Following on from strong growth in recent years, green lending is set to continue its upward trajectory as we enter 2022. By 2023, UK firms and financial institutions will be forced to show how they plan to hit net zero by 2050.
The on-going transition to a low-carbon economy is one of the key drivers contributing to the significant development of the green finance market, with major banks and financial institutions increasingly looking towards offering green products.
There’s no question that financial firms are quickly moving from viewing green finance as a minor area to an essential product offering. According to a new report from law firm TLT called Safety in numbers: levelling the playing field for green finance, nearly four in ten (39%) of financial service firms have already launched a green finance product or offering.
Clear barriers exist that are limiting green finance from becoming truly mainstream. As demand for products in this area grows, those institutions that don’t meaningfully engage will see a number of potential clients move to more green competitors.
One of the most significant challenges facing all financial firms who want to embrace greener lending is the relative lack of regulatory support. As the TLT report finds, more than one in three respondents (36%) say cost is either a “critical” or “significant” barrier to green financing, the role of regulators in fostering a strong green finance market is increasingly important.
When financial firms were asked what regulators and policymakers can do to support the growth of the green finance market, the TLT report shows that tax incentives for companies and investors (61%), subsidies or grant schemes for projects (52%) and green securitisation (46%), were the leading ideas.
While all financial service firms have a part to play in the transition to a greener economy, specialist non-bank lenders have a unique role in this shift. When seeking debt lending for green initiatives, some projects, especially in the construction industry, may require a deep understanding of issues such as eco-friendly building design.
As many traditional lenders do not yet have the in-depth knowledge required to offer products in this area that are truly ESG-compliant, specialist lenders with niche expertise will be best placed to offer lending to complex projects, thanks to their long-standing experience.
Specialist lenders like OffGrid.Finance, draw on their experience in agri-tech and energy financing, to provide loans to growing SMEs so they can purchase low-emission, productive use and energy efficient equipment. Their CTO, Amyas Phillips highlights the importance of green lending to SMEs:
“Demand for green investments is exploding but only a few have the expertise and cost structure to directly access the SME sector, which is responsible for half of global emissions. We’re partnering with cleantech vendors to offer institutional investors access to scalable pipelines of SME debt, each with a unique double profile of financial and impact returns.”
With research from the Energy Savings Trust finding that 22% of total carbon emissions in the UK currently come from homes and 96% of homeowners are concerned about their home energy efficiency, the market for green mortgages is only set to grow.
Recent proposals set out by the UK government require that all rental properties will need an EPC rating of ‘C’ or above by 2025 for new tenancies and all tenancies by 2028. This puts further pressure on buy-to-let landlords to focus on lowering carbon emissions.
Technology and green lending
Advanced technological solutions, including open banking, cloud and AI, are being pursued by all manner of firms in the financial sector when it comes to green finance. The TLT report finds the majority (70%) of financial service firms are examining how technologies can support their green finance strategy.
An additional 24% of respondents are also looking to explore the value of technology for green lending over the next 18 months, illustrating the expected power of technological innovations in this field.
Daniel Gibbs, a Climate Consultant, highlights the importance of accurate, real-time data for success in green lending.
“The success of green lending is going to depend on regular, accurate, and automatic data. Regular data will help banks to analyse whether customers are on course to meet the climate targets they have set, and quickly identify where targets will be missed. Accurate data is vital so banks can support businesses to collect and submit information that is representative of their operations.
Finally, climate data should be automatic where possible – products that find new ways to save customers time in data submission will do well. The organisations that solve these challenges will be the ones that succeed in the green lending space.”
Green lending for the next generation of borrowers
Although there remain some uncertainties around regulation, green lending is picking up the pace. Further regulatory guidance will accelerate green lending as lenders get a clearer picture of what is required.
Digital transformation is playing a crucial role in pushing greener lending. Many banks are merging or partnering to widen their green product offering. The recent acquisition of consumer lender, Oplo by Tandem bank, is one such example.
Susie Aliker, CEO of Tandem Bank, outlines the bank’s plans to offer a wider range of green products and the part that financial services can play in a greener society:
“This is a really exciting time for Tandem – our business combination with Oplo will create a bank focused on helping our customers to make fairer and greener financial choices. We intend to really accelerate our offering in this area – already we have supported customers with £230 million in green lending which has financed an annualised 12,000 tonnes in CO2 reductions.
With the Climate Change Committee estimating that, in order to meet the Government’s net zero target, some £10bn per year every year until 2050 will need to be invested by customers to finance the necessary green home improvements and electric vehicle switchover. We are intensely focused on playing our part and powerfully supporting customers with these initiatives.”
Finbarr Toesland, Editorial Contributor, VC Innovations
Join us at FTT Lending 3.0 on 30th March, where we explore the key ideas for revamping lending strategies to hit government climate targets and incentivise customers in the drive to net zero. We will evaluate the role of digital transformation and technology in building a more sustainable financial services industry.