SustainAbility Talks: Green loans represent less than 3% of banks’ portfolios. What are the barriers to financing the transition to sustainability?

Banks and investors are recalibrating their businesses and portfolios according to ESG (Environmental, Social, Governance) criteria, and green lending is one of the tools needed. Financing the transition to a sustainable Romanian economy is just beginning, according to participants in the SustainAbility Talks debate on “Financing the Transition to Sustainability”, organised by the Sustainability Embassy.

Global business leaders across all industries anticipate strong growth in ESG assets and make ESG investments with the same focus on financial goals as non-ESG investments. 71% of global business leaders believe that “ultimately, investment decisions will not be made without considering ESG.”

According to Bloomberg, ESG assets will reach $50 trillion by 2025, representing more than a third of the estimated $140.5 trillion in global assets under management.

“It’s little of what we’re seeing now in banks’ portfolios, where green loan exposure is less than 3% of total loans. When we look in more detail, we see that it is even less on the green lending side of non-financial companies, where we believe it would be an opportunity for credit institutions, not only for them but also for the real sector because we start from a very low level of financial intermediation in Romania, the last place in the European Union. Looking at this information, the low figure of green financing, but also the less adequate training of non-financial companies, we somehow understand that the role of banks is critical,” said Luminița Tatarici, Head of Service, Financial Stability Directorate, National Bank of Romania.

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Currently, companies are not motivated enough to access green credit.

“Even for a company that does all its homework, knows its objectives and calculates indicators, green financing brings an additional consumption of resources (…) There are no significant differences in terms of interest rates, instead, (green) financing comes with certain criteria that must be met in terms of reporting and subsequent monitoring,” said Magdalena Caramilea, Sustainability Director, Autonom Group.

Organisations prefer to opt for traditional financing in a context where there is no balance between the extra effort involved in accessing green credit and the financial benefits gained.

“The difference in cost is not visible. (…) Germany does an exercise, when it issues two bonds on the same day, with the same characteristics, and manages to see an interest rate spread of 1-2 basis points (compared to the green ones – n.n.). Thus, from a cost point of view, a company would take on an extra burden without seeing tangible benefits, but sustainability targets show that the company is also looking into the future. Companies that invest in sustainability now will have a competitive advantage over others. “, said Bogdan Zincă, Head of Contracting Service, General Directorate of Treasury and Public Debt, Ministry of Finance.

Green finance is just one component of the European regulatory framework, which should support the sustainable transformation of the economy. Elements such as taxonomy, SFRD – Sustainable Finance Disclosure Regulation, CSRD – Corporate Sustainability Reporting Directive, Green Bond Standards, and Green Claims Directive are still in the early stages of assimilation into corporate strategies and organisational cultures of companies.

One of the most important changes will concern non-financial reporting. According to the CSRD, companies will be obliged to publish non-financial reports compliant with the European Sustainability Reporting Standards (ESRS) from 2025.

“On the question of whether we’re moving too fast or putting too much pressure on, there were discussions comparing it to financial reporting as we know it today – with profit and loss, balance sheet, cashflow – which has developed over centuries. Now, they want to invent in 2-3 years a functional and very accurate sustainability reporting system, which is something completely new. (…) We are in a rather busy and stressful time for issuers and for companies that next year will have to have all the data in order to be able to report them from 2025 onwards”, said Remus Dănilă, Investor Relations and Business Development Director, Bucharest Stock Exchange.

Actors at the forefront of implementing sustainable economic transformation measures, particularly banks, have a key role in relaying information to all stakeholders.

“Two years ago, we were talking about Green Loan Principles (GLP) or Green Bond Principles (GBP), which are standards that are more accessible to banks, but also to borrowers. Now we’re talking about the European taxonomy and integrating definitions into what green finance means. This is why some companies, even if they want to access loans or even access loans with transition features, need more time to assess their baseline, define what significant risks they need to address, to choose some meaningful KPIs to associate with green lending or sustainable lending growth”, said Daniel Sava, Head of Structured Finance, UniCredit Bank Romania.

At the population level, only one in four Romanians is interested in the ethics and responsibility of a bank’s investments when accessing a loan or a financial service, according to the study “Romanians and the sustainable economy”, conducted by IZI data for the Embassy of Sustainability in Romania and presented during the debate. The most important criteria are the investment’s safety and the institution’s financial strength. The IZI data study was conducted in August 2023, using the CAWI (Computer Assisted Web Interview) online methodology on a population of 1049 respondents, nationally representative urban-rural, male and female internet users aged 18-65. The full study is available here.