BLOCKCHAIN AND ITS APPLICATION TO GREEN LOANS
Financing for sustainable activities and projects or for the purchase of environmentally friendly assets is called green loans. Their main objective is the reduction of CO2 emissions, the respect of biodiversity, or the use of clean technologies.
Compliance with the destination of the green loans is critical, as diverting the funds would threaten environmental protection and generate a social and ecological cost due to the misallocation of resources. Therefore, the applicant must demonstrate that the borrowed funds will be used for projects with environmental impact. Not only the borrower has to prove this, but also the lender, i.e. the financial institution, has to control and monitor that the stated objectives during the application process are met.
Some examples of green credits for households or individuals:
- Loans for solar panels.
- Loans for the purchase of a hybrid or electric car
- Loans for thermal insulation of a house.
- Loans for wind energy generators for households.
Some examples of green credits for businesses:
- Loans for building a solar farm.
- Loans to make zero-emission buildings.
- Loans to buy filters for effluent or emissions treatment.
- Loans to install a biodigester to generate biogas from industrial organic waste.
Green loans principles
The Green Loans Principles (GLP) were developed by APLMA (Asian Pacific Loan Market Association), the LMA (Loan Market Association) and the LSTA (Loan Syndications and Trading Association) to serve as a voluntary guide for issuers of green debt. To comply with the GLP requirement, green lending will be aligned with the following components:
- The use of funds: the fundamental objective of a green loan is the use of loan funds for green projects.
- Project evaluation and selection process: the borrower must inform the lender of its environmental sustainability objectives:
- its environmental sustainability objectives;
- the process by which the borrower determines how its projects fit into the eligible categories set out in Appendix 1; and
- the relevant eligibility criteria.
- Management of funds: The lender must adequately monitor loan funds to ensure transparency and integrity in the use of funds. To this end, funds should be credited to a dedicated/specific account or tracked by the borrower to maintain transparency and promote the integrity of the product.
- Reporting: The borrower should report to the lender on a regular basis on how the funds are being used and the progress of the project.
Traceability and accountability is critical to GLP compliance. In recent years this type of lending has gained momentum in the corporate and multilateral financial world. In 2021, green credits accounted for a portfolio of USD 2 trillion. However, doubts arise as to whether the money is being used efficiently. COP26 was the last annual UN conference on climate change. COP stands for Conference of the Parties, and the summit was attended by the countries that signed the United Nations Framework Convention on Climate Change (UNFCCC). At this last conference, activists demanded greater accountability from governments, multilateral agencies, banks and companies for the proper use of funds earmarked for green credits.
These demonstrations highlighted the need for GLP to move from being a voluntary guideline to a regulation by the competent authorities in each country.
There are many challenges in its implementation, mainly in terms of traceability and accountability. GLP compliance must achieve a positive cost-benefit ratio, i.e. the costs of controlling the destination of the funds must make the loan in question viable and profitable, especially in retail loans, where the average amounts do not allow the cost of individualized and bespoke audits to be covered.
Advantages of blockchain technology in the application of green credit principles
Blockchain technology can significantly facilitate compliance with the 4 green credit principles. Its main operational advantages are:
- Decentralized control
- Ubiquitous reporting
- Visibility and traceability
- Lower costs
- Immutable and incorruptible
For the fulfilment of green loan principle 3 and 4, i.e. fund management and reporting respectively, blockchain can provide funds traceability and at the same time generate ubiquitous reporting systems so that all stakeholders are informed about the funds use. In addition, meeting these 2 objectives could reduce the administrative burden of principle 1 and 2, i.e. justification of the funds use by the borrower and proper evaluation and selection of the project by the lender. If the funds are traceable, the loan application process is simplified as there is certainty that the funds were invested in the destination declared during the application. For more information visit BM-Trusck
Other international regulations for the use of green resources
In addition to the above-mentioned institutions, other organizations are committed to creating international standards for the proper investment of green funds. Some of these bodies are:
The Climate Discourse Standards Board was a consortium of Non-Governmental Organisations committed to causes related to environmental protection. It has now changed its name to IFRS, but has not changed its essence of monitoring the financial destination of its partners’ green loans.
The International Sustainability Standards Board represents a large number of global investors. This group constantly demands high quality reporting, transparency and reliability of the resources they provide for environmental projects.
The Task Force on Climate-related Financial Disclosures was established in 2015. Its main objective was to bring clarity and transparency to the resources allocated to climate investment. This was achieved through a series of recommendations that could be put into practice to monitor these projects.
With all the controls that the different international organizations have foreseen in recent and coming years, a regulatory trend is being created which will have a high impact on a market that is estimated to represent 30% of the credit portfolio of most financial institutions by the end of this decade.
Green loans: advice and responsibility
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