Shades of 'green': navigating sustainability labels in lending
Getting the language of ethical lending right is the next step in encouraging mainstream financial services to think more about the planet and people
This is an excerpt from the October edition of AltFi's new magazine The Financial Innovator, which is available for free here.
If ‘ESG’ is a dirty phrase in the world of finance, then the word ‘green’ slotted in front of insertyour-financial-term-of-choice here, is its only slightly less seedy cousin.
No one is going to argue that any form of green finance is intrinsically bad.
In fact, many would agree that is a necessary part of the financial landscape if we’re going to continue to have a planet on which to run these companies.
But words have weight, and the label itself runs the risk of enabling companies to get away with more than they should under the guise of doing something good for the planet.
No shortage of banks and other financial institutions have been criticised for greenwashing, or investing their ‘green’ funds into distinctly ungreen — brown? — causes to appear more sustainable than they actually are.
But beyond the high street banks designating small portions of their funds towards supposedly green financing, there are a number of fintechs putting their full force behind solely funding green projects and initiatives.
And as is so often the case, it is the fintechs that we need to pave the way for the incumbents that follow — sometimes even further behind than expected.
So, what do the companies walking the walk when it comes to truly green finance think about it? Do they like the term ‘green’ lending? Would ‘sustainable’ or ‘renewable’ or ‘ethical’ be better terms to use? Do the linguistics matter if the right results are produced at the end of the day?
For HeavyFinance, a climate fintech on a mission to remove a whopping one gigatonne (a billion tonnes) of carbon dioxide from the atmosphere by 2050, green lending seems to fit the bill.
Fighting climate change through farming and agricultural loans, HeavyFinance was co-founded by Andrius Liukaitis, Darius Verseckas and Laimonas Noreika in 2020.
The journey began with a profound realisation, CEO Noreika told AltFi, that “the very sector we rely on for sustenance is also one of the most underfunded”.
“Agriculture is a major contributor to carbon dioxide emissions, and can paradoxically become a solution to the climate crisis if sustainable farming methods are implemented on a large scale,” Noreika said.
“HeavyFinance stands at the forefront of this transformation. In the face of climate change, unity is crucial,” he added.
Given agriculture is responsible for nearly a third of global greenhouse emissions, bringing together investors and farmers to fund the reduction of carbon emissions in the space provides the possibility for significant change.
Noreika explained that international impact investments alongside financing sustainable practices have emerged as “vital tools in the battle against climate change”.
“By bridging the gap between investors and farmers, we're not only driving sustainable agriculture but also working towards a greener and healthier planet for future generations,” he said.
He described green lending as providing financial support for projects contributing positively to the environment — a definition most financial institutions would likely agree with.
“It's crucial to recognise the significance of green lending because addressing the pressing environmental challenges we face demands for collective action and financial support,” Noreika said.
While green lending can encompass a wide range of projects — from electric vehicle transition to establishing renewable energy sources like solar and wind farms — HeavyFinance focuses solely on providing green financing to farmers who can adopt carbon farming practices.
This might be no-till farming, more energy-efficient equipment or reduced use of chemical fertiliser, and the shift often requires a significant upfront cost to cover changes or upgrades to machinery, for example.
“At HeavyFinance, we bridge this financial gap by offering green financing tailored to the needs of environmentally conscious projects,” Noreika said.
“By providing accessible funding options, we empower individuals and businesses to contribute to a more sustainable future for our planet.”
Its risk assessment for prospective borrowers looks much like other lenders’ with a scale that ranges from A+ (for the least risky projects) to D (for the riskiest), the fintech requires extra information to make its decision, including information on a customer’s farming practices over recent years to see their sustainability efforts.
Inside a green bank
At Triodos Bank, which is known as ‘the green bank’ in its home country of the Netherlands, words like ‘environmental’, ‘sustainable’ and ‘ethical’ align more closely with the company’s focus.
“Sustainability is at the heart of everything that we do,” Triodos head of corporate finance Whitni Thomas told AltFi.
“We were set up for the sole purpose of using money for a positive impact on people and the planet. So unlike other banks, or some other fintech companies, this isn't an afterthought or something we bolted on in the last five to 10 years or so, it’s our whole reason for being.”
Keep reading? Get the full interview in the October edition of AltFi's new magazine The Financial Innovator, which is available for free here.