Guide: Why should SMEs take up green loans? | OCBC Business Banking SG
Now reading:

Why should businesses take up green loans?

Why should businesses take up green loans?

  • 18 February 2021
  • By OCBC Business Banking
  • 10 mins read

In the world we live in, businesses are key stakeholders. This puts them in an ideal position to help protect it and drive positive long-term impacts for the environment.

Moreover, all segments of the population that businesses come into contact with – including consumers, investors, governments and employees – are becoming increasingly conscious about the environmental footprint they leave behind.

People want to buy products that are eco-friendly; they want to invest in sustainable solutions; they want to drive green industries and protect the ecosystem; and they want to work for companies that share their values. While it’s natural that businesses need to be profitable, this doesn’t have to come at the expense of the environment.

One way businesses can signal their green intentions is by taking up green loans or sustainable financing. Locally, the Monetary Association of Singapore (MAS) recently launched the world’s first grant scheme to support Green and Sustainability-Linked Loan Grant Scheme (GSLS) on 24 November 2020.

By helping to defray up to S$100,000 of the cost of adhering to green and sustainability requirements, this grant will encourage more SMEs in Singapore to take up such green loans and become more environmentally-friendly.

What’s the difference between a green loan and a regular business loan?

From a financial perspective, a green loan may appear similar to a regular business loan. You will have to pay the amount you borrow back to the bank along with interest.

What’s different is that green loans are meant to finance or re-finance both new and existing eligible green projects, as defined by Green Loan Principles (2020). This requires borrowers to align their green loans to four components:

1. Use of proceeds

A green loan should be utilised for green projects with clear environmental benefits. Examples of such projects include climate change, natural resources depletion, loss of biodiversity, air, water and soil pollution.

2. Project evaluation and selection

Borrowers need to clearly communicate the environmental sustainability objectives of their projects, how the projects fit within eligible categories of use, and any related eligibility criteria. Borrowers should also disclose any green standards or certifications that they are seeking to attain.

3. Management of proceeds

Green loan funds should be put into a dedicated account, or otherwise tracked by the borrower to maintain transparency in the usage of proceeds. Borrowers are also encouraged to establish an internal protocol to track the usage of the funds.

4. Reporting

Borrowers should keep up-to-date information about the use of proceeds until the amount borrowed is fully drawn, and thereafter if there are any developments. This should include a description of the green projects that the borrower has funded, the amount allocated and the expected green impact from these projects.

Green loans are different from sustainability-linked loans

Apart from green loans, MAS’ GSLS also covers sustainability-linked loans. Sustainability-linked loans are not required to be put towards green projects. Instead, they are usually tied to sustainability targets by lenders.

The GSLS also encourages banks to develop sustainability frameworks for SMEs and individuals by defraying up to 90% of the expenses, capped at S$180,000 per framework (including green loans).

Why should businesses take up green loans?

With awareness on sustainability topics such as climate change, clean energy and conservation of biodiversity on the rise, more businesses are shifting towards responsible capitalism to stay relevant in this conversation.

There is also a common misconception that going green comes at the expense of building a profitable business, or takes attention away from your core business operations. This isn’t true as going green can lead to long-term business viability for your company.

Complying with the requirements to take up a green loan or a sustainability-linked loan may feel a little cumbersome. It is also a long-term commitment that will incur heavier costs and divert resources away from your core operations. This is how it can differentiate a company just paying lip service or seeking publicity from ones that are serious about their environmental impact.

Going green bolsters a company’s corporate image and underscores its brand values, which could be treasured by their stakeholders. Business leaders and employees may also feel more fulfilled in helping a company that is environmentally conscious and isn’t only driven by profits.

With a greener corporate profile, businesses are also putting themselves onside with governments and regulators. In effect, such businesses prime themselves to win more contracts by engaging clients and regulators to improve industry standards.

There are few ways to win a project without being the lowest bidder. A serious and validated commitment to protect the environment by using environmentally-sustainable solutions and work processes is one of those ways.

Besides building better rapport with customers, certain green-driven operational decisions, such as using less packaging, reusing materials or finding innovative ways to reduce material wastage can lead to long-term cost savings for your business. This bodes well not only for the environment, but also the company’s bottom line.

How to apply for sustainable financing?

At OCBC, we are committed to supporting businesses in their efforts to go green and pursue sustainable projects. With that in mind, we developed the OCBC SME Sustainability Financing Framework to enable our SME clients to embark on sustainable financing, with up to S$20 million in loans.

Our aim in developing this framework – aligned with the four core components of the Green Loan Principles (2020) – is to reduce time, complexity, and costs for businesses to embark on their sustainability financing journey and achieve their sustainability goals.

Areas of funding include renewable energy, green buildings, energy efficiency, clean transportation, pollution prevention and control, sustainable water and wastewater management, as well as sustainable environmental management. Projects can be in Singapore or other countries that you operate within.

Join us in making the world a greener place with your green financing needs.

Disclaimer

You may be directed to third party websites. OCBC Bank shall not be liable for any loss suffered or incurred by any party for accessing such third party websites or in relation to any product and/or service provided by any provider under such third party websites.

The information provided herein is intended for general circulation and/or discussion purposes only. Before making any decision, please seek independent advice from professional advisors. No representation or warranty whatsoever in respect of any information provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake any obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.


Ready to apply?

Fund your green initiatives today with sustainable financing.