Fundamental Questions Surrounding Green Financial Products

Mindful that an ever-increasing amount of attention is being placed on green initiatives these days, I wanted to address some of the fundamental questions surrounding Green Guarantees:

• What is this product?
• Who offers it?
• Does this new product have a framework that is viable, or could it be subject to “green washing”?
• What is the main role for Corporates and Financial Institutions when it comes to use of this product?

Energy Shortage Boosts the Need for Green Projects
Russia’s invasion of Ukraine and heightened sanctions placed on Russia has led to energy challenges in Europe. Some countries had almost 80 percent of their energy supply from Russia, either through Russian gas pipelines or from Russian oil on vessels. These countries were almost overnight forced to secure their energy supply from other countries or other sources which was quite dramatic. The energy challenge caused by the Ukrainian war together with the many climate objectives which have been on many countries’ agendas all over the world has really accelerated the push for innovative renewable energy resources and forward-thinking energy projects.

Green Offerings
Energy projects need finance and funding, and many financial institutions are now seeking solutions to be able to prioritize and discount green projects from corporates. In regards to the product aspect of trade finance, “Green Guarantees” have been the products that are considered most relevant. This might be due to that fact that the guarantee is the instrument type that has experienced the most rapid increase in usage in recent years and are very often linked to the value chain of sizable projects.

In my research of “Green Guarantee” offerings amongst financial institutions in Europe, I discovered that only a few European banks feature this as an option on their website. In regards to Scandinavian banks, the availability of “Green Guarantees” is not widespread compared to “Green Bonds”, for example. My investigation made me question the criteria each financial institution relies on to characterize a particular product as green. What is a “Green Guarantee” or a “Green Letter of Credit”?

Sustainability is a really hot topic nowadays, as is Environmental, Social, and Governance (ESG) which refers to societal criteria that investors use to assess a company’s sustainability and responsibility. As the area is still premature and no strict framework yet set, it seems like each bank has their own parameters for an ESG framework and what can be characterized as “green”. Another question is to what extent can a financial institutions benefit from having a large volume of green products in their portfolio and thus market themselves as a sustainable bank.

One major bank in Norway requires approved certification from DNV (Det Norske Veritas) a recognized international company providing quality certification. This will appear quite sensible at first, but if we consider that the criteria for attaining the certification approval is made solely by that specific bank and that they are the only one to consider what is accepted or not, then we can question if this is the best way to go as one bank’s criteria does not automatically mean that it is approved by other.