sustainability
Green loans are a building block of sustainable financing. Different standards make access more difficult for companies.
By Wolf Brandes
The market for green loans is fragmented and non-transparent. For banks and companies that want to commit themselves to sustainable financing, access often proves difficult. Despite ever-increasing interest in sustainable investments and the urgent need to meet climate targets, the framework conditions remain unclear and uncoordinated.
There is a lack of uniform standards. Banks are implementing different approaches to define green loans. While some credit institutions align themselves with the EU taxonomy, which contains clear criteria for sustainable economic activities, other banks pursue more individual approaches. The different definitions make it difficult to assess which criteria actually have to be met to be considered a “green project”.
An example of this fragmentation is Commerzbank. The bank has developed a comprehensive ESG framework that defines strict sustainability criteria. The bank attaches particular importance to the transformation of companies towards sustainable business models. However, Commerzbank does not exclusively refer to the EU taxonomy, but rather uses its own exclusion criteria and minimum standards. This means that potential borrowers not only have to deal with the criteria of the EU taxonomy, but also with the bank’s own requirements. This creates uncertainty for companies seeking a green loan.
KfW offers another example. The development bank has massively expanded its activities in the area of green loans in recent years and has developed its own taxonomies and evaluation frameworks. Their Sustainable Finance Framework aims to comprehensively support climate-friendly projects. Particular attention is paid to the carbon footprint of the projects. When granting its green loans, KfW remains bound to strict requirements that do not always correspond to general market standards. This creates a hurdle for companies because KfW’s criteria sometimes differ from those of other institutions.
Deutsche Bank has also published a comprehensive Sustainable Finance Framework. Deutsche Bank is guided by various standards, such as the Green Bond Principles of the International Capital Market Association (ICMA) and the Sustainability-Linked Loan Principles of the Loan Market Association (LMA). At the same time, it develops its own evaluation and classification systems to assess the sustainability of projects.
In addition, green loans often do not offer the financial incentive that many companies hope for. The interest rates for green loans are often only slightly lower than conventional loans, and the costs for comprehensive sustainability assessments are high. Many companies are therefore faced with the question of whether the effort is justified. The fact that the refinancing options for banks in the area of green loans have so far been limited further contributes to the fact that green financing does not stand out significantly from conventional loans.
In addition, the projects that are eligible for green loans are often limited. Strict requirements apply, particularly in the area of EU taxonomy. This means that many companies whose business models do not clearly fit into the given categories have difficulty obtaining green financing. Access is often blocked, especially for companies that are still undergoing transformation.
What would be necessary is a uniform regulatory framework at European level. A binding definition of what counts as a “green project” could help overcome fragmentation. Incentives should also be created to make green loans more attractive, for example through cheaper refinancing options for banks.
