Making Money Matter: Green Loans & Ethical Finance
As a wise frog once said, “it isn’t easy being green.”
For the average person, navigating the plethora of options to adopt greener, more ethical practices can feel like being bombarded with directives to reduce our carbon footprint, embrace zero-waste lifestyles, and minimise our impact on the world. Yet, despite these challenges, the desire among Aussie consumers to ‘go-green’ is steadily growing – not just in what we put in our dishwashers, or use to wash our hair, but also in the world of finance.
There are over 1000 lenders in Australia made up of banks and non-banks, with the mortgage market being dominated by the bigger lenders – in 2023 the top 10 held 92% of the market share. Historically, many of these institutions would have invested heavily in coal, mining, gas and oil. However, in recent years there has been a drive towards more environmentally friendly, ethical policies that are driving the banking sector, with many of these major banks signing up to the Net-Zero Banking Alliance, committing to financing ambitious climate action to transition the real economy to net-zero greenhouse gas emissions by 2050.
While these commitments are helping influence and affect change, it can still be a challenge for us to make informed choices about where we want to put our hard-earned dollars, and who we want to borrow from.
Indigo Finance’s resident Green Loans Expert, Suze Pirreca, sat down with us to share insights, experience, and expert advice for consumers exploring green loans and ethical finance.
Over the last two years, Suze has started to see a change in the market, with green lending and ethical finance becoming more of a talking point.
“I’ve always been very environmentally conscious, and so I think the whole concept resonated with me. Then when I started looking into it more and understanding it, it became more of a passion for me, something that aligns with my values and how I feel the market is also evolving.”
But what exactly are we talking about? Green Loans? Ethical Lending? Are they the same or different?
Suze explains:
“It’s two different things. On the one hand, we’re talking about how lenders are investing their money and what they’re doing in practice and in their business models to reduce their carbon footprint. On the other, we’ve got green loans – these may be similar to ethical lenders but have specific products that may offer anywhere from a 20 to 30% discount on an interest rate if your house complies with specific standards, or if it’s fitted with certain products or features that could reduce your carbon footprint.
There are still a lot of brokers who don’t even realise that this is a thing or that there are these products available. On the other side, there are some brokers out there that will only offer loans that are green or with ethical lenders.”
Ethical Lending
There is definitely a shift for mainstream lenders to try and adapt their strategies to become more ethical and eco-focused. Not only as part of the wider strategy driven by government policy, but also perhaps to meet what their customers want –
“I would say this is a generational thing we’re seeing as well – they are more aware of the world issues that we’re facing and are driving this trend that we have to go green, so it’s becoming increasingly popular.”
Suze explained how these lenders might be looking to ‘go green’:
“A lot of lenders are aware that these shifts in consumer demand are happening, and so they are getting ahead of it all – preparing action plans and being able to produce data. It comes down not just to their loans, where they invest and what products they offer, but also to how they educate their staff and how they run their offices. In some cases, we could see that 20% of lenders’ portfolios are ‘carbon unfriendly’, and as they look to the future, they realise that consumers will want to see this reduced.
And it’s not just the ethical reasons – this can also be more commercially viable for lenders. Australia is so big, and we have so many different states that could be experiencing different negative environmental impacts at the same – from drought, to fire, to flooding. Because of this, lenders, and their clients will be impacted by these at some point – for lenders they may be paying out to support recovery programs, have clients unable to work and meet their repayments because their homes are flooded, or having insurance policies to pay out. Choosing to invest in programs that will hopefully help reduce the severity and frequency of these environmental impacts makes sense.”
Green Loans
When it comes to Green Loans, the stage is clearer, especially in the realm of property. This is where lenders step in with tailored financial incentives for customers committed to eco-friendly initiatives or those investing in sustainable properties. These measures could encompass installing Solar Panels, implementing energy-efficient heating and cooling systems or upgrading to environmentally friendly appliances.
While the upfront costs of installing these green elements can put many off, seeing the long-term impact both financially and environmentally could present a different picture:
“People tend to move more than previous generations, so there is also the reluctance to make this financial investment into a property that isn’t your forever home. There is definitely an education piece needed on green loans, as often if you do the math, it’s probably cheaper in the long run to invest in these elements – especially if you could get a green loan that’s going to cover the installation.”
In Australia, both banks and non-bank lenders offer Green Loans – to qualify for a Green Loan, the asset being financed – be it a home, a car or a green home improvement such as solar panels, must meet specific eligibility criteria. In return, borrowers may enjoy discounted interest rates compared to standard loan products.
While there isn’t a universally accepted definition for Green Loans in Australia, lenders will operate within their own sustainability frameworks, leading to variations in classifications. Nonetheless, there’s a convergence among Australian lenders on certain criteria.
Green Mortgages, for instance, cater to individuals purchasing eco-friendly homes or undertaking green renovations. Lenders commonly require properties to incorporate solar systems or adhere to age-related building restrictions. Many lenders demand external property certifications to bolster confidence. These certifications, including the Nationwide House Energy Rating Scheme (NatHERS) administered by the Australian Government, evaluate energy usage and efficiency, with plans underway to extend coverage to existing homes.
For investors, the extra cost and management of these features could be off-putting:
“A lot of people that are buying or building new homes for investments, they want to keep the costs down, just putting in the bare essentials. Not many renters want to pay more money to have solar panels on their house, they just want to keep rents low where possible. There are government incentives for things like insulation and solar power, but it can still be a big upfront cost investment.”
What about Greenwashing?
A phrase that will be familiar to anyone who has ever tried to make the ‘greener’ choice is Greenwashing, where it seems that something is ticking all the boxes with the buzz words on the surface but is more style over substance.
When working with clients, Suze assesses their options:
“The first thing I look for are action plans and firm resolves from lenders. A lot of them invest in communities and environmentally friendly programs. If I can see them actively doing things in the community, and putting time and resources into producing plans and reporting data that gives me more comfort selling their products as green over a lender with a generic 1 page on their website saying they are going green because they’d planted four trees, but they are still investing heavily in fossil fuel projects for example.”
Overcoming the challenges
Some of the challenges Suze sees in navigating these waters are:
Finding the products in the first place
“I think lenders aren’t advertising these green products as much at the moment, perhaps because there’s not as much demand for them so lenders aren’t wanting to invest money in advertising these green products. There’s an education piece in researching what options are available, and working with a specialist who can understand and navigate this market.”
Understanding the criteria, especially green loans
“Some lenders may have stricter criteria than others – ensuring your home complies fully with NatHERS ratings for example – so it’s important to understand exactly what your lender requires. You will likely need to supply a bit more paperwork, certificates and receipts – but if you are working with a specialised Lending Adviser who is knowledgeable in this area, they will be able to guide you through this and put in the extra work. And if it’s getting 30 points off your rate then it’s definitely worth it – if it was me, I’d be providing those receipts!”
Understanding your ‘why’
“If someone comes to me and they say, ‘I only want to borrow through an ethical lender’, but they have no idea what that means, I would say to them ‘what does your moral compass look like? Why is it important to you? Is this because something has impacted you in some way?’ You’ll often find that there is always something behind it – perhaps an illness in the family and they want to be cleaner, or it’s a lifestyle choice.
I’ve even had clients in the past looking to step away from a particular bank, they took away everything, not just their lending but also their super. In that case, they were lucky because they had the capacity to be able to make that choice. But for other clients, it can create some difficult questions, where perhaps we might be able to get them the additional borrowing they need for their dream home, but not with a lender who they might not feel has the green credentials they are looking for. This is where knowing what is negotiable comes in – much like using some ‘eco-friendly’ products that just aren’t quite as good as the non-green counterpart – for me this is dishwashing tablets! You need to know where your line is drawn.
Buying a home is such a big investment, you throw all this, stress and energy into this massive decision. And then on top of that you’ve got the extra pressure of saying, you know, do I go with the ethical lender or the, the not so ethical lender? ”
The Lending Expert’s Role
“As expert lending advisers, we can help our clients through this, presenting different available options. Our role can extend beyond traditional lending to include sustainable financing. If I can do something in my job or even educate someone, just one person at least I feel like, I’m keeping my end of the bargain. Like I’m doing my bit.
I might not always be able to use the eco-friendly dishwashing tablets for my tough dishes, but I will always try and educate my clients on green products where I can to doing my part.”
