Retooling the bank for sustainable lending
October 22, 2021
What is sustainable lending?
Sustainable lending, like sustainable investing, means that environmental, social, and governance (ESG) considerations play a central role in credit decisions. A sustainability-linked loan will typically focus on giving the borrower incentives to meet ESG performance objectives. The conditions of the loan will be tied to the achievement of ESG metrics such as carbon emissions or workforce and board diversity.
What’s driving the sustainable lending trend?
In the wake of the COVID-19 health and financial crisis, banks face growing calls to play their part in addressing today’s environmental and social concerns. Some of the forces driving the rise of sustainable lending include:
What green lending products can banks offer?
How can banks transform their lending chains for sustainability?
A medium-term ESG roadmap might focus on these steps:
How can banks’ lending practices prepare for sustainable lending?
Many banks’ credit professionals have not been trained to assess lending terms and conditions through the lens of sustainability, nor do they have skills in analyzing ESG data. We suggest three actions to consider:
How can banks prepare their data platforms for sustainable lending?
We recommend these possible steps:
1. Banks and Fossil Fuel Financing, BankTrack, 2021.
2. Environmental, Social, And Governance: How Sustainability-Linked Debt Has Become A New Asset Class, S&P Global Ratings, 2021.
3. EBA advises the Commission on KPIs for transparency on institutions’ environmentally sustainable activities, including a green asset ratio, European Banking Authority, 2021.