How ING is avoiding greenwash in the new green finance era
EXCLUSIVE: ING's global head of sustainable finance Leonie Schreve believes that stronger internal relations between the finance and sustainability departments within businesses will create more access to green loans and bonds to assist the low-carbon transition.
While growing at an exponential rate, the green finance market is still in its infancy and is, therefore, suffering from a lack of definition. What is considered “green” varies from investor to investor and from bank to bank, both in terms of business clientele and financial offerings from the sector.
The green bonds market, for example, grew by a staggering 78% between 2016 and 2017, with national and institutional investors funnelling more than $150bn into low-carbon projects. Some estimates suggest the market could reach $250bn this year.
Dutch bank ING has been one of the pioneers of the green finance movements. It issued its first green bond in 2015 and one year later, revealed that it had funded more than €27bn to clients aiming to solve environmental challenges.
With a loan book of more €500bn, green finance is just a small fraction of the bank’s dealings. However. A goal to double its Climate Finance portfolio by 2022 compared to 2017 has now been introduced to accelerate actions.
Speaking exclusively to edie, ING’s global head of sustainable finance Leonie Schreve said that investors need to ensure that the green finance market focuses on backing “quality” over quantity for environmental and social funding opportunities.
“What is interesting when looking at the green bonds market is that investors determine what they deem to be ‘green’,” Schreve said. “We need to make sure there’s user quality in the market and that there are certain green definitions in place, so investors know what to back.
“We’ve built a green finance framework where we defined what qualifies as green, social and sustainable and only those can be included. Banks can pull the loan if governance is breached. A framework needs to be accepted by an external market, but there’s a difference between external benchmarks for sustainability ratings and us looking to help certain industries or businesses in transition to motion towards sustainable practices. There’s a balance that needs to be understood.”
Lack of definitions
Despite the rapid growth of the green bonds market, investors looking to capture new economic opportunities in this area can be inundated with ambiguous proposals from firms that could be viewed as “greenwash”. Currently, there is no universally accepted market standard or definition for what would make finance transactions “green”.
The European Union's (EU) High-Level Group on Sustainable Finance recently recommended that an EU sustainability taxonomy, a definition of priority investment areas, the clarification of investor duties and development of "official" European sustainability standards for green bonds should be introduced by the European Commission.
The funds should be “exclusively” used to finance or refinance green projects, in line with a new EU Sustainability Taxonomy. In addition, an “independent and accredited” external reviewer should confirm the green bond’s alignment with the standards.
This is an approach that ING is well-versed in. It has partnered with the Two Degrees Investing Initiative to develop a methodology that it believes should be the standard for how "international banks measure the climate impact of their lending portfolios".
Called the Terra approach, the standard uses detailed data on the assets companies use for their production today, as well as future investment plans. ING also uses global databases such as independent researcher Sustainalytics to examine current corporate efforts to transition to the low-carbon economy, but Schreve doesn’t want to limit funding to just leading sustainability firms.
“A company with the lower [sustainability] score at the moment has much more potential to improve compared to one which is already on top. We need to differentiate and that’s where the expertise of our team comes in,” Schreve added. “We do set certain quality benchmarks first though, with the finance and the sustainability departments, on how to realise improvements and there needs to be an agreement on specific KPIs to improve the company.
“But, it allows us to identify clients that need ING’s help the most. Ideally, the company needs to have an organisation fully aligned to improving its sustainability performance. You need finance and board-level commitment on this.”
Expanding the opportunity
One way ING is opening the green bond market to firms that are in the earlier phases of the low-carbon transition is through its pioneering green loan offering. Last year, ING agreed on a €1bn loan with Philips – albeit a sustainability leader - that has an interest rate dependent on the year-to-year progress of the global lighting firm’s sustainability performance.
The ‘revolving credit facility’ agreed between the two Dutch firms will operate through a rating system assessed by Sustainalytics. The score of Philips’ benchmarked sustainability performance will decide whether the interest rate goes up or down.
The bank is also funnelling finance towards start-ups and innovators through a €100m Sustainable Investments fund to help new businesses to scale up concepts and projects tailored for energy, water and resource efficiency.
The €100m fund will be gradually invested over the next three to four years and will target companies with proven concepts that can deliver positive environmental impacts. The fund will primarily target innovations in areas including the energy transition, the circular economy and water, but is open across all sectors.
But while the finance sector continues to find its footing in the new market of green loans and bonds, Schreve added that if corporates want to gain access to this ever-growing funding pool, sustainability has to be at the heart of all their decisions.
“For any company and client that we deal with, they need to meet our environmental and social risk criteria first,” Schreve added. “We don’t want to provide to a sector where we don’t bank, like coal or weapons. We want to see the commitment from the company that they are willing to improve.
“If there’s no connection between the sustainability and finance team and they just want the financial incentives and discounts, that’s an area we would not step into.”