Merisa Lee Gimpel, Sustainable Trade Finance Lead, ICC United Kingdom, Head of Working Capital Innovation & Trade Transformation, Lloyds Bank, provides a practical guide to sustainable finance
The Climate Imperative
‘What does sustainability mean to you?’ Sustainability can and should be deeply personal. To me, it means doing business and living responsibly; changing our ways so future generations can live and thrive on our planet. My giki zero app tells me ‘if everyone lived like you, there’s just 10 years and 5 months until the Global Carbon Budget runs out.’ Thankfully, it also provides a wealth of recommendations to improve my footprint, incentivising me through improvements in my ‘Giki score’ through changes and commitments I make.
In a similar spirit, many banks are also looking into how to encourage its business customers to curb carbon emissions, build resilience and gain competitive advantage. This guide looks at why and how banks are supporting their customers with sustainable finance solutions.
SMEs and Sustainability
Small businesses make up 99.3% of the UK business population, three fifths of employment and around half of turnover in the UK private sector, and UK SMEs remain committed to sustainability despite Covid-19. Almost two-thirds of SMEs in Britain believe the move to a greener economy post Covid-19 presents positive opportunities, according to the Green Entrepreneurs Network.
According to Lloyds Bank’s Business Barometer in December, more than half (52%) of UK SMEs continued to work to become more environmentally sustainable in the past 12 months. Initiatives include using suppliers that source environmentally friendly products and services (19%), making alterations to premises to improve energy efficiency (19%) in the last year and investing in energy efficient equipment or machinery (17%).
The SME Climate Hub is an initiative founded by the International Chamber of Commerce, the Exponential Roadmap Initiative, the We Mean Business coalition and the UNFCCC Race to Zero campaign, with the aim of supporting small and medium-sized businesses to build business resilience. The SME Climate Hub provides a one-stop-shop for SMEs to commit to climate action and access tools, incentives and other resources designed to make it easier than ever for small and medium-sized businesses to cut carbon emissions, bring innovative green solutions to market and build business resilience.
Support from Banks
The financial sector is expected to contribute to national and international development goals and facilitate the transition to a low carbon and green economy, and many banks have sustainability high on their agenda to address risks and opportunities. Banks are seeing continued focus from NGOs and activists, competitors acting at pace, investors demanding that climate change is top of the agenda and clients needing support on their transition journey. For example, from 2030, it will no longer be possible to buy vehicles with internal combustion engines in the UK. Banks are also gearing up for changes in regulation around sustainability issues and management of environmental risks: this year, the Bank of England and the European Central Bank are running climate stress tests to assess banks’ vulnerability from risks arising from extreme weather events and the energy transition, and many other G20 central banks have announced they will be doing some form of stress testing.
Small businesses make up 99.3% of the UK business population, three fifths of employment and around half of turnover in the UK private sector
Sustainable Finance: Enabling the Transition
There are a broad and expanding range of sustainable finance products and services available to SMEs through banks, which include:
Green loans: green loans are loans where proceeds will be used for an eligible green-purpose. Green loans require transparency on how sustainable projects are selected and funds are allocated. Some banks may provide discounted pricing for eligible green loans.
Sustainability-linked loans: these facilities involve setting internal and/or external ‘sustainable performance targets’ for the borrower, which if met, rewards the borrower with a ratcheting down of the loan’s interest rate. There is no restriction of proceeds to be allocated to green or sustainable projects.
Green trade finance: the principles of green loans is expanded to trade finance products such as letters of credit and bank guarantees and bonds. Some banks may provide discounted pricing for eligible green trade finance transactions.
Sustainable supplier finance programmes: there are various flavours of this service, which allows large corporates to encourage more sustainable practices from its suppliers. In a common model, supplier finance discount rates to suppliers are linked to the suppliers’ sustainability scores, providing financial incentives for their suppliers to become more sustainable. In another model, green or ESG-linked eligibility criteria is set at the programme level and participating suppliers must meet these requirements in order to participate in the programme. Consider asking your customers how ESG performance is rewarded in their supplier finance programmes.
Awareness & education: many banks are invested in supporting customers transition to sustainable business models and operations, and provide thought leadership, guidance and support through a number of channels, including through their relationship teams who are trained on climate change and sustainability-related risks and opportunities, as well as education programmes and awareness campaigns.
Additional tools and services: banks may offer solutions beyond green finance products. For example, Lloyds Bank’s Green Buildings Tool enables businesses to optimise potential energy efficiency investments in their property portfolio depending on sustainability, investment and cost-saving priorities.
To bring the solutions to life, here are some practical examples of how companies have used sustainable finance products:
HRJ Properties – an eco-friendly business park in Cumbria has harnessed the power of water to heat its industrial units in a six-figure project funded by Lloyds Bank’s Clean Growth Finance Initiative, which provides discounted lending to help businesses invest in reducing their environmental impact, and also benefits from the Government’s Renewable Heat Incentive Scheme (RHI).
Mayfield Eggs – A family-owned free-range egg farm in Oxfordshire has diversified its operations to help meet a significant uplift in demand for eggs during the pandemic, after securing support from Lloyds Bank’s Clean Growth Financing Initiative.
EcoMove – EcoMove, distributes an all-electric, affordable range of mopeds, bikes, step on scooters and recently opened the doors to its flagship store in Bristol, thanks in part to funding from Lloyds Bank via the Bounce Back Loan Scheme (BBLS)
Cartrefi Conwy – a £22m sustainability linked loan provides the Welsh social landlord with a set of environmental and social KPIs it must meet in order to secure margin discounts on its financing.
Sustainable Supply Chains: The Next Frontier
McKinsey estimates that over 90% of companies’ environmental impact comes from their supply chains. For many businesses, the majority of greenhouse gas emissions and cost reduction opportunities lie outside their own operations. Beyond improvements within their own operations, companies are focusing more on their supply chains and holding suppliers accountable, through techniques including but not limited to including sustainability scores into a supplier’s scorecard, setting public targets, providing tools and advice, and working with suppliers to return, recycle and reuse products. Expect to see continued sustainable finance innovation in the supply chains space, as banks continue to innovate to support their clients’ transition.
What does sustainability mean to you and your business? I encourage you to speak with your banks to see how they can help you on your transition.
The ICC’s Sustainable Trade Finance Working Group
The ICC Sustainable Trade Finance working group was established in 2016 to develop tools and best practice standards to promote sustainability across the trade finance industry. The members of the working group represent commercial banks, multilateral development banks and other trade and sustainability experts, which liaise with key regulatory and industry initiatives. The working group has been developing tools and best practice standards to promote sustainability across the trade finance industry, focusing its efforts in four work streams: process and principles, training, capital and incentives, and definitions, all of them working in coordination with other ICC Working Groups.