• 2 min read

Sustainable Finance: what to expect in 2024?

Modern office building with green leaves. Bottom view of modern office building with green leaves

2024 promises to be a year of constant economic activity and change. Following the steep fall in the UK’s annual inflation rate, forecasts on interest rates and the general cost of borrowing have shifted. Shifts are also expected within sustainable finance markets, with a hopeful trend towards improved access. But what shifts can we specifically expect?

Clearer frameworks for Green Loans

Demand for sustainable finance is on the rise, and is being met with an increase in product options offered by lenders. However in 2023 the uptake of green loans and mortgages did not hit the levels anticipated.

Following a call for advice from the European Commission (“EC”) as to the reasons for this, the European Bank Authority (“EBA”) provided a report highlighting the need for more rigid guidelines on what constitutes a green loan. It suggests that access to and confidence around green loans would increase if consumers understanding of their benefits and implications improved.

The EBA also recommended that prospective borrowers would be aided by an alignment of certain sustainability features of green loans with the Mortgage Credit Directive. Again, the hope being that this would simplify access to green loan products and therefore increase uptake.

The final major recommendation by the EBA was to introduce a ‘Green Loan Label’ with dedicated evidence-based assessments and cost-benefit analysis to allow consumers to easily identify green loan products with lower costs of borrowing.

It is unclear the extent to which the EC will consider these recommendations, but they reflect a general consensus that new green loan products need to be framed better with consumers in mind.

Tougher rules for Sustainability-Linked Loans

The Financial Conduct Authority issued warnings in June 2023 around ‘market integrity’ following suggestions that lenders were accepting weak targets as part of their sustainability-linked loan standards in a bid to improve their own environmental, social, and corporate governance (“ESG”) credibility.

Increased regulation around sustainability-linked loans has resulted in lenders introducing tougher standards for access, following the pressures of potential greenwashing claims and general reputational risk. Since the introduction of these tougher standards, there has been a fall in demand by borrowers for the products who now face increased risks themselves when utilising sustainability-linked products (e.g. higher penalties if they miss ESG targets considered under the products).

As general accounting practices align further with the Task Force on Climate-Related Financial Disclosures (“TCFD”)  and the Task Force on Nature-Related Financial Disclosures (“TNFD”), we may see a rise in utilisation of the products this year as companies are more able to appreciate targets and work them into their general corporate governance.

Potential rise of Transition Finance

In 2024, transition finance could meet the needs of those companies looking to introduce long-term net zero measures yet are unable to meet the requirements of standard sustainable finance products. Transition finance products are commonly viewed as a bridge between standard finance and sustainable finance.

However, their technical criteria is yet to be firmly established. Whilst any ESG targets will be more relaxed than those associated with sustainable finance, they will still be necessary and will carry similar penalties to sustainable finance products if breached.

If you wish to hear more about Sustainable Finance, please contact the firm on 023 8032 1000 and ask to speak to one of our banking and finance specialists.

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