Financing arrangements are increasingly being linked to sustainable business practices. This includes where the proceeds are used exclusively to finance a combination of green and social projects or where pricing varies depending on whether the issuer achieves its ESG objectives within a predefined timeline.
This new range of ESG based financing initiatives can be complex and raise potential financial reporting considerations.
Organisations are considering all aspects of their operations to identify opportunities to align their business models with the increasing demand by investors and consumers for more sustainable growth. ESG initiatives are being integrated into all elements of their operations, including financing activities.
Financiers are also aware of the potential change in risk profile of customers that are not engaging to move to more sustainable business practices. As a result of these developments, financing arrangements are evolving to incorporate ESG factors by rewarding organisations that achieve their ESG targets with a lower cost of borrowing.
This is leading to a new range of ESG based financing initiatives, which raise potential financial reporting considerations.
In this Reporting Update we highlight the main types of ESG financing initiatives that are emerging, both domestically and globally, and the accounting implications.
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