Western banks are introducing a new practice: they reduce rates on loans for responsible business conduction – reducing harmful emissions into the atmosphere, reducing organic waste or special assistance to job seekers. If the company does not reach the previously agreed goals in the field of ecology, social responsibility or corporate governance, then a fine can wait for it – then the loan will be more expensive.
The new type of loans is called ESG loans (according to the first letters of English words and phrases: ecology, social responsibility and corporate governance), “responsible” loans or positively stimulated loans.
The amount of “responsible” loans extended to $ 36.4 billion in 2018. The demand for such financial products is often caused by the desire of companies to declare their social responsibility.
This is a normal mid-term or revolving loan, as a rule. The only difference is that the borrower, depending on whether he achieves the agreed goal, can receive a discount or be forced to pay a penalty.
The loan rate can be reduced if the company reaches certain goals. The objectives may be different – the main thing is that the parties agree on them in advance.
For example, the Belgian plastic manufacturer Solvay SA received a loan of 2 billion euros, the rate of which depended on whether the company would be able to reduce its greenhouse gas emissions.
The French energy company Electricite de France promised to reduce harmful emissions into the atmosphere, add electric cars to its fleet and increase the number of users who monitor energy consumption online to get a cheap loan.
The loan rate for one Irish food producer was tied to reducing the amount of organic garbage and reducing the use of landfills. A British company specializing in renting low-cost housing, agreed that in exchange for a more profitable loan, 600 local residents will be helped by job search every year.
This is still a new market and not all borrowers are willing to share information about loans that they are given. Therefore, it is difficult to understand how much organizations save on average. However, there are a few examples.
Thus, the British educational organization Pearson can save about 1.5 million per year on a renewable loan of $ 1.2 billion. The Dutch SBM Offshore NV should reduce the carbon footprint, that is, reduce the amount of greenhouse gases emitted into the atmosphere. Subject to the conditions on payments on the loan of $ 1 billion, the company will be able to save up to 5 million per year. Otherwise, the same amount will be a fine.
The main advantage for banks is the opportunity to increase customer loyalty. Many ESG loans were offered to companies whose loan agreement expired, which means they could go to any other bank. Also, banks can protect themselves, because socially responsible companies usually have a good credit history.
In addition, Western banks often face pressure from regulators who require special attention to the environmental and social consequences of financial transactions. More than 90 credit organizations, investment managers and insurers are already applying the principles of “responsible” banking, developed jointly with the UN.
The main problem is that it is difficult to confirm the positive effect of issuing such loans. The largest credit associations formulated the basic principles to prevent banks and borrowers from turning ESG transactions into a marketing tool. So, organizations borrowers should ensure transparency of social responsibility strategy, set more ambitious goals for themselves than those they have already achieved and independent experts should evaluate their actions.
However, it is still not clear how to measure the social responsibility of companies. They are working to create common rules for the development of “responsible” investments in the EU. However, each industry has its own characteristics and standards and this can complicate and delay the decision-making process.