If analysis pieces from sources such as IBISWorld, EY and the RBA in the last year are anything to go by, Environmental, Social, and Governance (ESG) factors are fast becoming benchmarks for creating new lending policies.
Changing societal values, particularly amongst Gen Y/Millenials, who are now entering their thirties to forties, are driving change in socially responsible investing (SRI) and banking. ESG is now considered more than a ‘green’ trend. It is a substantial data source for policy setting across government, regulators and other change agents.
We explore the impact of ESG policy on Commercial, Agribusiness and Residential Finance.
In a financial sense, ESG refers to how companies score on environmental, social and governance metrics and standards criteria.
IBISWorld states, “Governance factors evaluate leadership quality and internal controls, vital for ethical and efficient operations. By considering these dimensions, banks can predict and mitigate risks more effectively, leading to more secure financial outcomes.”
How banks are using ESG data
Commercial banks are being mandated to seek data beyond traditional financial metrics when conducting credit risk assessments. ESG analysis is used in the following ways:
EY Australia predicts that the cost of finance will eventually become tied to sustainability performance. Rather than a PR or compliance exercise, ESG reporting will factor into financial and performance management KPIs.
Companies that prioritise sustainability by actioning ESG success measures may soon be viewed more favourably for financing opportunities than companies that do not.
Energy efficient incentives and commercial loans
Most lenders, including Commbank and Gateway Bank, already offer discounted commercial loans for 4 Stars and above rated energy efficient commercial properties.
Commercial Property Green Loans allow eligible businesses to access additional funds for property sustainability upgrades. Property upgrades help commercial investors attract quality long-term tenants and offer tax depreciation benefits. Commercial case studies can be found on the Energy Efficient Council website.
Agri Green Loans
Major and secondary lenders have recently launched green Agribusiness finance products that support investing in sustainable practices such as soil sequestration, converting degraded land, forestry, waste and water management, solar and other renewable energy, and regenerative farming.
These loans encourage and support climate change initiatives that reduce greenhouse gas emissions in a low-carbon economy.
Australian state governments also offer agribusiness initiatives such as Queensland’s ‘Dealroom’ for Agri Startups and Tasmania’s ‘AgriGrowth Loan Scheme’.
In Australia, there is no centrally administered definition of a green loan for mortgage lending. Therefore, lenders have developed their own frameworks around green mortgages, green automotive and green personal loans.
Many lenders offer clean energy and energy-efficient incentives such as a lower base variable rate with additional discounts, including Lenders Mortgage Insurance (LMI) discounts. A recent environmental incentive from ING offers a cashback for eligible properties with a energy rating of 7 stars or greater that finance an ING Home Loan before the end of 2024.
As reported by the Australian Financial Review, major banks are pushing for a national, standardised star-based rating systems that measure the energy efficiency of homes ‘to help reduce the credit risk associated with lending to borrowers living in inefficient properties susceptible to bill shock’.
In Victoria, the government is moving ahead with its policy to mandate energy-efficient standards for rental properties. However, landlords who cannot comply within the time frames may be forced to sell, causing more stress in an already burdened rental market.
The Reserve Bank of Australia (RBA) has publicly advocated for greater transparency in financial markets to ‘improve the flow of financial capital between investors and ‘green’ (securities) issuers and assist the transition to net zero or broader sustainability objectives.’
If Australia is to reach its net zero greenhouse gas emissions by 2050 commitment, then green and ESG lending is set to play an ever-increasing role.
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The team at MCP Financial Services has specialised expertise in structuring complex debt arrangements. We can assist with review and restructuring, refinancing and renegotiating.