Whether or not you accept all the issues that it seeks to tackle, finance that is geared to sustainability is beginning to look like a better deal for everyone. It is time you demanded something better.
Globally, US$90trn will be needed by 2030 to achieve sustainable development and climate objectives, according to figures from the City of London Corporation’s Green Finance Initiative. The accuracy of the figures is uncertain but the scale of the problem for humanity is not. This is why the Paris Climate Agreement and the UN 2030 Agenda both ask for commitment from financial institutions and businesses to align their financial flows with a pathway towards low-carbon and climate-resilient development.
As a result, sustainable finance – funding investments that take into account environmental, social and governance (ESG) considerations – has evolved to include a range of products, including bonds, loans, leasing and even receivables finance, that address a wider range of needs in the financial value chain.
Leonie Schreve, ING’s Global Head of Sustainable Finance, explains that although the bank’s focus in this space was initially on lending, its commitment to “financing tomorrow’s economy” has seen its sustainability mandate expand to all commercial banking areas. Schreve believes that it is right for banks to support companies that are proactively tackling sustainability.
As an example of ING’s commitment, Schreve explains that clients who agree to make, and achieve, ambitious, externally benchmarked improvements in their sustainability performance are eligible to take advantage of a special preferential facility in which improvements (or deteriorations) in performance are linked to the interest rate payable; the better the performance is, the lower the rate. “ING’s Sustainability Improvement Loan, from a client perspective, is a very simple yet strong signal to the market that the business takes sustainability very seriously and is integrating it into its financial management.”
The contrary view that sustainability is a PR stunt is outdated and wrong. “We have moved beyond sustainability just being recognised by a few believers; it has become mainstream,” says Schreve. “Many companies now know that it makes business sense, helping them to more easily anticipate market changes and to become more resilient. And there is some good evidence that putting sustainability high on the agenda improves financial performance too.”
Indeed, in February 2018, Switzerland-based academic publisher, MDPI, produced a paper, ‘The Impact of Sustainability Practices on Corporate Financial Performance: Literature Trends and Future Research Potential’, using content analysis to examine the current state of research. It stated that from a total of 132 papers from “top-tier” journals, 78% reported a positive relationship between corporate sustainability and financial performance.
There is some concrete evidence too for treasurers and CFOs that sustainable finance is prudent from a purely financial perspective, comments Schreve. Within the investor market, she reports a “continuing and significant growth in mandates”, to the extent that there is not enough supply of ‘green’ assets – lending or bonds. This can lead to a pricing advantage for issuers.
Furthermore, taking the sustainable finance path offers companies greater diversification of investors. By having a good ESG score – as defined on a broad level by the ISMA’s Green Bond Principles, and on a sector-by-sector basis by the likes of the major ratings agencies and the banking sector’s own experts – it allows investors to come on board who otherwise would not invest. If there was any doubt that this would have any impact, consider, for example, that Swiss Re, one of the world’s largest institutional investors, announced last year that it was exclusively moving its entire US$130bn investment portfolio to ESG indices.
In terms of uptake, sustainable finance is no longer the preserve of sectors such as energy, finance, waste management and real-estate. There is, notes Schreve, “increasing diversity in the sustainable finance market”, with the likes of commodities producers and infrastructure development companies climbing on board.
Of course, the banks sit at the heart of this change. It needs these institutions to commit fully. ING recently launched an approach that will begin steering its €600bn lending portfolio towards alignment with the Paris Agreement’s re-asserted target of preventing global average temperatures from rising 2°C (it was actually ratified by 192 countries as part of the 1997 Kyoto Agreement).
Known in-house as the ‘Terra’ approach, ING is using open source technology, developed with the 2˚Investing Initiative, a global think tank on developing climate and long-term risk metrics and related policy options in financial markets.
Terra is a scientific approach to measuring the technology shift needed across certain sectors to keep well below the two degree target. It works on the basis that real progress on decarbonisation is dependent not on emissions targets per se but on major changes to domestic energy, industrial and innovation policies, and that these efforts should be supported at source.
In the automotive sector, for example, lowering emissions must be complemented by increased production of electric vehicles and changed manufacturing models. Terra effectively quantifies the gap between current and future practices, defining what needs to shift, by how much and when. Other banks have been invited to join the programme.
A number of banks, united under the Banking Commission of the United Nations Environmental Programme Finance Initiative (UNEPFI) (within which Schreve was a founding member), have also launched a positive impact manifesto. This is a commitment from members – including some investors – “to think more holistically about their role in the economy, society and the broader environment”.
It’s a positive step but whether sustainable finance takes root or not is down to financial institutions and corporate borrowers. Public pressure may ultimately prevail, in the meantime Schreve is confident that increasing uptake “will turn today’s alternative into tomorrow’s mainstream”. Treasurers who agree can start making a big difference.
A feature on this topic, with treasury viewpoints, will appear in the January/February edition.