Practical advice to help UK businesses access green and sustainable (ESG) finance

All the UK banks are looking to increase their green and sustainable lending with Barclays, HSBC, Lloyds Bank, NatWest, Santander, Standard Chartered and Triodos (at the time of writing) having undertaken to align their lending with pathways to Net Zero by 2050 as members of the Global Net Zero Banking Alliance. As banks issue green bonds or sustainable bonds (often linked to the UN SDGs), or look to attract green deposits, they will increasingly look to green and ESG loan assets to underpin these instruments. Most of the UK banks have published green or sustainable frameworks defining what they consider to be eligible activities for these loans. Further guidance is expected to come when the UK Green taxonomy, a detailed list of economic activities that are deemed to be sustainable, is published by the UK Government.

UK companies can (and should) prepare themselves before they approach banks for green or ESG finance. The best way to do this is to understand that the banks apply certain principles to green and ESG lending, and if your project cannot generate the information required to meet the principles, then green or ESG loans will not be an option.

The principles applied are the LMA Green Loan Principles (for green loans) and the Sustainability Linked Loan Principles (for ESG loans).

Green loans requirements

• Firstly your project needs to fall within an eligible category (renewable energy, green buildings, energy efficiency, and reducing water use are all examples of eligible categories).
• The second requirement is for the borrower to be able to explain how they have ascertained that their project or investment will have a green benefit (this may be information from a third party, or the technical specs of a piece of newer or more energy/water efficient kit).
• The third requirement is that the green loan must be explicitly directed to that green investment (this could be evidenced by paid invoices or commissioning certificates). Finally, the actual impact of the completed project should be able to be reported to the bank.

ESG loans requirements

• To have a sustainability strategy that sets out your direction of travel - your intentions to improve the E (Environment), S (Social) and G (Governance) aspects of your business.
• The next requirement is to set meaningful and ambitious targets to improve on E, S and G. This implies a starting point or baseline to compare improvements against, the data for which should be no more than 2 years old. As borrowers are not allowed to “mark their own homework”, a third party will be needed to verify if those targets (often referred to as Key Performance Indicators, or KPIs) have been met.
• Finally, the lender will require the results of achieving (or failing) those targets to be reported, ideally publicly.

If your business is “transitioning” towards becoming greener/reducing its green house gas emissions or using less scarce natural resources an ESG loan is probably best but there are indications that the UK Green Taxonomy may consider that activities that aid the green transition can also be considered to be eligible for green finance.

Green loans and ESG loans need to be repaid just like brown loans, so the borrower’s credit quality and the commercial logic behind projects are still paramount - credit risk will still drive the pricing. However, the advantage is that banks will compete more for green and ESG lending than for brown lending and, although you cannot “jump” from one credit band to another just by implementing a green investment, banks will price much closer to their minimum return for your level of risk.