Environmentally Sustainable Lending

From Open Risk Manual

Definition

Environmentally Sustainable Lending is lending activity consistent with the goals of Sustainable Finance. It means lending to finance environmentally sustainable economic activities. It is part of the wider concept of sustainable finance, meaning any financial instrument or investment, including equity, debt, guarantee or a risk management tool, issued in exchange for the delivery of financing activities that meeting criteria for being environmentally sustainable.

EBA Guidance

Institutions that originate or plan to originate environmentally sustainable credit facilities should [1] develop, as part of their credit risk policies and procedures, specific details of their environmentally sustainable lending policies and procedures, covering the granting and monitoring of such credit facilities.

These policies and procedures should, in particular:

  • Provide a list of the projects and activities, as well as the criteria, that the institution considers eligible for environmentally sustainable lending or a reference to relevant existing standards on environmentally sustainable lending that define what type of lending is considered to be environmentally sustainable;
  • Specify the process by which the institutions evaluating that the proceeds of the environmentally sustainable credit facilities they have originated are used for environmentally sustainable activities. In cases of lending to enterprises, the process should include:
    • collecting information about the climate-related and environmental or otherwise sustainable business objectives of the borrowers;
    • assessing the conformity of the borrowers’ funding projects with the qualifying environmentally sustainable projects or activities and related criteria;
    • ensuring that the borrowers have the willingness and capacity to appropriately monitor and report the allocation of the proceeds towards the evironmentally sustainable projects or activities;
    • monitoring, on a regular basis, that the proceeds are allocated properly (which may consist of requesting that borrowers provide updated information on the use of the proceeds until the relevant credit facility is repaid).


Institutions should position their environmentally sustainable lending policies and procedures within the context of their overarching objectives, strategy and policy related to sustainable finance.

In particular, institutions should set up qualitative and, when relevant, quantitative targets to support the development and the integrity of their environmentally sustainable lending activity, and to assess the extent to which this development is in line with or is contributing to their overall climate-related and environmentally sustainable objectives.

See Also

References

  1. EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06