Green Credentials

The Growing Importance Of Green Credentials In Consumers' Credit Choices

19 July 2022

Green is no longer a dream

In 2022 independent research from EQ Credit Services revealed that a growing number of borrowers are interested in the green credentials of financial providers when considering taking out a loan.

Despite increasing pressure on UK consumers from rising inflation and an increased cost of living, the research signalled important attitudinal changes in consumer behaviour.

So, what does it mean to be green?

The term green loan is often used to define where the loan proceeds go, indicating they're invested in green projects. Whilst sustainability-linked loans feature a pricing structure which is linked to the borrower's performance against sustainably-linked criteria. More broadly, the term "Green Loan" is an umbrella term often used to describe these two different products.

In the past, financial providers have adopted a more voluntary approach to being green but now, as regulation takes over, the need to behave in a more climate-aware way is prevalent and can be more profitable. Earlier this year, the UK Government announced it was exploring plans to link mortgages to green home improvements, and at present the Minimum Energy Performance of Buildings Bill is being reviewed by Parliament, which is connected to the EPC rating of buildings. This is only the beginning in terms of industry-wide regulations and forward-thinking lenders are proactively making changes.

As the UK economy moves towards increased sustainability and green measures, through necessity and choice by the individual, there are several long-term benefits for both borrowers and lenders. While some borrowers are proactive and engaged with sustainability and are concerned about the environment, lenders can also play an active role in educating a wider audience.

56% of those we surveyed (in EQ’s Consumer Borrowing Survey) were 'interested' in a sustainability-linked loan where the interest rate is influenced by the borrower’s energy efficiency, with an additional 25% being 'curious'. By investing and educating in the practical day-to-day benefits and tangible rewards of a greener approach, its clear lenders can create opportunities that are mutually beneficial to all. 

By offering a lower interest rate on electric vehicles, car finance lenders can play an essential part in reducing vehicle emissions in the UK.

In 2021 the UK Government announced a goal to be net-zero by 2050 as part of its commitment to climate change. To achieve this ambitious target more green solutions must be adopted on a large scale across a number of different areas. Banks and FinTech companies are heavily investing in AI to help with providing green solutions, but also in response to a demand for greater ESG accountability. As the need for all industries to be more transparent about sustainability, companies are beginning to publish annual reports about their carbon footprint. This will also have an impact on a borrower’s decision when choosing a lender.

While the electric car market is growing every year, the cost of an electric vehicle is still prohibitive for most consumers. By offering a lower interest rate on electric vehicles, car finance lenders can play an essential part in reducing vehicle emissions in the UK. Going forward, the second-hand electric car market will play an important role in reducing carbon emissions. The increased availability will mean a reduction in price and greater adoption, especially as the sale of new petrol and diesel cars will end in 2030. 

Financial services and markets have an important role to play in the transition to a more sustainable future

— FCA, 2021

Another piece of the puzzle for the UK to become net-zero is having the appropriate infrastructure in place. This is both in terms of suitable charging points for vehicles and more green solutions for the home. Solar panels, cavity and loft insulation, a new boiler and energy-efficient windows will all help to reduce heating bills and carbon emissions. 

Green loans and mortgages have become more commonplace in the last few years, with mainstream banks and building societies playing their role in increasing awareness amongst the general public. Financial incentives for carrying out 'green' home improvements or living in an energy-efficient home are becoming more prevalent and less risk adverse for lenders as these investments typically hold the value. It’s still early days but research shows the appetite is there.

At EQ Credit Services, we believe these will become the standard for all future loans. More lenders will find themselves funding green solutions in the future.

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