteria after they get the loan and are in violation of the covenant’s restrictions, terms and conditions the bank can renegotiate the loan, changing the interest rate,” he explains.

Banks are not being altruistic in offering discounted rates for green lending; commercial factors are a driver too, Gam points out.

“One belief is that green borrowers will outperform brown borrowers. The evidence is not yet very strong but the belief is that consumers want greener, more sustainable products and that, because of that, green companies are better than brown companies,” he says. Consequently such companies are seen as being of lower risk and, “from the bank’s perspective, that’s better,” he adds.

“Banks also really care about their environmental reputation,” says Gam. “Bank stakeholders – the depositors – care about climate change and environmental issues, so banks must also maintain their reputation.”

He points to how protesters against the Dakota Access pipeline in the United States in 2016 went after the funders of the project, threatening to withdraw bank deposits in an attempt to halt building work, as a case in point.

“If banks want to get stakeholders they need to maintain their environmental reputation and therefore need to allocate more money to green projects,” he explains. “Banks have incentives to do this.”