Sathish DhanapalGCPF Expert
Senior Energy Specialist | ResponsAbility | IN
Why should you consider green finance as a mainstream business?
Climate Change is real, and we are already facing in our day to day life from shifting weather patterns that threaten food production, to rising sea levels that increase the risk of catastrophic flooding. The impacts of climate change are global in scope and unprecedented in scale.
Ok, these facts most of us know. We also know green finance is a powerful tool to mitigate the impacts of climate change and the estimated investment potential is around USD 23 trillion.
But, why should you as a financial institution consider green finance as a mainstream business? To save the planet from the impacts of Climate Change? Of course, yes. But beyond this there is also a strong business case to consider this as mainstream.
Often, when a financial institution launches a green finance program, the end clients (borrowers) expected subsidized credit lines to invest in Energy Efficiency and Renewable Energy technologies. But this is not the natural starting point for green finance. The issue of subsidies often confuses the discussion around clean technologies that are already providing cost reductions, increasing net revenue and helping the company adapt to the future.
That future will require businesses to adapt to survive. Large corporates are increasingly recognizing the need to ensure that their supply chain (i.e. suppliers) is resilient against the impacts of climate change. So, the investments in environmentally-friendly technologies are already driven by a strong business rationale. While the case is increasingly clear for the end clients (borrowers), it is not immediately clear what role the financial sector plays in this story.
Technology and climate impact are one part of the green finance, but there are other key benefits (mentioned below) which the financial institution could tap in to by doing green finance.
Better credit risk management: While implementing green finance, financial institutions being to approach their clients from a more holistic perspective. They ask for more information about the client business activities like their environmental and social risk management practices, energy / water / resource usage and cost reduction impact, productivity gains, etc., The process of understanding their client business activities automatically strengthens the credit appraisal process.
According to this report by IFC, 95% of green loans have NPLs same or lower than the other non-green loans.
Exploring more business opportunities with existing clients: Relationship managers could use green finance as the tool to engage with the existing clients to explore more business opportunities. They will be looking at this as an opportunity once they realize they can do more business with their existing clients.
Client retention: By engaging closely with the existing clients on new business opportunities which adds value to their business in terms of cost savings and revenue generation, the client retention rate will also improve.
Portfolio diversification: Since EE/ RE technologies could be adopted across various sectors, green financing helps to diversify the financial institutions focus sectors and clients. Link
Branding and positioning: Green financing helps to position the financial institution as a responsible and sustainable institution. Both clients and investors would value the branding of the institution. Link
Attracting more long-term funds: By doing green financing, the financial institutions develop their internal capacity to assess the climate impact potential as well as the Environmental & Social impacts of the projects financed. These aspects are very important for accessing long term international climate funds. Link
The above-mentioned benefits are some of the examples we have come across with our partner institutions. Do you agree with these benefits?
Have you come across any other benefits that green financing can bring in?
Do you think green finance could be considered as a mainstream business?
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