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green office block | accountingweb | The reporting challenges of green finance

The reporting challenges of green finance


As financial accountants grapple with sustainability, Santosh Sahani looks at green finance from the issuer’s perspective and reporting practices.

30th Aug 2023
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Despite plenty of noise surrounding sustainability from technical lectures, very few provide an actual understanding of the overall effect of “sustainability” on the financial statements.

This is due to the fundamental issue of not knowing the impact of sustainability while complying with any financial reporting framework.

To understand the challenges of sustainability on the balance sheet, you need to get to grips with green financing because this funds the sustainable world. 

This article will explore the green financing framework, the potential impact of green financing on the issuer’s financial statement under International Financial Reporting Standards (IFRS) accounting standards, and the current practice on green finance from the issuer’s perspective.

Green-financing framework and lending arrangement

Policymakers, whether in Europe or Asia, have introduced the green financing framework (the framework) in the debt-fund market. The objective is to promote green financing in new infrastructure projects (green projects).

Effectively, the framework is guidance to ringfence the green financing of infrastructure projects of entities operating in specific industries. The ringfencing is based on eligible projects, their utilisation of proceeds, and the reporting metrics for key performance indicators.

The framework is integrated with the lending terms of green projects in master lending arrangements. The terms of the framework are generally referred to as “green feature” in a master lending arrangement.

Potential impact for issuers of financial statements

Under IFRS accounting standards, this lending arrangement references key terms such as principal amount, interest rate, its payment and a green feature.

Anyone taking a detailed look at these key terms might conclude that the green feature does not change cashflows of the principal or interest rates. This is because the framework guidelines explicitly state that the proceeds from green finance should be used only to finance or refinance a green project.

Questions might be asked over whether the green feature would designate the green finance as “a financial liability with embedded derivative feature” for an issuer. 

As per the IFRS, the answer is “no”. This is because green feature:

  • is a non-financial variable
  • does not affect the cashflows of the issuing entity
  • is specific to a green finance issuing entity that operates in a particular set of industries.

Thus, green finance is a simple financing arrangement with a principal amount and interest rate. In absence of any variability to cashflow, the green finance would be easily classified as a financial liability and should be subsequently measured at amortised cost as per IFRS 9 in the financial statement of an issuing entity.

A way forward

In my view, the idea of green feature as an embedded derivative in green finance might not come to reality so soon. Because the first green feature has to satisfy the definition of derivative [Appendix A of IFRS 9].

To meet the definition of derivative, there should be a particular market structure for the green feature, where the green feature should be separately identified and measured for its variability to cashflows, like other derivative instruments. After all this, it should be linked to arrangements of green finance for variability in cashflow of an issuing entity.

The policymakers want to promote the financing of green projects without any variability to cashflows to an issuing entity. An introduction of the variability to cashflows could discourage financing in green projects and thus, the vision of building a sustainable world.

Current practice

We have analysed the financial statements of 10 entities. These entities have mentioned the issuance of green finance in their annual reports. Of entities analysed:

  • six entities have referenced green finance in their financial statements
  • the other four entities have referenced green finance in their other reports instead of their financial statements
  • no entities have reported about the utilisation of proceeds for green projects in notes of cash and cash equivalents of the financial statements.

Information about green finance analysed in annual reports

Sr. No Entities Region Industry Annual report Green finance reported in annual report Specific disclosure in the financial statement Disclosure on utilisation of proceeds Purpose of green finance
1 Renault Group Europe Auto  2022 Yes Yes No Proceed to finance or refinance electric vehicle and charging infrastructure.
2 Dailmer Group Europe Auto  2022 Yes Yes No Proceed to finance eligible projects.
3 Volvo Group Europe  Auto  2022 Yes No No To finance eligible projects and assets.
4 Honda Group  Asia-Oceania Auto  2022 Yes No No To be used exclusively toward environmental initiatives.
5 RWE  Europe Electricity 2022 Yes Yes No For financing or refinancing wind or solar projects.
6 E.On  Europe Electricity 2022 Yes No No To fund infrastructure and energy-efficiency projects.
7 Enel  Europe Electricity 2022 Yes Yes No To fund efficiency projects.
8 National Grid Europe Electricity 2022 Yes No No To fund the eligible projects.
9 TEPCO  Asia-Oceania Electricity 2022 Yes Yes No To fund the eligible projects.
10 Tokyo Gas Group Asia-Oceania Electricity 2022 Yes Yes No To fund renewable projects.


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