What is Green Finance?
Green finance refers to any financial product or service specifically designed to support environmentally sustainable projects and initiatives. It is a growing area of the financial sector that aims to encourage businesses to invest in activities that help reduce their environmental impact, such as cutting carbon emissions, improving energy efficiency or adopting cleaner technologies.
For small and medium-sized businesses, green finance provides a pathway to contribute to the UK’s net-zero goals while also making their own operations more resilient and efficient. It is a way to access capital for projects that might not be funded through traditional means or to secure more favourable terms for investments that have a positive environmental outcome.
The types of projects that can be funded by green finance are wide ranging. This includes the installation of solar panels or heat pumps, purchasing electric vehicles for a company fleet or investing in new energy-efficient machinery for a manufacturing process. The finance provided is often tied directly to the project’s environmental benefits, which must be clearly defined and reported on. This ensures that the funding is genuinely contributing to a greener economy.
The Main Types of Green Finance Available
Green finance is not a single product but a collection of different funding options tailored for environmental purposes. The two most common types for businesses are green loans and green asset finance.
Green Loans
A green loan is a form of business loan where the funds are specifically for an environmentally beneficial project. This could be to pay for building upgrades such as insulation or LED lighting or for a larger project, like the installation of a renewable energy system. The key feature of a green loan is that the business must use the funds exclusively for an approved ‘green’ purpose. Many lenders offer green loans with incentives, such as no arrangement fees or a discounted interest rate to encourage businesses to make these investments.
Green Asset Finance
Green asset finance works in the same way as traditional asset finance but is specifically for the purchase of environmentally friendly equipment or vehicles. This could be to acquire electric or low-emission vehicles for a fleet or to finance new, more energy-efficient, manufacturing machinery. Just like a regular asset finance agreement, the business makes regular payments over a set period to use the asset with the finance often being at a discounted interest rate due to its green credentials.
Green Finance in a Broader Context
Green finance is becoming a significant component of business finance. In the past, businesses seeking to invest in green technologies might have had to rely on standard business loans. Now, with dedicated green finance options, businesses have more direct and often more ways to fund these projects.
For a small business, using green finance can be a way to reduce long-term operational costs. While the initial investment in a new heat pump or a fleet of electric vans may be significant, the savings on energy bills or fuel costs can make the project financially viable over time. This makes green finance a strategic business decision, not just an environmental one.
For larger businesses, green finance may also come in the form of green bonds, which are used to raise large amounts of capital from investors for a range of green projects. While this is a more complex instrument, the underlying principle is the same: to align financial flows with sustainable outcomes.
As sustainability becomes a central part of business planning for companies of all sizes, the demand for green finance is growing. The UK government and the British Business Bank have also introduced various initiatives and schemes to support this transition, with some government funding available in the form of grants or other forms of support. These options provide businesses with a diverse set of tools to invest in a greener future, helping them not only to meet environmental targets but also to improve their financial performance and reputation.
Green Finance FAQs
Is green finance only for large corporations?
No, green finance is available to businesses of all sizes, including small and medium-sized enterprises (SMEs). Many banks and specialist lenders offer green loans and asset finance products with incentives specifically aimed at helping smaller businesses make the transition to a greener way of operating.
What can a green loan be used for?
A green loan can be used to fund a variety of projects that have a clear environmental benefit. This can include investments in renewable energy, energy efficiency upgrades to a business’s premises, installing low-carbon heating or purchasing electric vehicles and charging infrastructure.
Are green loans cheaper than regular business loans?
Many lenders offer green loans with more favourable terms, such as a discounted interest rate or waived arrangement fees, compared to their standard business loan products. The specific benefits will vary by lender and depend on the details of the project and carefully check the costs.
How does a lender verify that a project is ‘green’?
Lenders have a framework that defines what constitutes an eligible green project. They will ask for detailed plans and evidence of the proposed investment to ensure it meets their criteria. This might involve an assessment of the expected environmental benefits, such as a reduction in greenhouse gas emissions or energy.
What happens if a business doesn’t use the green loan for its intended purpose?
The terms of a green loan agreement are strict. The funds must be used for the agreed-upon green project. If the business fails to use the funds for that purpose, the loan may be re-classified as a standard loan and the business could lose any of the benefits that were tied to the project’s green status or it may find itself breaching contract terms which can come with a number of issues.