What is sustainable finance?
Sustainable finance includes investments, loans and insurance that consider the environmental, social and governance (ESG) factors of an economic activity or project. This article focuses on sustainable finance in the form of targeted bank loans.
The sustainable loan market is growing. In 2021, New Zealand banks committed to at least $3.3 billion in new sustainability-linked loans.
Banks see it makes commercial sense for businesses to operate sustainably. They are expanding their loan offerings to support more businesses making positive change.
This can cover all aspects of sustainability, including climate, nature and social impact.
Banks can offer dedicated financing to help you afford the upfront costs for your sustainability project in the form of a loan with a preferential interest rate, that you pay back over time. Check your bank’s website to find out what your bank has to offer, or talk with your banker.
Loan types to look for
A growing number of banks offer loans to smaller businesses for sustainability projects or purchases.
These could be called a “Green Loan”, “Green Business Loan”, “Business Green Loan”, “Sustainable Business Loan” or “Business Sustainability Loan”. Some banks offer specific “Green Asset” or “Sustainable Equipment” finance.
Some features of these loans are:
- The money you borrow must be used for specific actions that have environmental or social benefits. Many different actions can qualify, such as switching to electric vehicles, installing solar panels, making energy efficiency improvements, improving water quality or tree planting.
- Lower interest rates are available for this borrowing compared to other business loans.
- Evidence is needed to show your initiative meets sustainable finance criteria.
Many banks also offer “Sustainability-linked Loans” for larger amounts. These loans include sustainability targets you must achieve to get special interest rates. These are more suitable for larger businesses as they can be complex and require third-party verification.
Information to help get your loan
Your bank will want to know details about your sustainability initiative to check if it is a good fit for a loan. This will also help avoid greenwashing. Good information to have ready includes:
- The type of project you want to fund and how it will help make your business more sustainable. You may need evidence or data to show the positive impacts. Some types of activity need more supporting evidence than others. If you’re not sure, it’s worth checking with bank staff. It may be easier than you think.
- Evidence of the costs like quotes, invoices or agreements.
- Plans to pay back the loan. Consider whether the change you are making will reduce your operating costs or help your business grow.
Top tip: If your initiative aims to reduce emissions, the Climate Action Toolbox can help you plan and prepare information. This could include a calculation of your carbon footprint.
Other things to keep in mind
Talk to your bank. If your project isn’t a perfect fit for a sustainable loan now, your bank may have other options. If your business is leading the way with a new technology, or a new business model, a conversation with a banker is a great way to start exploring financing options.
Some projects or purchases that are eligible for low interest sustainability loans now, will not be eligible once they become business-as-usual. For example, when electric vehicles are common, they won’t qualify for a sustainable loan. Don’t miss out.
We’re adding a category for sustainable finance providers and consultants to the Circular Economy Directory in July. Check out the Directory today for other organisations providing sustainability solutions to businesses in Aotearoa New Zealand.
For a wider overview of funding sources, see this sustainability funding map from The Aotearoa Circle.