Globally, there is a growing recognition that social and environmental risks should be given equal weight to 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.
Implementing such projects aims to create positive, long-term impacts leading to new jobs for highly-skilled workers at all levels of the chain.
There are several approaches to Sustainable Project Financing, including:
Traditional lending: 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 organisation to fund a project.
Grants are often awarded for projects with a specific social or environmental focus.
Impact investing: 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: Raising money for a project through small contributions from many 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 have a bigger regulatory responsibility to consider the environmental, social, and governance (ESG) impacts of their financing decisions.
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.
Financial institutions can engage with the companies, organisations management and equity providers 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 are also responsible for considering the ESG impacts of their activities and utilising e borrowed funds responsibly.
Transparency obligations by disclosing ESG information. By law, financial institutions must disclose information about their ESG practices and investments to increase transparency and accountability.
Financial institutions can adopt recognised 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 guide how to manage environmental and social risks in investment and financing activities.
The Equator Principles, for example, have identified that large infrastructure and industrial projects can adversely impact people and 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 aligned with the United Nations Sustainable Development Goals (SDGs) can contribute to a more resilient future by supporting initiatives addressing global challenges such as poverty, inequality, and climate change.
SDGs are a set of 17 global goals adopted by the UN in 2015, further actively (2018) embraced by the European Union Sustainable Finance policies 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, and climate action (Green Deal) and also target to end poverty.
Financial institutions and investors can help drive progress towards a more sustainable and equitable world by financing projects aligned with the SDGs.
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 infrastructure development and other assets that can withstand shocks and stresses, such as natural disasters or economic downturns.
Equally important is creating new jobs directly related to implementing 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.
By Nicole K. Phinopoulou, Lawyer, Banking, Corporate Commercial & Financial Services, LL.B(Hons), LL.M(UCL), LPC, CISL, University of Cambridge
