With the International Monetary Fund estimating that it will cost as much as €20 billion a year to fund Ireland’s transition to a zero-carbon economy by 2030, it is of critical importance that finance becomes greener. The outlook is positive – green bonds raising $351 billion were issued globally in the first six months of this year, breaking previous records.
In addition, green loans are generally cheaper than their non-green alternatives, acting as an incentive to encourage more sustainable activities, and often offer competitive returns in comparison to their “brown” counterparts. While there have been past concerns regarding lack of investor interest in green finance and potential underperformance of loans, it is believed that green bonds have helped to diversify the traditional fixed-income investor base by attracting new types of investors, keen to play their part in the transition towards renewables.
Given the broader societal shift with regard to sustainability, geopolitical turmoil and the escalating battle against climate change, many observers say green finance is now poised to overtake more traditional forms of funding and will eventually lose its green tag, becoming “BAU” – business as usual.
“In simple terms, green finance is the provision of capital through the use of financial products such as loans, mortgages or bonds, which support environmentally sustainable activities,” explains Conor Holland, head of environmental, social and governance (ESG) reporting and assurance with KPMG.
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“Compared to traditional lending, green finance can generally be obtained at a discount, with borrowers being able to obtain a cheaper cost of credit while simultaneously advancing their environmental objectives.”
Holland says green investments often deliver better returns than alternatives. “But, crucially, they are a key enabler in the need to reorient capital flows toward more environmentally sustainable activities,” he says. “Using finance as a mechanism to decarbonise our society and economy will be critical if we are to reach net zero emissions.”
According to Holland, green finance may not yet dominate but it is well on its way to being the only game in town.
“Green lending continues to grow significantly as lenders look not only at the financial sustainability of a business or a project but, increasingly, consider its environmental sustainability,” he says. “Businesses that are not making efforts to become more sustainable may find it harder to obtain finance in the future as they will be seen as not viable in the long term.”
He adds that, with banks subject to more regulation related to how they manage their climate risks and with consumers increasingly looking to make changes to their homes or lifestyles to help lower their carbon emissions, further proliferation in green finance products is inevitable.
Indeed, Irish retail banks have been busy in this regard, acting to deliver on the objectives of the Government’s Climate Action Plan by providing finance at preferable green interest rates to thousands of customers seeking to improve their energy efficiency. Bank of Ireland announced earlier this year that around half of mortgages issued in 2023 were so-called “green mortgages”, which offer a lower interest rate based on a home’s energy efficiency. With roughly 10 per cent of Ireland’s carbon emissions coming from private homes, green mortgages can help combat climate change by encouraging demand for better-built, energy-saving homes that are easier to heat and keep warm.
AIB’s green lending grew 65 per cent to €3.3 billion in 2022, accounting for 26 per cent of its new lending, while the bank has also seen green mortgages increase significantly, up to around 30 per cent of new mortgages.
“AIB seeks to be a driving force for the sustainability agenda in Ireland, supporting customers and communities to make the transition to a low carbon economy,” says the bank’s chief sustainability and corporate affairs officer, Mary Whitelaw.
She notes that AIB recently partnered with the Strategic Banking Corporation of Ireland (SBCI) to launch its Energy Efficiency Loan scheme, making €70 million available to help eligible SMEs and farmers cut their energy bills and reduce carbon emissions by investing in energy-saving measures.
“We have a clear ambition for 70 per cent of our new lending to be green or transition by 2030,” Whitelaw says.
The bank has also set itself a target to achieve net zero in its financed emissions by 2040 for its lending portfolio, and by 2050 including agriculture, in line with the Government’s Climate Action Plan.
Despite the recent surge in growth, green finance is still in its relative infancy globally in terms of regulation, meaning it is susceptible to “greenwashing” or misrepresentation of its green credentials – which observers say is one of the big barriers to the sustainable transition.
However, policy is catching up and scrutiny of green finance products is set to increase; forthcoming regulations and reporting requirements in the EU are improving transparency and making greenwashing less likely, says Holland. In recent weeks, members of the European Parliament voted to adopt a voluntary standard for the use of a “European Green Bond” label, the first of its kind in the world, which will ensure investor confidence and hopefully add to the allure of green bonds.
“Evolving regulations and reporting requirements should improve the current challenges,” says Holland.