Absa will become the first bank in Africa to extend loans for biomass and other renewable projects under a new sustainable financing programme based on “green loan principles” using money from the World Bank.
The deal will see the International Finance Corporation (IFC) — a division of the World Bank focused on the private sector in emerging markets — extending the group a loan of up to $150m (about R2.1bn) for exclusive use in predefined green projects.
“The IFC wants to help banks in developing their financing of green projects. This financing is the first tranche of a broader relationship, and will support our capacity to lend in a number of ways,” says Absa group treasurer Deon Raju.
Raju was recently appointed the group’s risk officer, a role he will assume from June 1.
The projects and the specific way in which Absa must report on the uses of the funding are detailed in a set of “green loan principles” developed by the Loan Market Association (LMA).
The LMA is a global network of institutions comprising commercial and investment banks, institutional investors, and service providers that exists to develop recognised standards and practices for lending.
According to LMA’s principles, the fundamental determinant of a green loan is the use of proceeds. Besides the obvious application of financing renewable energy projects, loans meeting the definition can also be made for projects enhancing energy efficiency, the sustainable management of natural resources, aquatic biodiversity conservation and “clean” transportation, to name a few.
Besides obtaining dollar funding at beneficial rates — what Raju says is much cheaper than what Absa could raise on its own — there are other benefits to the partnership.
“They will also provide input in how to develop our framework for assessing projects as they have been doing this worldwide. This talks to how credit assessments are performed and how we can measure the impact of specific projects in relation to the objectives of green financing,” says Raju.
The assessments also inform the cost of financing that Absa passes on to the borrower. If done comprehensively and correctly by identifying the positive “externalities” that flow from the project — in the form of cleaner air or the preservation of biodiversity — this will lower the cost of funding for green projects.
A key feature of the principles is transparency in reporting. As part of the requirements that will be overseen by the IFC, Absa will separately report on its green financing activities under the programme. This means investors will be able to see how the funding provided by the IFC has been used.
This could be big business for Absa and its peers moving forward. SA has committed to reducing its greenhouse gas emissions by 42% by 2025 and reducing its reliance on coal-fired power by 2050. Absa in turn aims to extend or arrange R100bn in funding for environmental, social and governance projects by 2025.
Raju says green financing is at the top of the agenda with investors and funding partners.
“The discussions around green financing with stakeholders has increased exponentially over the last five years and is now a topic at every roadshow. Investors are looking for every opportunity to deploy cash into these projects.”
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