What are green loans and how are they linked to the EU Taxonomy Regulation?

17 February 2023 by Jürgen Ritzek
What are green loans and how are they linked to the EU Taxonomy Regulation?

Summary

The EU Taxonomy Regulation aims to provide clear and consistent criteria for identifying environmentally sustainable activities. In addition, the EU Taxonomy Regulation also requires financial market participants to report on the environmental sustainability of their investments, one of the reasons why green loans are becoming more popular.

 

Green loans are loans that are specifically earmarked for projects that have a positive impact on the environment. The market size of green loans has been growing rapidly in recent years, driven by increased demand for financing for environmentally beneficial projects and a growing recognition of the role that finance can play in addressing environmental challenges.

 

The global green loan market is estimated to be worth more than 30 billion dollars. In Europe, green loans have become a well-established financing tool, with many large banks and financial institutions offering green loans to their clients. In other regions, such as Asia, the market is still developing, but is growing quickly as more financial institutions recognize the opportunity to provide environmentally friendly financing. Green loans are becoming increasingly popular for projects in the agriculture and real estate sectors.

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What are green loans and how are they linked to the EU Taxonomy Regulation?

The EU Taxonomy Regulation is a key part of the European Union's strategy to combat climate change and drive investment towards environmentally sustainable activities. It sets out a common classification system, known as the EU Taxonomy, which aims to provide clear and consistent criteria for identifying environmentally sustainable economic activities. The classification system was developed based on work of the Taxonomy Expert Group (TEG) which identified 67 activities for sustainable finance.

 

 

What are green loans?

Green loans are loans that are specifically earmarked for projects that have a positive impact on the environment and are aligned with the objectives of the EU Taxonomy Regulation. By using the EU Taxonomy criteria, banks and other financial institutions can identify and finance environmentally sustainable projects, such as renewable energy or energy-efficient buildings. This helps to ensure that financial resources are channeled towards activities that are in line with the EU's goals for a sustainable and low-carbon future.

In addition, the EU Taxonomy Regulation also requires financial market participants to report on the environmental sustainability of their investments and the alignment of their activities with the Taxonomy criteria. This increased transparency and disclosure helps to build trust in green finance and supports the growth of the market for green loans.

 

Green loans are offered by various financial institutions, including banks, development finance institutions, and specialized green finance companies.

 

Major commercial banks such as HSBC, BNP Paribas, and Standard Chartered offer green loans as part of their broader sustainability efforts. Development finance institutions such as the International Finance Corporation (IFC) and the European Investment Bank (EIB) also provide green loans, often in collaboration with commercial banks, to support sustainable development projects in developing countries.

 

In addition, there are also specialized green finance companies that focus exclusively on providing green loans. These companies typically have a strong commitment to sustainability and use their expertise and networks to help organizations transition to more environmentally friendly business practices.

 

However, while green loans are becoming more widely available, they are still a relatively new financial product and the market is evolving. As a result, the availability and terms of green loans can vary widely, depending on the financial institution and the project being financed.

 

 

What are examples of green loan financed projects and what is the economic return?

Green loans can be used to finance a wide range of projects with environmental benefits, including:

  1. Renewable energy projects: Examples are solar, wind, hydro, and other clean energy projects. The economic return on these projects can vary widely, depending on factors such as the technology used, the location of the project, and government policies that support renewable energy.
  2. Energy efficiency projects: This can include retrofitting buildings to improve energy efficiency, upgrading heating and cooling systems, and implementing energy management systems. The economic return from energy efficiency projects can come from reduced energy costs and improved operational efficiency.
  3. Sustainable transportation: Typical examples are financing for electric vehicles, bike-sharing schemes, and public transportation. The economic return from sustainable transportation initiatives usually come from reduced fuel costs and reduced emissions.
  4. Sustainable agriculture: Sustainable agriculture projects cover sustainable farming practices, waste reduction, and conservation of natural resources and their economic return is based on improved yields, reduced input costs, and improved soil and water quality.
  5. Green buildings: This can include both, the construction of new buildings that meet high environmental standards, as well as retrofitting existing buildings to improve energy efficiency. The economic return not only comes from reduced energy costs but also from increased property values, and improved indoor air quality.

 

 

What is the market size of green loans and whoch segments are most popular?

The market size of green loans has been growing rapidly in recent years, driven by increased demand for financing for environmentally beneficial projects and a growing recognition of the role that finance can play in addressing environmental challenges.

According to recent estimates, the global green bond market was worth approximately $250 billion in 2020, while the global green loan market is estimated to be worth more than 30 billion dollars.

 

The popularity of green loans varies by region, with some markets being more developed than others. In Europe, for example, green loans have become a well-established financing tool, with many large banks and financial institutions offering green loans to their clients. In other regions, such as Asia, the green loan market is still developing, but is growing quickly as more financial institutions recognize the opportunity to provide environmentally friendly financing.

 

The segments of the market that are most popular for green financing vary by region, but generally include renewable energy, energy efficiency, and sustainable transportation initiatives. In some regions, green financing is also becoming increasingly popular for projects in the agriculture and real estate sectors.

 

 

Outlook

In 2023, we will see the final outcome of the work of the Energy Efficiency Financial Institutions Group (EEFIG) where EEIP is a partner of the consortium running EEFIG. EEFIG covers many topics directly or indirectly linked to the EU Taxonomy and green loans, specifically for private households and SMEs. One of the latest working groups is called “Stimulate consumers’ demand for energy efficiency investments” and co-led by Rod Janssen, president of EEIP.

 

In other words, we will keep you informed!


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