Climate and Sustainability-Linked Lending: A Game-Changer for Banks

APAC banks are uniquely positioned to lead the shift toward climate and sustainability-linked lending (SLL). However, this type of lending isn’t without its challenges — particularly when working with mid-market and small businesses. For many of these companies, tracking and reporting Scope 1, 2, and 3 emissions is often complex, expensive, and time-consuming.

Yet, the opportunity remains significant. For banks, addressing this bottleneck can unlock a critical market segment, create new lending opportunities, and drive ESG adoption across supply chains including benefits such as:

• Risk Mitigation: Climate events can devastate borrower operations. Linking loans to sustainability performance incentivizes clients to enhance resilience, reducing default risks.
• Meeting Regulatory and Market Demands: APAC regulators and investors are increasingly pushing for sustainable finance. Offering SLLs positions banks as forward-thinking partners.
• Accessing New Markets: Green financing for renewable energy, sustainable agriculture, and climate adaptation projects opens doors to untapped sectors.

The Data Challenge: Emissions Tracking for Small and Mid-Market Businesses

Scope 1, 2, and 3 Emissions – Why They Matter

To qualify for SLLs, businesses are often required to measure and report:

• Scope 1 (Direct Emissions): Emissions from company-owned sources, such as fuel consumption.
• Scope 2 (Indirect Emissions): Emissions from purchased electricity or energy.
• Scope 3 (Value Chain Emissions): Emissions from suppliers, customers, and other indirect sources.

However, in practice, many mid-market and small businesses struggle with this process.

During my conversations on the topic across the region there are a number of challenges that continuously arise:

• Data Availability and Cost: Small businesses often lack the technical capabilities or budget to track emissions comprehensively. Tools for measuring Scope 3 emissions, in particular, are costly and data-intensive.
• Complex Reporting Requirements: The administrative burden of continuous data reporting discourages businesses from pursuing SLLs. Even when they qualify initially, many drop out due to the difficulty of meeting ongoing monitoring and reporting obligations.
• Lack of Standardization: Many businesses find themselves lost in a sea of inconsistent ESG reporting frameworks, making it harder to meet lender requirements.

Case in Point: ESR Group’s JPY 22 Billion Syndicated Sustainability-Linked Loan

Despite these challenges, larger corporates in APAC have successfully adopted SLLs. For example, in March 2024, ESR Group Limited secured a JPY 22 billion syndicated sustainability-linked loan, arranged by Mizuho Bank. This facility highlights how larger companies with established ESG frameworks can succeed in the SLL market:

• Sustainability Performance Targets (SPTs): ESR committed to reducing carbon emissions and enhancing energy efficiency across its portfolio.
• Economic Incentives: The loan offered interest rate discounts for achieving the SPTs, aligning financial benefits with sustainability outcomes.
• Independent Verification: ESR’s ESG progress was monitored and reported regularly, ensuring transparency and accountability.

While this success is promising, replicating it for smaller businesses will require reducing the administrative burden associated with emissions tracking.

A Path Forward: Addressing the Data Gap

To expand SLL adoption in the mid-market and small business sectors, banks can consider:
1. Simplifying Metrics: Develop less complex sustainability targets that are easier for smaller businesses to track and report. For example, setting goals related to energy efficiency or waste reduction, which are easier to measure than full carbon emissions.
2. Leveraging Technology: Banks can provide tech-enabled ESG monitoring tools, such as digital emissions calculators, to reduce the cost and effort required from borrowers.
3. Data Partnerships: Partnering with ESG data providers or creating industry-specific reporting frameworks can help reduce data gaps and standardize reporting.
4. Support and Training: Offering advisory services, workshops, and tools to educate businesses on emissions reporting could boost SLL participation and retention.