By Edel Corrigan,Irishexaminer.com

Copyright irishexaminer

Green (or sustainable) finance refers to financial products, services and investments that support environmentally or socially sustainable projects, such as renewable energy, pollution reduction, biodiversity conservation, or building retrofits, says Colette Shirley, director of sustainability with Bank of Ireland.

“While traditional financing typically prioritises financial growth and returns, green finance integrates positive environmental impact into its decision-making framework.” It works by directing capital toward projects or activities that promote “green” activities, says Deirdre Timmons, sustainable finance lead, ESG reporting and assurance, PwC Ireland.

“An example of this is activities that support the transition of the economy to a net-zero economy in the fight against climate change, known as transition finance. The actors in the economy, such as businesses and households, need to reduce their carbon emissions from their activities and operations in order to achieve a net-zero economy, and in most cases this requires significant investment or funding.” In short, transition finance means directing capital towards projects that help businesses and households cut emissions on the path to net zero.

Green finance can often be more attractive in terms of price, with reduced interest rates commonly offered, Shirley says. “Beyond cost, there’s a reputational advantage: investors, insurers, employees and customers tend to view businesses engaged in green initiatives more favourably.” The first thing companies need to have is a credible transition plan. That means they have identified what actions they need to take to get to net-zero, and by when, and have a clear roadmap with targets, actions and milestones indicating how they will get there, says Timmons.

“Once that is in place, they can identify their funding needs. It can be very worthwhile to seek advice on their options at this point, as there are many options available to them and finding the most cost-effective one may save a lot of money in the long run.”

Larger companies, such as listed companies, can raise this capital themselves by issuing a green bond which would attract a wide variety of investors, Timmons explains. “To do this they would need to have a large project, or several smaller projects, earmarked for the use of the proceeds. There can be quite stringent reporting requirements around green financing for the bond to be credible to investors and not face greenwashing allegations around their use of proceeds.

“For smaller companies, most banks are offering green finance, often in the form of a sustainability-linked loan where cheaper credit terms are linked to achieving certain conditions over the term. For example, the terms may be linked to achieving a reduction in baseline greenhouse gas emissions on an annual basis. If this is achieved, a discounted rate is applied. If it is not achieved, a standard rate is applied, or a penalty rate applied.”

Timmons says that in almost all cases, credibility and transparency are key to achieving cheaper green finance and therefore third-party verification of either the actions being taken or the robustness of the reporting of the actions, or both, will need to be undertaken as part of accessing the green finance.

Over the next five years, green finance is set to become a core part of business funding in Ireland, with green loans moving from niche to norm, says Shirley.

“Regulatory momentum, driven by frameworks like the EU Taxonomy, VSME [voluntary sustainability reporting standard for non-listed micro, small and medium enterprises] and CSRD [the Corporate Sustainability Reporting Directive], is accelerating, placing greater demands on Irish businesses to report and validate their sustainability performance.