As in many other industries, the integration of ESG (Environmental, Social, Governance) will also play a central role in the leasing industry in 2024. This is due to the combination of increasing regulatory requirements, growing pressure from investors and lessees and the internal need to better manage risks.
Against this backdrop, the basic idea that the integration of ESG criteria into leasing strategies can bring great benefits to the players involved by positioning companies as responsible market participants and securing long-term competitive advantages comes up again and again. Whether this idea can be implemented in practice must first of all be assessed independently for the lessor (financial service provider) and the lessee (company or private consumer). In addition, a more detailed analysis reveals that many prerequisites still need to be created for the chain of effects of this idea to work in practice.
This article examines the actual impact that ESG integration can have on the leasing business in current practice and the role that IT will play in this.
ESG - what is it?
Behind the acronym are the three terms Environmental, Social and Governance. As is to be expected with terms of this kind, there is no simple checklist for the meaning behind them. However, what is meant by ESG quickly becomes clear when you look at the specific fields of action that are assigned to these terms. Fields of action in the broadest sense are activities that companies must, should or can carry out.
The environmental criterion stands for the impact of companies on the environment and their contribution to environmental protection. This includes, for example, climate protection measures, the promotion of biodiversity or greenhouse gas emissions.
The social criterion stands for the social responsibility that a company assumes. Examples of this include points such as working conditions, standards and social commitment - including in the supply chain.
The governance area describes the area of sustainable corporate management. This includes sub-areas such as compliance, measures against corruption and money laundering or dealing with whistleblowing.
The need for action in companies is often triggered by changes in the legal situation (e.g. stricter reporting obligations). This is also the case with the integration of ESG. New laws such as the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) require detailed sustainability reports, which leasing companies must also take into account - for themselves and with their financing. Companies that do not meet these requirements risk penalties and loss of reputation. Insofar as leasing companies are not yet (directly) covered by the new regulations, the need for comprehensive transparency may arise (indirectly) - e.g. as part of their refinancing - as the banks financing them will demand this. It is therefore time to act!
ESG integration in leasing between wishful thinking and reality
Wishful thinking
As mentioned at the beginning, there are many levels at which ESG can be integrated into the leasing business. This starts with the choice of business partners in a leasing relationship. From the leasing company's perspective, the selection of leasing partners and objects will in future have to be based decisively on environmental, social and governance factors - just as a corresponding portfolio management system will have to be established.
Leasing companies can "reward" companies for good compliance with ESG criteria. The term "ESG linked leasing" emerges in this context: ESG Linked Leasing goes beyond the mere consideration of ESG criteria and links the leasing conditions to the ESG performance of the lessee. As a result, companies that meet or exceed certain ESG targets can benefit from better leasing terms, such as lower interest rates or more flexible contract terms.
Example: A technology company could conclude a leasing contract that requires an annual reduction in the CO₂ emissions of its leased equipment. If these targets are met, the leasing costs could be reduced in the following year. This creates incentives for sustainable business practices with direct financial benefits.
Reality
In order to put the above-mentioned approaches in the right light in terms of their practical suitability, it is necessary to consider the legal and organizational requirements regarding data availability, collection and evaluation. Here we can see that practice is often still a long way from the basic idea mentioned in the previous paragraph. This starts with the legal situation. Imagine that a lignite producer wants to lease investments in environmentally friendly assets. The wishful thinking would be that this ESG integration would give the lignite producer a positive influence on the leasing conditions. Unfortunately, the legal situation is already a barrier to this idea: as long as an assessment of the debtor (and its industry) takes place and not an assessment of the asset, the investment is "not green". Therefore, a lignite producer today (as a lessee) does not have a good rating from an environmental perspective. The intention to invest in an environmentally friendly asset is therefore not yet reflected in the planned improvement in leasing conditions.
In addition, the consideration neglects the fact that a transfer (as a reward) is not possible without further ado. Leasing companies cannot pass on the benefit at all. They would only (be able to) do so if they were also able to make refinancing more favorable. However, there is currently no significant interest rate spread. In the end, "brown" investments will be expensive, as the leasing company will not be able to obtain any / only expensive refinancing funds from its refinancing partners - or will have to meet higher equity requirements. It can currently only become "cheaper" by including subsidies, but this is not the case here.
If we look at the effects of including ESG criteria in the leasing business against the backdrop of the current legal framework, the focus is primarily on the field of reporting, i.e. sustainability reporting. If a distinction is made between the leasing company (financial services provider) and the lessee (company) and if the external and internal perspectives are examined, then the key topics initiated by ESG integration can be presented as a matrix.
As briefly mentioned in the introduction, ESG reporting, which pursues the concept of dual materiality, can be approached from two perspectives:
- Outside-in perspective: impact of ESG factors on the performance, market position and development of institutions.
- Inside-out perspective: Presentation of how institutions can in turn have ESG-relevant effects on society and the environment.
If we look at the impact on the leasing business from these two perspectives, it is logical to distinguish between "normal companies" and "financial companies", i.e. leasing companies. So there are also the two perspectives:
- Enterprise
- Financial business
The following matrix indicates the different focal points from each specific perspective:

An in-depth look at the individual fields would go too far at this point, but will also be covered on this blog in the near future.
Challenges and benefits of ESG integration in leasing
The challenges
As can be seen from the matrix, the challenges for companies and leasing companies are of a different nature.
The leasing business has been regulated for years - with ever more stringent regulations. Despite assurances to the contrary from the regulatory authorities, the regulations to be observed appear to be becoming ever more comprehensive. For leasing companies, compliance with national and international regulations creates additional complexity. Upgrading the organization to comply with these regulations results in additional costs at both the personnel and IT levels. The same applies to the increased data collection requirements. Leasing providers need additional data in order to effectively integrate ESG criteria.
On the corporate side, there are also hurdles that need to be overcome. The implementation of ESG initiatives can incur initial costs. For example, greener equipment may be more expensive than conventional alternatives, even if this disadvantage is partially mitigated by the use of incentive programs.
Advantages
The integration of ESG criteria also has a number of advantages for companies. These advantages (especially from a company perspective) include
- Sales of "green products" in B2C & B2B business.
- Financial benefits: Many investors today favor companies that operate sustainably and responsibly. This can lead to better financing conditions and lower capital costs. Studies show that companies with high ESG performance tend to achieve better financial results and are seen as less risky. For example, a study by MSCI found that companies with high ESG ratings have, on average, a lower cost of capital and higher valuations. This shows that acting sustainably can contribute directly to financial success.
- Risk mitigation: ESG initiatives help companies minimize risks associated with environmental violations, social unrest and poor governance practices. This leads to more stable and secure business practices. One example of this is avoiding supply chain disruptions by selecting socially responsible suppliers.
- Legally on the safe side: By integrating ESG criteria, companies ensure that they meet the increasingly stringent legal requirements that apply at national and international level.
- On the safe side in terms of personnel: ESG integration requires the appropriate expertise in the workforce. Personnel who are familiar with ESG issues will become increasingly important in the future.
Making the IT of leasing companies fit for the integration of ESG
From the leasing companies' point of view, the leasing business is not only becoming increasingly strictly regulated. The pressure for efficiency in recent years has also led to a high degree of automation. Without constantly improving leasing software and leasing IT systems, automation would not have been possible. For this reason, in addition to the general challenges mentioned above, the role of leasing companies' IT in the integration of ESG issues must be examined.
ESG integration essentially has an impact on the following levels of leasing systems:
- Data collection and integration: ESG data can be collected from a variety of sources, including internal systems and external partners. IT systems must be able to integrate this data efficiently and ensure that it is accurate and up-to-date.
- Data analysis and reporting: Modern IT systems offer powerful analysis tools that enable companies to comprehensively analyze ESG data and generate detailed reports - both for their own (leasing) company and for the financed portfolio. These reports are not only important for compliance with regulations, but also for internal decision-making processes and communication with stakeholders.
- Risk assessment / scoring: The IT systems of leasing companies must be able to incorporate ESG-relevant points into the credit assessment, again both in the isolated consideration of financing and in the leasing company's existing (investment) portfolio.
- Transparency and compliance: IT systems support compliance with ESG regulations through transparent and traceable processes. They enable the complete documentation of all ESG-relevant activities and thus facilitate their traceability.
In conclusion: A wide variety of data is required to cover the entire range of issues arising from ESG. The traditional software solutions map - via extensions - the "E" data. In addition, a "data lake" is needed in which the "S" and "G" data can also be collected, evaluated, reported or prepared in such a way that improvement can be driven forward (by setting responsibilities for individual data points, defining target values, setting up improvement processes and tracking the results achieved).
The leasing solutions from NAVAX Software GmbH can make a valuable contribution to the success of ESG integration, particularly at level "E". In addition, data warehouse solutions are provided that incorporate the above-mentioned data lake.
Could ESG integration be a good impetus to rethink your leasing software or leasing solution? We would be happy to find out together. We look forward to hearing from you!