A subprime green situation

A couple of weeks ago, I was watching “The Big Short” for the umpteenth time. I like to do it about once a year to keep in mental shape and be reminded that there is no such thing as too stupid. As I watched it, I got the feeling of something very familiar.

It wasn’t the energy transition, it was something more specific. So, later I went to my “Reading materials” file and browsed through it. There it was, a Bloomberg headline from November that said banks were in a rush to add special clauses to their sustainability-linked loan contracts in a bid to anticipate any claims of greenwashing.

I wrote an article about it for Oilprice at the time but I thought it wasn’t long and caustic enough to do the topic complete justice. First, I reached out to some legal professionals for the pro take. Oddly, I only received two responses to my query for comments. I should have put “EVs” somewhere in the title.

Anyway, about those banks and their SLL problems, here’s what I learned from Rick Chahal from Kahlon Law, an Ontario criminal law firm. Rick explained there hadn’t been much of scrutiny for sustainability-linked loans until the market grew so much that regulators started paying attention. Sound familiar yet?

What’s more, Rick said, banks left it to borrowers to make sure they use the money from the SLLs for sustainability-linked activities. As he put it, “Banks naturally focus on the borrowers' financial credibility more than the purpose of the loan. It's outside their expertise to assess environmental or social impacts comprehensively.”

Obviously, banks can’t do everything themselves, so they have to delegate — to borrowers or to third parties that do certifications, “which might sometimes be misleading”, says Rick.

In other words, as I gather, banks tend to believe borrowers when they say that of course they’re going to use their green loan for green projects without checking because they have neither the time nor the resources.

So they sometimes use the “Call a friend” option and employ the services of certification providers, which, I’m afraid, sound too much like ratings agencies. Cue the S&P scene in “The Big Short”.

I’m not saying it’s the same situation. I’m saying it strikes a strangely familiar note. And it’s not the only one. The whole green loan situation smacks of somebody forgetting to do some homework too busy chasing easy money.