At RI DigiFest last month, the question of how financial organisations can help create Paris-aligned economies, rather than just Paris-aligned portfolios, became a central part of discussions.
It’s an important nuance, which is rarely meaningfully addressed. But ING, the largest bank in the Netherlands, says it wants to understand how it can contribute to climate change mitigation, rather than how climate change will impact its business.
Leonie Schreve started as the Managing Director and Global Head of Sustainable Finance at ING in 2012, when the bank became one of the first mainstream players to integrate sustainability into its commercial strategy, she says.
Aligning industries with Paris
Building on this, two years ago ING announced that its €600bn lending portfolio would be steered towards the Paris Agreement by creating an accurate way to measure 2℃-alignment. Dubbed the ‘Terra’ approach, ING has teamed up with other banks and financial institutions “to work towards a joint approach on reporting on climate change,” says Schreve. Iit is also working with the 2 Degrees Investing Initiative (2DII) to develop science-based and forward-looking metrics.
“To really align our portfolio with the Paris Agreement, we don’t just need an indication of where we are today, but also which of our clients are proactively addressing climate change and realising the low-carbon transition,” says Schreve. ING and 2DII are using company-level data from the Science Based Targets initiative (SBTi).
“A lot of initiatives always look at sector averages, and they look backwards. We want to do the opposite and be able to steer on an individual basis to the transition, by having a view of where the market is going and supporting clients by financing transition activities,” says Schreve.
As well as using the SBTi’s Sectoral Decarbonisation Approach that lets individual companies derive their unique science-based emission reduction targets based on their relative contribution to their total sector activity, ING is using the Paris Alignment Capital Transition Assessment (PACTA) tool, which looks at technology shifts needed at a sector level to slow global warming, and then measures this against the actual technology companies are using, or plan to use.
The Terra approach will be open source, to encourage wider adoption. “We want to have an industry standard,” says Schreve. The Netherlands is known for its collaborative finance sector, which last year signed an agreement with the Dutch Government to reduce greenhouse gas emissions. Schreve says 36 banks are interested in adopting the Terra approach in the Netherlands and globally, as part of the UN-backed Collective Commitment to Climate Action for banks.
ING released its first progress report on Terra last year. It is focusing on the sectors in its loan book that are most responsible for GHG emissions: power generation, fossil fuels, automotive, shipping, aviation, steel, cement, residential mortgages and commercial real estate. It plans to measure and benchmark whether its lending in each sector contributes to climate resilience aligned with the Paris Agreement.
Data and macro-economic challenges
Schreve says there will be a lot of discretion on how other banks and financial organisations adopt Terra, but she expects them all to take a sector-by-sector approach “so we can really look at what are the technological changes that are needed to to support each sector”.
Schreve admits the process is very complicated. On launching its first progress report, ING CEO Ralph Hamers said it was a challenge to identify one methodology that works for all sectors, given that each sector will have its own transition pathway and each bank prioritises different sectors and assets. “Another challenge is that some sectors don’t yet have a clearly defined pathway on how to slow global warming, or don’t yet have greener technologies available.”
Nevertheless, the progress report demonstrates how ING has been able to set targets aligned with science-based scenarios in five sectors: power generation, automotive, commercial real estate, residential real estate and cement.
The work is iterative, and many challenges remain in supporting each sector to align with Paris goals. In power generation, for example, 70% of today’s global investment in energy supply is undertaken by governments – restricting available financing opportunities for banks.
In residential real estate, homeowners needed to be aware and willing to make their houses more energy efficient. It’s “a tough challenge, and one that we cannot overcome alone,” says ING.
Progress in all sectors is also being held back by a lack of data. Schreve says regulation, like the EU taxonomy, will help tackle the problem, but industries must also come together to work on the issue – especially sectors like shipping and aviation, which aren’t currently included in scenarios provided by the International Energy Agency.
Soon, ING will release a new Terra progress report focused on the shipping, aviation, steel and fossil fuels sectors.
Sustainability and innovation
ING recently came under scrutiny for its board’s ties to the fossil fuel industry, with Bloomberg claiming: “No bank has a greater share of its board with ties to the planet’s biggest polluters”. Six of its 15-person management and board have worked at, or been board members of, big emitters like Royal Dutch Shell and Daimler. None have links to renewable energy, although Chairman Hans Wijers served as Chair of environmental association, Natuurmonumenten, until last year.
Schevre says its exposure to carbon-intensive assets reflects the global economy, but ING is phasing out lending to thermal coal and in its second Terra report will publish metrics for the climate impact of its oil & gas portfolio, like it does now for its coal portfolio. “We live up to our commitment to phase out thermal coal,” says Schevre. “In fact our lending to thermal coal power plants decreased by 22% year on year to EUR 180m in 2019. Today, coal fired power plants account for a mere 1.6% of our lending portfolio to individual power plants.” Schevre adds that ING does not finance oil extraction from tar sands – a very energy-intensive form of energy extraction that leads to high CO2 emissions. “We will continue financing oil and gas,” she says. “The world still depends on these sources for its energy supply. ING is committed to steering our EUR 600bn lending book towards the well-below 2 degrees goal of the Paris Climate Agreement.”
She adds initiatives such as Terra were well underway before the OECD complaint, which resulted in a number of commitments to climate objectives from ING.
Terra has the potential to be a game-changing innovation in the fight to tackle the climate crisis through improving data, comparability and most importantly, alignment with science. ING is well-known for innovating on sustainable finance products. It recently helped launch Europe’s first Covid-19-related bond to raise financing for French public hospitals.
Schreve says along with sustainability, one of ING’s key priorities is innovation to stay ahead of the market and be a differentiator for its clients.
In 2017, ING facilitated the world’s first sustainability linked loan – a $1bn revolving credit facility for Dutch multinational Philips – with an interest rate that’s coupled to the company’s sustainability performance and rating. The innovation took off quickly with the International Capital Markets Association launching the sustainability-linked loan principles last year.
Machinery and plant manufacturer Durr issued the first ESG-lined Sustainability Schuldschein (an alternative fixed income product) with ING. And last year, ING structured the first derivative product linked to sustainability performance with an interest rate swap with fees tied to ESG performance. The product involved Euronext-listed Dutch oil and gas service provider SBM Offshore.
Schreve says the SBM Offshore deal relates to ING’s Terra commitments. “It isn’t all about sectors that are already green. It’s also about how we can help all our clients to transition. Some clients might not want to issue a green or sustainability bond but they have a strong ambition to transition.”