In line with the objectives of the Paris Agreement, banks have the primary task of supporting companies that are firmly committed to achieving these goals by offering them smart, responsible lending conditions. To succeed in this task, banks need to develop a holistic understanding of sustainability and make climate protection in particular an integral part of their DNA. It will only be possible to realise the energy transition if banks shift from simply being market players to becoming responsible change-makers. The forms of funding that have been developed previously remain important, but they are no longer sufficient for banks to be able to drive change. Probably the most prominent form of funding until now has been green bonds, which an increasing number of reputable companies are using and the proceeds of which can only be utilised for sustainable purposes. Green loans are likewise becoming widely used internationally, based on the same principle that the money borrowed can only be spent on sustainable projects. But the structure and focus of loans linked to ESG (Environment Social Governance) are different.
In this case, companies can choose how to use the money they are loaned. However, the conditions are linked to achieving certain sustainability goals and if these are not achieved, the conditions are made less attractive. This form of funding linked to sustainability criteria combines corporate and social responsibility in a structural way. In particular, the borrower must specifically define a philosophy of sustainability as a key condition for their business success. The borrower is required to tell the lender their ESG goals as set out in their sustainability strategy. The borrower must also explain how the sustainability performance targets that they have defined as measurement criteria for meeting the funding conditions relate to this strategy and how they as a whole then contribute measurably to the overall corporate strategy. Funding companies and projects that focus on producing sustainable energy is a specific field. Banks have been financing companies like this for decades, a key example being the rapid rise of solar energy a few years ago. But in the wake of the Paris climate change targets, this field is taking on a new dimension and dynamic.
It is now young, innovative companies with a variety of focal points that are laying the foundation for separating corporate activity and economic growth from the consumption of finite resources. This means that technology is not the only thing evolving to combat the challenges that climate change is posing us – the customer groups that use this technology are changing too. Collectively, banks now need to develop a holistic approach to financial services in terms of sustainability in order to keep up with the complexity and pace of the journey towards becoming climate neutral. This approach has three pillars:
- Products (green bonds/loans, project funding, new asset classes/technologies, developing innovative financial products);
- Customer groups (corporate and retail, partly a mixture of both, for example in online-based distribution systems);
- Services ("traditional" funding, securitisation/placement, consulting).
The issue is becoming more complex
The whole topic of funding sustainability in line with the Paris Agreement is developing dynamically and is becoming increasingly complex. For banks, this means that it is no longer enough to just adapt what they already offer, for example by developing new consulting services or financial products. Instead, what they need to do is start afresh and take an approach that is fundamentally different – an approach that structurally links their corporate activities with achieving the Paris climate targets and includes defining what banks will stop doing in the future. This is precisely the aim of the Terra approach, which is designed to make the loan portfolio climate-neutral. This means financing more sustainable projects than non-sustainable projects in the future, which in turn changes the pertinence of the customer groups. Every bank needs to decide under which conditions they are willing to explore new horizons – only then can technologies be financed that are not just green but are genuinely promising and forward-looking too. These are often advanced by young companies, but established market players are likewise committed to new technologies and equally need access to loans for corporate- and project-based funding.
To finance the most promising companies, it is a good idea for banks to form interdisciplinary teams and pursue a holistic in-house approach to funding and consulting. As well as "traditional" lending expertise, ideally these teams should also have in-depth industry knowledge about renewable energy. This makes them well equipped to offer customers the greatest added value, given that "sustainable funding in light of the energy transition" is a complex and rapidly changing set of issues. Having interdisciplinary teams also makes it possible to hold productive discussions with established market players, as they can use their experience to help young companies structure large projects or funding correctly and place them on the financing market with its wide-ranging options. The quality of these projects to be financed has significantly improved. For example, the renewable energy sector has undergone significant professionalisation in recent years. There is increasingly less focus on "traditional" projects such as wind farms and greater focus on innovative business models that combine a decentralised energy supply, which is important for the energy transition, with scalability. This scalability is essential.
In line with the Paris climate targets, the aim is to build as many sustainable power stations as possible in the shortest possible time. The key to rapid implementation is appropriate funding – and the more that banks and companies work together, the better the conditions for such funding on risk-adequate terms. In negotiations with other lenders, banks can contribute their specialist knowledge about what factors will really help to enhance the respective business model and how reasonable conditions can be reached on both sides. By substantiating the advantages of the respective project through acting as an adviser in their customers' discussions with other lenders, these banks are also filling in gaps in customers' knowledge as they are almost constantly focused on building and expanding their operating business.
Successful collaboration between banks and companies not only allows banks to perform a central, innovative role in funding the energy transition; it also sets the stage for both established companies that are evolving and new market players to grow. This support within a cooperative partnership ideally leads to a sustainable and lucrative customer relationship with future energy producers.