<strong>Green transformation in the world of finance</strong>

Green transformation in the world of finance

Green transformation is currently in the spotlight of financial market participants around the world. In your practice, is there also an increased interest in ‘green’ finance in the Polish market?

While some borrowers and sponsors were aware of ESG (Environmental, Social and Governance) criteria, until recently these criteria were perceived more as part of the marketing strategy than an actual material element of the structuring of financing transactions. For several years this has been changing dynamically, and not without reason. The abbreviation “ESG” has entered the mainstream and become firmly rooted in the consciousness of market participants. Companies that manage ESG risks more effectively are perceived as less risky by financing parties, as a result of which they even more often also enjoy lower costs of financing. Moreover, it is estimated that implementing the aforementioned ‘green transformation’, i.e. including achievement of the 2030 Sustainable Development Goals formulated by the UN, will require global investments of up to USD 7 trillion a year, accounting for more than a third of all investment globally.  With the increasing supply of sustainability-related projects, so-called ‘green’ capital will have an increasing share of and role on the market. Debt financial markets have very creatively responded to the challenges of achieving sustainable development goals, by creating a number of products related to that area for bonds and loans, and recently increasing often also factoring products and derivatives. Depending on the breakdown criteria, from several to more than 10 categories of products offered by participants of the Polish and European financial markets can be distinguished. Interestingly, debt financing products related to sustainable development can be considered one of the few examples of financial innovation where European, and not American, financial markets are leading the way.

The terms ‘green finance’ and ‘sustainable finance’ are used interchangeably by many. Is this correct,  or are those terms not synonymous?

The terms are inextricably linked to each other, and it can be assumed that green finance is a sub-category of the term ‘sustainable finance’. At a very general level, green financing can be described as a process involving the raising of funds for goals related to climate and environmental issues, while sustainable finance takes into account issues and risks related not only to the environment but also to society and corporate governance and serves to increase the volume of  investment in sustainable economic activities and projects.

This distinction is also reflected in the area of credit financing, where there is increasing interest in the two separate types of products. On the one hand we are dealing with green loans whose main distinguishing feature is the purpose of the financing – the funds must be allocated to the implementation of a ‘green project’. They may therefore be projects for renewable energy, pollution prevention, biodiversity conservation, clean transport or the construction of ‘green’ buildings. Owing to the ambitious plans concerning, inter alia, reductions in emissions and achieving carbon net zero in the EU, the capital needs for such investments will increase, but the limited number of projects in which investors or lenders could commit their funds and the fact that most companies, due to the nature of their business, do not have the capacity to make such investments means that a green loan is not the most versatile financing instrument.

Sustainability-linked loans are a separate category of loans. The criterion differentiating this type of product is not the purpose of the loan but the linking of the level of the margin to the achievement of certain indicators, KPIs, i.e. sustainable-development-related parameters agreed on by the lender and the borrower that the borrower must attain. This could be, for instance, a reduction in emissions or an improvement in its general ESG rating. However, it is essential that the agreed parameters be strictly related to the borrower’s core business and that they translate into a tangible gradual improvement of its ESG profile. Depending on whether the borrower achieves the goals set – which are termed sustainability performance targets (SPTs) – the margin will decrease or increase. Sustainability-linked loans (SLLs) are most often granted as revolving loans designated for the day-to-day corporate needs of the borrower, which is another of the many reasons why SLLs are becoming increasingly popular.

So how will the new types of financing instruments affect (or are already affecting) the transaction process?

Certain elements are being modified at virtually every stage of the transaction. Starting with the expansion of due diligence to include verification of ESG-related criteria, through increasing the variety of financing instruments available at the stage of structuring transactions – financing parties may choose to use green, blue (i.e. related to projects aimed at protecting the marine and oceanic economy) or social bonds (i.e. related to projects aimed at financing social services), and the aforementioned green or sustainability-linked loans, depending on their needs. Following the European Commission’s latest legislative proposals, we also expect that financing parties will take ESG-related criteria into account in their decision-making processes to an increasingly greater degree. We are closely observing proposals concerning the obligation that banks attribute an increased risk weighting to the financing of projects in the fossil fuel industry in a broad sense.

You mentioned that only a part of borrowers and sponsors are aware of the meaning of ESG criteria. What will happen to those financial market participants who are not interested in involving their resources and in taking ESG criteria into account in their activity?

In extreme cases, if some institutions fail to fulfil their obligations concerning so-called non-financial reporting, i.e. the ESG-related requirements, penalties provided for in the applicable criminal provisions of law could be imposed on them. Some more commonly encountered consequences of not taking ESG criteria into account in a company’s activity will definitely entail difficulties in obtaining financing by the companies whose activity does not qualify as activity making a material contribution to the mitigation of climate changes (and, at the same time, not causing damage to other environmental goals). This is not yet a result of ‘hard’ provisions of the EU or Polish law, but it may be a consequence of self-regulation of financing parties in order to increase their financial involvement on investment implementing the 2030 Sustainable Development Goals. This may take the form of increased involvement in projects qualified as related to sustainable development and simultaneous financing of so-called “brown” projects or the form of a total resignation from the financing of the latter. However, it must be mentioned here that a misapplication of ESG criteria in one’s activity also constitutes an equally serious business and legal risk.

Such entities expose themselves then to currently common accusations of greenwashing. Won’t the fear of reputational damage resulting from such accusations discourage institutions from involvement in actions concerning ESG and from informing the public about these actions?

In the context of sustainable finance, greenwashing refers to situations in which given products or instruments used by financial institutions are defined as “green” or “sustainable” or exerting “sustainable influence” without the application of clear criteria which would allow the actual proving of such influence or would allow such influence to be measured.  It is undoubtedly a negative phenomenon that has been the subject of many controversies on the market and a reason for criticism that at times has been directed at the broadly understood ESG finance market. The increased pace of legislative works aimed at standardising products and assessment criteria in such a way as to hinder greenwashing are therefore unsurprising. A key instrument in the fight against abuses will be the Taxonomy of the EU and the acts of law related to it. We expect that the regulations arising as a result of those works will contribute on the one hand to the strengthening of market transparency, while on the other they will pose a major challenge for its participants – because they will impose a number of requirements, mainly reporting requirements, that it will be difficult to satisfy without the support of experts. Legal advisers and consultancy firms can therefore expect an influx of mandates on the part of clients who are among those affected by the new regulations.


Andrzej Stosio, advocate, partner, Co-Head of the Global Financial Markets, Clifford Chance Warsaw

Maksymilian Jarząbek, advocate, Senior Associate, Global Financial Markets, Clifford Chance Warsaw

Aleksandra Sierac, lawyer, Global Financial Markets, Clifford Chance Warsaw

Last Updated on October 6, 2022 by Valeriia Honcharuk