Green financing is a borrowing mechanism that companies can use to fund sustainability initiatives. Examples of green financing include green bonds and green loans. Other industries have utilized green financing for decades, but it remains relatively rare within healthcare.

Green financing carries three primary benefits. First, companies can use it to fund a wide array of green projects, including those in facility design. Second, green financing often provides access to lower borrowing rates than through “traditional” corporate borrowing. Lastly, green financing can boost the reputation of corporations that adopt it, and it can help adopters comply with Environmental, Social, Governance (ESG) criteria or incoming regulations and incentives.

Macro socioeconomic and regulatory pressures continue to squeeze health system financial margins. Coupled with high interest rates, these forces are pushing health systems to look for cheaper ways to access capital. Further, regulatory and social pressure is building around healthcare’s high environmental impact. This pressure is driving health systems to find new ways to reduce their environmental footprints at a time of constricting finances and risk-averse lending. Green financing represents an opportunity to finance sustainability projects at lower rates than would otherwise be available.

Green financing requires health systems to commit to long-term financial and environmental reporting targets, with high levels of scrutiny from banks and investors. Associated projects must follow green financing principles, so adopters sacrifice latitude over what they can invest in compared to traditional financing mechanisms. Organizations looking to utilize green financing must also ensure their culture prioritizes environmental sustainability.

Green financing is a financial mechanism used to fund sustainability initiatives. Green financing can unlock access to capital and investment opportunities to back projects that contribute to measurable environmental benefit.

This report focuses on the two predominant forms of green financing that are most accessible to health systems: green bonds and green loans (for additional definitions, see glossary).

1. Green bonds: Like a traditional corporate bond, a green bond is a fixed-income instrument that raises capital for an issuer from investors over a set period. However, a green bond is different in that its proceeds are issued to fund a specific environmentally beneficial project or series of projects. Green bonds often have the same credit rating as their issuers’ other debt obligations, and, like traditional corporate bonds, are typically of large volume and mature over a 20- to 30-year period. They may also be listed on public exchanges. Green bonds can be tax-exempt or generate taxable benefits for the business issuing them.
2. Green loans: Green loans raise capital for specific environmental projects most commonly through banks instead of external investors like in green bonds. Green loans are often for less money and shorter maturity periods than green bonds. Green loans typically have lower transaction costs than green bonds and, unlike green bonds, don’t need to be a minimum size to be tradable. 

To be labeled as “green,” green bonds and loans should abide by the Green Bond Principles and Green Loan Principles set by the International Capital Market Association. These principles establish that 100% of associated proceeds of each instrument must be directed toward the specified green projects.

It’s important to note that an issuer or borrower can label their own bonds or loans as “green” without adhering to these principles or without validation through a third party. This is increasingly uncommon, is unlikely to abide by any upcoming regulations, and can limit the number of investors due to concerns about “greenwashing” if this occurs.

In summary, the principles of green financing models are:

• Use of proceeds: Issuers and borrowers should assess, quantify, measure, and report progress on all associated green projects. They should clearly designate loan tranches or preexisting financial structures to be refinanced.
• Process for project evaluation and selection: Issuers and borrowers should inform lenders of how the project(s) will contribute and adhere to environmental benefit and strategies, policies, certifications, accreditations, and credit ratings related to environmental sustainability. They should identify, monitor, and report on any associated social and environmental risks.
• Management of proceeds: Issuers and borrowers should maintain transparency and integrity by crediting and tracking the loan or bond, and any associated tranches, in a distinct account. They should establish internal processes to track the allocation of funds toward green projects, placing unallocated proceeds in an account that is visible to the lender.
• Reporting: Issuers and borrowers should continuously track the use of proceeds and their specific allocations, and report environmental outcomes annually using both quantitative and qualitive performance indicators.

Because green financing has historically been used more in other industries, healthcare is still forming its understanding of what constitutes a permissible project that green financing tools can fund, and this remains a gray area. For that reason, the issuer or borrower must provide as much information as possible in a pre-issuance/pre-loan report to make the argument clear that the instrument will meet all accountability criteria and only fund projects with environmental benefit. Regulators recommend that issuers and borrowers ensure projects are audited by a third party to ensure they meet the Green Bond or Green Loan Principles.

The following page shows Advisory Board’s early analysis of what potential types of projects should be eligible or ineligible for green financing, based on interviews with healthcare leaders and literature on precedent from around the world. Overall, issuers and borrowers have wide flexibility when it comes to selecting projects, as long as the projects meet accountability measures and result in specific and measurable environmentally beneficial outputs.

Macro socioeconomic, environmental, and regulatory pressures are creating a financial market that is increasingly highlighting the potential benefits of green financing.

Below are two macro trends and their underlying drivers that are generating interest in and adoption of green financing. We’ve also provided data points that support these underlying drivers.

In 2011, BMC was on the brink of receivership having lost $200 million over the previous two years due to changes in reimbursement under Massachusetts healthcare reform¹. BMC is a safety-net hospital with thinner margins than non-safety-net peer organizations. Because safety-net hospitals — which receive less reimbursement due to a larger population of uninsured patients than other health systems — have limited opportunity for revenue growth to widen their margins, the organization was forced to look at cost savings instead. An obvious target was facility costs. Many buildings across BMC’s campus were old and created spatial inefficiencies and redundancies. BMC’s ever-increasing capital investment needs were also significantly greater in their original split campus configuration, a product of a previous merger. BMC realized that this could all be addressed by reducing and consolidating their facility footprint.

BMC’s Senior Vice President of Facilities and Support Services, Bob Biggio, generated a radical facility redesign plan that would significantly reduce BMC’s physical footprint and energy usage while expanding or maintaining patient capacity.

The plan involved expanding two buildings on the campus that could house clinical space from facilities elsewhere in the system that could be sold. Additionally, BMC planned on renovating nearly 500,000 square feet of their campus to relocate clinical space from outside the campus into a single footprint. Finally, the campus, its services, facilities, and equipment were to be upgraded and modernized. This included building brand-new operating rooms, intensive care units, and an emergency department. The plan was estimated to cost $350 million — a significant sum for an organization under financial distress.

To source this capital, BMC identified and sold off the real estate it vacated as a result of the plan and issued the first green bond by a U.S. hospital. This bond — split into 5% and 4% coupon offerings — was worth over $385 million. Using this capital, BMC was able to redesign services around fewer, higher efficiency facilities and reduce carbon emissions and energy use in the process. The bond was used to fund projects such as a cogeneration plant, which redirects waste heat from electricity generation back into the hospital’s heating system, and modification of heating and cooling systems to make them less carbon intensive.

Celsus financed the building of the new Royal Adelaide Hospital (RAH), which opened in 2017, at a cost of AU$2.85 billion in 2011. Celsus acquired funding through a traditional corporate loan which required refinancing at three- to four- year intervals. The hospital was designed to be a leading hospital for sustainability and was considered one of the most expensive buildings in the country.

In July 2021, Celsus refinanced the loan, and it was classified as a green and social loan in accordance with the Green and Social Loan Principles that had since been published by the Asia Pacific Loan Market Association in April 2021. Refinancing during the COVID-19 pandemic provided some economic uncertainty. While a traditional loan was considered, qualifying for a Green and Social Loan provided a platform to pursue long-term environmental, social, and governance initiatives for Celsus. By refinancing to a green and social loan, Celsus was able to keep similar terms and rates and attract new investors.

Banks were eager to engage in the loan because they saw the hospital as a social enterprise — a low-risk, high-impact social investment that would enhance their ESG credentials. Bank scrutiny was still high, so Celsus had to prove that they could report accurate water and energy usage data across the hospital’s footprint, which was validated by a third party, DNV Global.

Crucially, the Celsus executive team cultivated a belief in the loan and a collective willingness to make progress on sustainability criteria. It did this by leveraging strong relationships with the state government, subcontractors, banks, and the Celsus Board, using the transparency associated with the loan-reporting process to get stakeholder buy-in.

Green financing is still a new concept to healthcare. The eligibility of prospective projects for green financing is dictated by several variables including an organization’s financial situation, stakeholder alignment, local geography and demographics, and local and national regulations.

Executives looking to adopt green financing must be willing to convince their boards and lenders that green financing is the right method to access capital for specific green projects with specific outcomes in mind. Leaders should ensure that projects are fully assessed for costs risks, and have clear measuring and reporting processes in place before applying for a green bond or loan.

Your organization might benefit from green financing if:

• It has specific green projects it wants to pursue that will directly contribute to specific and measurable environmental outcomes
• It requires access to capital to fund progress toward its sustainability goals
• It wants to enhance its reputation to its consumers, employees, partners, and regulators
• It has a culture that prioritizes environmental sustainability, particularly at the board and executive level
• It can create common objectives and communication pathways between often siloed stakeholders (e.g., financial leaders, facility managers, procurement managers, C-suite)

Your organization is unlikely to benefit from green financing if:

• It wants to retain complete latitude for what it can invest in with allocated capital
• It will struggle to attain board buy-in and the collective mindset shift toward prioritizing environmental sustainability
• It can’t rapidly create and maintain strict, comprehensive tracking and reporting processes needed for green projects, including tracking carbon emissions
• It doesn’t want to structure its own financing terms in isolation as most green finance offerings are not “on the market”

The pharmaceutical and life sciences sectors are emerging as big players in the green finance market. For example, Amgen issued its first green bond — valued at $750 million and six times oversubscribed — in 2022 as part of its ambitions to become carbon neutral by 2027. The pharmaceutical and life sciences sectors and their supply chains are responsible for around 80% of healthcare’s total emissions, so pharmaceutical and life sciences companies must generate cohesive and broad strategies to reduce their environmental footprint. Green financing is used to fund the switch to more efficient, lower carbon supply chain and manufacturing infrastructure. To prevent “greenwashing” accusations which can be harmful to an organization’s reputation, pharmaceutical and life sciences companies must ensure they are publishing climate impacts and progress to waste and emissions targets.

Insures increasingly elevate ESG and sustainable investing in their long-term strategies, but only 24% claim to have mature environmental policies or capabilities. Likewise, 49% of payer CEOs say their organization cannot measure their carbon emissions even though regulators are starting to require emissions reporting. Payers, like health systems, have considerable gaps in their environmental strategies. Green financing, particularly green loans, could provide an opportunity to invest in sustainable projects and reduce their environmental footprint.

Payers must self-assess their environmental strategies and outputs and identify areas where capital investment could improve impacts and efficiencies. Payers should increase transparency into their environmental outputs by publishing emissions and waste data, and track their progress over time as they engage with environmental strategy. Payers should ensure their products and services abide by the United Nations’ Principles for Sustainable Insurance.

The International Capital Market Association’s Green Bond and Green Loan principles remain voluntary commitments. Until there are formalized and legalized criteria for green financing adopters to adhere to, the market will remain underdeveloped. Governments and regulators are likely to introduce their own stringent criteria on green investing and borrowing in the near future. As more jurisdictions around the world adopt tax incentives associated with green projects, governments and regulators should push for a high level of adherence to positive environmental outputs from healthcare organizations pursuing these projects, through green financing or otherwise.

As the green finance and ESG markets continue to develop, the amount of — and clarity around — green financing options for healthcare entities will increase. Public and regulatory scrutiny over these arrangements will likely increase in tandem. We’ll be watching out for:

• Developments in the regulation of green finance markets: New market regulators or rules may appear and could set stringent eligibility, reporting, and compliance criteria that locks organizations out of green finance labels.
• New green financing mechanisms: Additional types of borrowing or new methods of financing environmentally beneficial projects, specifically seen in healthcare.
• Alternative reporting tools: Processes or systems that help healthcare organizations to measure, track, and report their environmental data and aggregate it across all sites.
• Innovative green projects: Unique or powerful projects at healthcare organizations funded by green finance capital.

Green financing offers new ways for health systems to reduce their environmental footprint at a reduced cost. It can increase operational efficiencies and bring the cultural shift required to make significant progress on environmental objectives.