Financial Benefits For SMEs To Take A Green and Sustainability-Linked Loan

On 24 November 2020, the Monetary Authority of Singapore (MAS) announced the  Green and Sustainability-Linked Loan Grant Scheme (GSLS). As a first-of-its-kind globally, the GSLS is part of MAS’ Green Finance Action Plan to position Singapore as a leading centre for green finance regionally and globally. This scheme came into effect from 1 January 2021.

This isn’t just for Singapore’s economy either. Human emissions of carbon dioxide and other greenhouse gases are the primary driver of climate change. With businesses forming a large part of human activity, the heat is naturally on business executives, financiers and thought-leaders to show they are part of the solution to one of the world’s most challenging issues.

This new scheme will help corporates of all sizes get more support in securing green and sustainability-linked loans. Going forward, accessibility to green loans and sustainability-linked loans will not be just for large and industrial businesses, but also for smaller businesses to play their role in reducing their carbon footprint.

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These two loans are available as a source of financing for firms across different industries to transition to more sustainable practices. However, adopting sustainability also means that a third party is required to assess that your business is adhering to the green principles outlined by MAS. Doing this will cost time, effort and money.

The GSLS was therefore launched to assist firms in defraying some expenses required to engage independent service providers to validate the green and sustainability credentials of their loan. 

The Green Loan helps to finance new or existing green projects, while the Sustainability-Linked Loan provides incentives to firms in achieving their sustainability performance targets. Here’s a breakdown of the two and how it’ll benefit SMEs in Singapore.

What Is A Green Loan?

Green loans are specific loans meant to finance green or sustainable projects. However, a business must meet certain conditions in order to be considered green. Known as the Green Loan Principles, they include:

#1 Use of proceeds must have clear environmental benefits

The projects that are being financed by the loan must have clear environmental benefits, which will be assessed by the borrower. Examples of projects that have clear environmental benefits include:

  • Renewable Energy
  • Energy Efficiency
  • green Buildings
  • Clean Transportation
  • Pollution Prevention and Control
  • Eco-Efficient and/or Circular Economy
  • Sustainable Water and Wastewater Management
  • Environmentally Sustainable Management of Living Natural Resources and Land Use

#2 Projects must state clear environmental sustainability objectives

The borrower of a green loan must inform its lenders of the project’s environmental sustainability objectives and is required to disclose any green standards or certifications that the project is hoping to meet.

#3 Dedicated account to manage proceeds

A dedicated account should be set up for green loans to be credited into. This is to maintain transparency and integrity of the loan monies being used for its purpose. Firms should also establish internal governance processes to track the usage of the funds. 

#4 Reporting

Information on the use of proceeds should be reviewed annually. All information such as the list of green projects, its impact, and amount allocated should be readily available and kept up-to-date. 

How Are Green Loans Different From Normal Bank Loans? 

A green loan is no different from a conventional loan, except that the loan must finance projects with a clear sustainability agenda that benefits the environment. 

An example of a project that took up a green loan is Allianz Real Estate and Gaw Capital Partners for DUO Tower and DUO Galleria, where green features such as double-glazed low-emissivity glass exterior, rainwater harvesting system and surrounding lush green landscape were incorporated into the building project. Eco-friendly office towers 7 & 9 Tampines Grande were also financed with green loans.

Businesses can also refinance their existing loans with a green loan. For example, Gold Ridge, the owner and developer of NEX mall, secured a $900 million green loan from OCBC, DBS and UOB in March 2021. Its Green Loan Framework was drawn up with the owner and asset manager of NEX mall as well as OCBC, DBS and UOB.

Read Also: Using The Government-Assisted SME Working Capital Loan To Grow Your Business

What Is A Sustainability-Linked Loan?

Sustainability-linked loans are a type of loan that incentivises borrowers to achieve sustainability performance targets. For example, the loan interest rate is pegged to a series of environmental, social and governance (ESG) performance metrics. If pre-determined targets are achieved, the interest of the loan will be reduced. Unlike green loans, no restrictions are placed on the use of proceeds for sustainability-linked loans, and they can be used for general working capital purposes. 

A local SME that took on a sustainability-linked loan is Chew’s Agriculture. The egg producer will enjoy lower interest rates if it meets Humane Farm Animal Care (HFAC) standards.

What Support Does The Green And Sustainability-Linked Loan Grant Scheme (GSLS) Provide?

With the GSLS, MAS helps cover up to $100,000 of expenses that firms need to pay to engage independent sustainability assessment and advisory service providers over a 3-year period. These providers develop green and sustainability frameworks and targets, obtain external reviews, and report on the sustainability impact of the loan.

By defraying the costs required to go green, MAS hopes to reduce barriers and make green financing more accessible for SMEs. This will encourage more businesses to adopt sustainable business practices. At the same time, other objectives of this grant include ensuring the integrity of green and sustainability-link loans with external assessments, as well as developing deep green finance expertise in Singapore.

Moreover, the GSLS is also extended to banks to support them in developing frameworks targeted at SMEs and individuals. This is to encourage banks to provide greater support to SMEs.

As mentioned, this is part of Singapore’s push to become a leading green finance centre, developing green products, deepening local expertise and strengthening the financial sector resilience.  

Why SMEs Should Apply For The MAS Green And Sustainability-Linked Loan Grant Scheme (GSLS)

If it was prohibitively expensive in the past or there were too many hurdles for your firm to jump in order to hop on the green bandwagon, perhaps it will be easier to do so now. As an SME embarking on a green loan or sustainability-linked loan, you will receive financial assistance of up to $100,000 per loan over 3 years from MAS.

Banks will also be more inclined to support you in this journey as they have also received support of up to $180,000 funding (capped at 90%) over 3 years to Develop Green and Sustainability-Linked Loan Frameworks for SMEs and Individuals. This will streamline the assessments of green and sustainable lending and support businesses in financing circular economy projects, renewable energy, energy efficiency activities, and promote sustainable supply chain practices. 

Today, consumers are also becoming more aware of the environmental impact of the products and services they buy. Similarly, investors, employees and governments are more inclined towards firms not just with high profitability and growth, but also with sustainability in their corporate culture. Taking up a Green Loan or Sustainability-Linked Loan will highlight your company’s commitment to the environment and sustainable business practices.

At the end of the day, climate change is everyone’s business, which makes it the business of your business too. 

This article was first published on 3 December 2020 and has been updated with the latest information.

Need Financing Support During This Period?

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For SMEs that are just six months into operations, secure up to S$100,000 with the OCBC Business First Loan . If your SME is above two years old, secure up to S$700,000 with the OCBC Business Term Loan – good for funding business operations or expansion. Terms and conditions apply.

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