By Nicole K. Phinopoulou, Lawyer, Banking, Corporate Commercial & Financial Services, LL.B(Hons), LL.M(UCL), LPC, CISL, University of Cambridge
Globally, there is a growing recognition that social and environmental risks should be given equal weight as financial risks in investment decision-making.
Especially when the decisions are about Project Financing. Sustainable project financing refers to the funding of initiatives that are environmentally and socially responsible, whereas the implementation of such projects aim to create positive, long-term impacts leading to the creation of new jobs, for highly-skilled workers at all levels of the chain.
There are a number of approaches to Sustainable Project Financing, including:
- Traditional lending: This involves borrowing money from a bank or other financial institution to fund a project. These loans may have terms and conditions that require the borrower to meet certain sustainability standards.
- Grant funding: This involves receiving financial support from a government agency, foundation, or other organization to fund a project. Grants are often awarded for projects that have a specific social or environmental focus.
- Impact investing: This involves investing money in projects or companies that are expected to generate both financial returns and positive social or environmental impacts. Impact investors may provide equity, debt, or other types of financing.
- Crowdfunding: This involves raising money for a project through small contributions from a large number of people, typically via the internet. Crowdfunding platforms allow individuals to invest in projects they believe in and support.
If we concentrate on traditional lending, it is generally accepted that financial institutions, now is legally evident that they have a bigger regulatory responsibility to consider the environmental, social, and governance (ESG) impacts of their financing decisions. Incorporating ESG criteria into their investment policies. Financial institutions can incorporate ESG criteria into their investment policies and processes to ensure that they are consistently considering sustainability and ethical factors when making financing decisions.
- Engaging with borrowers and stakeholders. Financial institutions can engage with the companies, organizations management and equity providers to whom they lend to and encourage them to improve their ESG performance.
- Both financial institutions and the borrowers that receive their capital (funds) share the responsibility for the ESG impact of their decisions. Borrowers also have a responsibility to consider the ESG impacts of their activities and to utilize borrowed funds in a responsible manner.
- Transparency obligations by disclosing ESG information. Financial institutions are now by law obliged to disclose information about their ESG practices and investments to increase transparency and accountability.
- Adopting industry standards and best practices. Financial institutions can adopt recognized industry standards and best practices related to ESG, such being, inter alias, the United Nations Principles for Responsible Investment (PRI) or the Equator Principles Association (EP), which provide guidance on how to manage environmental and social risks in investment and financing activities.
The Equator Principles, for example, are one of the sets that have identified that large infrastructure and industrial projects can have adverse impacts on people and on the environment. The Equator Principles are intended to serve as a common baseline and risk management framework for financial institutions to identify, assess and manage environmental and social risks when financing Projects.
Sustainable project financing that is aligned with the United Nations Sustainable Development Goals (SDGs) can contribute to a more resilient future by supporting initiatives that address global challenges such as poverty, inequality, and climate change.
As noted in our previous articles the SDGs are a set of 17 global goals that were adopted by the United Nations in 2015, further actively (2018) embraced by the European Union Sustainable Finance policies, in an effort to protect the planet and ensure that all people have the opportunity to live peaceful, healthy, and prosperous lives. The Goals cover actions related to health, education, gender equality, clean water and sanitation, renewable energy, climate action (Green Deal) and target also to end poverty.
By financing projects that are aligned with the SDGs, financial institutions and investors can help to drive progress towards a more sustainable and equitable world. This can involve investing in initiatives that provide access to basic services, promote economic development and protect the environment.
Sustainable Project Financing leads to more resilient communities and economies by supporting the development of infrastructure and other assets that can withstand shocks and stresses, such as natural disasters or economic downturns. Equally important is the creation of new jobs directly related with the implementation of sustainability standards. By investing in projects that are designed to be resilient, financial institutions and investors can help to reduce the risks and impacts of these events and promote long-term stability and prosperity.