Recent news has revealed that global banks are failing to invest in renewable energy in line with commitments made at COP21 in Paris. Unfortunately, with 93% of all energy funding going to fossil fuel projects and only 7% going to sustainability projects, the numbers speak for themselves.

In contrast, at the local level, companies of all sizes continue to rise, with commercial investment in renewable energy growing rapidly. Installing solar panels on rooftops is booming in developed markets as companies seek to protect themselves from skyrocketing fossil fuel energy prices.

Many of these renewable energy projects are self-funded through investments, but a significant portion are backed by green loans and their equivalents. Access to finance is a key factor in our transition to a greener, cleaner energy future, and there are a number of fintech companies taking up the challenge to meet this need.

What are green loans?

Green loans are financing solutions tailored to the needs of organizations undertaking projects with proven environmental benefits. They differ from traditional loans because they come with special policies that guarantee the funds are only used for environmental initiatives.

Some examples of projects often funded by green or “sustainability-related” loans include commercial solar power, battery walls, electric vehicle chargers, and other sustainable assets.

Those offered by large banks come with a strict set of policies and reporting requirements and are often only offered to existing customers. There are also alternative lenders that fund green projects with less red tape, making the process easier for busy business owners.

What is under the umbrella of green loans?

Green credit, sustainability-linked credit, and dedicated decarbonization payment solutions are all different products, but the term “green credit” is often used as an umbrella term for all three.

The defining characteristic of a true green loan is that the proceeds are used for green causes, which is determined by four key criteria – use of proceeds; the green project selection process; management of proceeds; and reporting.

Dedicated payment solutions aim to solve the same problems as green loans, but in a more flexible and business-friendly way. A recently Comparison of green loans and Australian fintech Smart Ease’s products show that less paperwork, faster turnaround times and a distinct lack of reporting requirements are the key differences. This style of agile, 100% green online financing is gaining momentum due to increased accessibility for businesses of all sizes and persuasions.

Why is there growing interest in investor-funded renewable energy?

Several factors play a role here. Global inflation remains high, reaching 9.2% in January 2023. Businesses are feeling the strain of rising energy prices, interest rates and utility costs. Those with savings can afford to reduce energy use by generating their own electricity using solar or – to a lesser extent – ​​wind power. Those lacking capital need an alternative, and green finance has stepped in to fill that gap.

Second, there has been a strong push towards decarbonization in the retail world in recent years. This is driven by two things: public perception of and support for companies based on their green credentials, and environmental, social and corporate governance (ESG) action. Companies without a plan to combat climate change have a lower ESG profile and are therefore viewed as a higher risk by potential investors.

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Businesses are expected to lead the way in decarbonization. Consumers are becoming savvier about recognizing “greenwashing” — making exaggerated or false environmental claims to earn brand candy points — so the days of paying only lip service to environmental responsibility are numbered.

Green loans and specialist financiers investing in decarbonization projects support real actions that have real impact. By financing solar rooftops, electric vehicle charging stations, energy-saving “smart tech” and more, these lenders are enabling their business clients to lead organization after organization in reducing their dependency on fossil fuels.