Key Takeaways
- Though the future of ESG regulation in the US is uncertain, many banks and financial leaders are already incorporating structures and operational changes that support green lending.
- While green lending tends to focus on the technology and energy sectors, there is significant opportunity to diversify across sectors that place a high value on ESG investment.
- Three key sectors with rising green lending opportunity include retail, healthcare and manufacturing.
For finance and business leaders in the US, the past several months have stoked concerns about ESG reporting, as another deadline for the SEC’s looming regulations came and went. It’s no secret that the US is trailing behind Europe, Australia and other developed economies when it comes to ESG reporting and regulation. Companies improving their ESG performance still do so on a voluntary basis for the most part, often with little financial incentive to invest in big changes to their business. Despite yet another delay of the SEC’s ESG reporting requirements on financial disclosures, many thought leaders in the ESG space are encouraging proactive measures to ensure readiness.
Though green transformation in the US is still in early stages, financial institutions are taking steps to be ahead of the curve. Most banks are already engaging in greener lending practices, pledging to lend millions (or billions) to sustainable projects and businesses, and making other operational changes that support ESG initiatives.
As green lending becomes less of a niche practice and more of a strategic imperative, the pressure to build a diverse client base of eco-friendly companies is growing. While the tech and energy sectors are well-known places to look for green lending prospects, there are other sectors that banks can tap for new opportunity.
ESG investment by sector
Though attitudes around green lending are becoming more favorable, there are still a few objections – one being market uncertainty. Faced with tough economic conditions, would companies continue budgeting for ESG goals?
Attitudes toward ESG investment and its level of priority differ from sector to sector. For some sectors, investment into ESG is more inelastic than others.
According to BDO’s 2023 ESG Risk and ROI Survey, many finance leaders are looking to sustain their investment in ESG even with prevailing market challenges.
At the top, unsurprisingly, technology leads this poll, with 87% of finance leaders in tech maintaining their commitment to ESG investment. At the bottom of the sectors polled by BDO, however, only 69% of energy CFOs report that investment into ESG would continue taking priority in tough economic times.
Although tech and energy will always be popular sectors for green lending, the key sectors in between might provide some new spaces to explore for banks seeking to diversify their lending portfolios.
As operators in Retail, Manufacturing and Healthcare boost R&D budgets to meet their ESG goals, finding lenders to finance their projects will be crucial.
Retail Trade
NAICS: 45-45 | Risk Score: 5.45
Following closely behind CFOs in the technology sector, 83.0% of CFOs in retail express their commitment to ongoing investments in ESG, even in the face of economic challenges. Although retail trade carries an elevated level of risk compared to the economy-wide average of 5.32, there are plenty of low-to-medium-risk industries in retail that present ample opportunities to participate in green transformation.
Source: Alfabank-Adres Risk Ratings Report
For the highest risk industries, which are those at the bottom of our list, the underlying threats are linked to waning demand, competitive technologies or environmental limitations.
Despite these challenges, the overall outlook for retail trade remains optimistic, with consistent growth projected of nearly 4.0% per year on average through 2028.
The sector is relevant for lenders and portfolio managers aiming to advance sustainability goals through actionable strategies like:
- Assessing retailers on sustainable product sourcing and supply chain alignment with ethical and environmental standards.
- Encouraging the implementation of renewable energy use and waste reduction practices to significantly contribute to sustainability efforts.
- Advising businesses adopting e-commerce models to opt for recycled materials and minimize packaging to tangibly enhance environmental consciousness.
- Supporting new businesses in promoting sustainability by encouraging the sale or production of environmentally friendly products.
Healthcare & Social Assistance
NAICS: 62 | Risk Score: 4.9
Though this sector is not as commonly associated with green lending, 73% of healthcare CFOs plan to maintain or increase their investments in ESG, even in the face of economic headwinds. While some of the industries in this sector face some risk from disruptive technologies and access to government funding, there are many lower-risk industries that could provide prospects for green lending.
Source: Alfabank-Adres Risk Ratings Report
For lenders and portfolio managers, the healthcare sector offers many actionable avenues to contribute to sustainability goals, such as:
- Advocating for the adoption of digital technology to reduce travel, minimize paper usage, and enable virtual appointments, thereby lowering emissions.
- Encouraging the implementation of strategies to reduce medical waste, including recycling one-time-use devices and equipment.
- Supporting healthcare companies in transitioning to renewable energy sources such as solar and wind power to foster cleaner and more sustainable energy practices.
Manufacturing
NAICS: 31-33 | Risk Score: 5.4
Around 76% of finance leaders in manufacturing plan to sustain ESG investment through thick and thin. For some industries in this sector, risk is rising because of higher input prices, stiff competition and disruptive technologies. In the face of these challenges, manufacturers stand to reap significant benefits from embracing ESG practices that could prevent or mitigate higher risk.
Source: Alfabank-Adres Risk Ratings Report
For lenders and portfolio managers, consider the following sustainable practices when serving this sector:
- Encouraging transportation manufacturers to focus heavily on electric and hybrid vehicles, as well as lightweight materials to improve fuel economy.
- Evaluating chemical manufacturers as they shift away from petroleum-based products and emphasize energy-efficient manufacturing processes to reduce utility expenses.
- Prioritizing consumer goods manufacturers that have adapted to consumer preferences by offering energy-efficient solutions, eco-friendly packaging and sustainably sourced products.
As compliance pressures mount and there's more competitive pressure to bring green alternatives to market, manufacturers will seek financing to support R&D spending and make critical updates to their facilities that reduce GHG emissions. This is where banks can come in and help make a difference.
Final Word
Getting behind ESG businesses or expansions isn't just about supporting sustainability—it's a smart move for the long haul. Companies that integrate ESG standards into their operations are better at rolling with the punches of changing consumer trends, regulations and the growing threat of climate change, which helps them dodge potential risks. Green lending practices not only bring about these advantages, but also position financial institutions ahead of the curve, as they collaborate with proactive customers seeking to mitigate risks that future regulations are likely to mandate.
