In the last 12 months or so, I’ve noticed an increasing focus on ESG (environmental, social and governance) initiatives in the finance industry. Banks in Europe are leading the way, driven by regulatory standards and consumer expectations, as well as their own desire to build a sustainable future.
In North America, many lenders, including those providing financing and loans for equipment, have been slow to recognize the green opportunities within their reach. Nor have they engaged with the reality that ESG reporting will soon be a required standard in operational reporting. Furthermore, some are still weighed down by manual processing and outdated IT systems, and don’t have the agility to change direction even if they see the potential for growth.
However, for those that have transformed themselves into digital businesses, or are in the process of doing so, opportunities for green and sustainable lending are ripe. You could choose to:
- Create new offerings around leasing sustainable equipment. I consider this the quickest way equipment financiers can help to accelerate an ESG transformation.
- Ensure that asset management is sustainable through to the end of life for the equipment. Measure performance against sustainability KPIs or monitor IoT-connected assets in real time.
- Become an ESG enabler, supporting sustainable transformation through servitization finance models and partnerships with sustainable suppliers. Circular economy opportunities vary in complexity but could have a large impact that extends beyond the finance industry.
Green lending opportunities
Traditional banks are beginning to offer green lending solutions. For instance, HSBC recently launched five new sustainable finance tools, one of which is Green Equipment Financing. The purpose of this offering is to support small- and medium-sized businesses wanting to finance equipment that has tangible environmental benefits, in alignment with the market standard and the Green Loan Principles.
Other companies are building their entire business around green financing. For example, US-based Renewable Energy Equipment Leasing (reel) supports residential, commercial and municipal customers with green loans and leases for equipment, including that used for the production of clean, renewable power: solar, wind, geothermal and others.
Norwegian Veridis Kapital is focused on financing capital-intensive equipment—for solar power, hydro-electricity, hydrogen power and battery storage, among others—that contributes to the green transformation of industries like shipping. The company works with equipment suppliers (offering leasing finance solutions for their customers), users (offering equipment leases) and owners (offering sale-leaseback solutions).
In the US, partnering with a state agency is another opportunity equipment financiers could consider. The California Hub for Energy Efficiency Financing (CHEEF) has created a platform called GoGreen Financing. Designed to support the state’s goals of reducing greenhouse gas emissions and addressing climate change, the platform connects customers, finance companies, contractors and energy service companies. An interesting aspect of this partnership is that the organization offers a loss reserve to help mitigate risk. This enables finance companies to offer lessees more attractive terms, such as lower rates, larger amounts to borrow and longer repayment periods.
Preparing for a green future
If you see the value in offering green lending solutions like these, I believe there are several ways you can act now to prepare for the coming surge in sustainable lending.
- Transform the lending value chain. You’ll need to update core components, such as product specifications, documentation, collateral or covenants to reflect ESG principles, and continue process digitalization. That means building on your progress in automating and speeding up credit processing.
- Set up an ESG data platform. I’ve talked before about the importance of intelligent data. Because of the additional complexity of assessing the risks associated with green loans, you’ll need to re-evaluate your data management, the definition of your data policies and data frameworks, and how to complement your internal data with data from third-party sources.
- Create a value proposition for borrowers. Your customers will need to report on their own ESG activities, and you can embed yourself into that important requirement by helping them show meaningful results.
- Reskill the workforce. To support new green lending offerings, you’ll need to train your workforce on ESG criteria, the value of sustainable lending and the context of what sustainability means for your target industries and sectors.
Now might also be a good time to think about your ecosystem partners and their capabilities. Can you collaborate with your partners rather than going it alone?
Federal regulations are coming; there’s no avoiding that. My expectation is that the current focus on ESG initiatives and financing a sustainable future is only going to grow in intensity over the next five years. In 2020 alone, the world spent a staggering $500 billion on renewable power, electric vehicles and other sustainable technologies. This indicates to me that there’s huge potential for equipment financiers that want to help finance the green transition—and at the same time, grow their business.
If you’d like to talk about seizing the green equipment lending opportunities that are expanding every day, please feel free to reach out to me directly .
In the meantime, I highly recommend you download the report: Sustainable lending: An action plan for banks. It offers an action plan with concrete steps for retooling your organization for sustainable lending, and real-world examples of what other organizations are doing.Read report