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ING Bank to expand sustainable loan programme to Asia, with pricing linked to ESG

The bank is piloting the innovative model after success in Europe

Dutch bank ING is in talks with its Asia-based clients about offering loans with interest rates linked to ESG performance, saying “many” other banks are considering following suit.
The bank has already completed five loans in the format since the programme was launched in March, with borrowers all in Europe. It agreed bilateral loans with EDF and Gas Natural, and syndicated deals with technology company Phillips, cocoa producer Barry Callebaut and Belgium’s Bpost. The latter deal was announced last week, and saw the postal company borrow €300m to refinance an existing debt facility. Loans have been up to €1bn.
Danske Bank, Kommunalbanken, Kommuninvest, SEB and BBVA are among the growing numbers who are offering green loans to clients. The loan books are often financed by green bonds, and borrowers typically have to use the proceeds for green projects. The Dutch Government, for example, has a ‘green projects facility’ that commercial banks can use to offer loans with lower interest rates if they finance green assets.
ING uses this facility for some of its lending, but the sustainability loan programme takes a different approach: proceeds can be used for general corporate purposes, so long as the company scores well in its ESG ratings, which it takes from Sustainalytics. 
“Green loans and green bonds work by allocating proceeds and performing audits and reporting to ensure the investor is informed about the progress of green projects,” says Roland Mees, Director of Sustainable Finance at ING Bank. “But these loans are for general corporate purposes, which leaves the companies with a lot of flexibility. It doesn’t force the client to do anything, but they will get a carrot or a stick when they achieve certain results.”
The “carrot” is an improved rate of borrowing for eligible companies with strong ESG scores, as judged by Sustainalytics. If the borrower continues to improve annually then the interest rate is revised downwards further. If the company’s score deteriorates, the interest rate can rise.ING uses Sustainalytics’ ratings because “we feel they are the market leader, at least for European companies and investors,” explained Mees, adding that the methodology means a company cannot have a good score without performing well on all three pillars: environmental, social and governance.    
The thresholds and discount levels are not publicly disclosed, and Mees said that for the companies borrowing – who are often large – “it’s not really big bucks, but it is meaningful enough”. Consideration is given to the starting point of a company, on the basis that a firm with a high ESG score will find it harder to improve than one starting from a lower point.
Mees acknowledged that European companies are leading on sustainability, saying much of this is down to transparency. “European companies – and to some extent American companies – tend to be slightly more transparent than, for example, Asian companies,” he told RI.  However, ING Bank is now discussing the loan format with its clients in Asia, with a view to rolling the programme out in the region.
The bank operates in China, Hong Kong, India, Indonesia, Japan, Malaysia, Mongolio, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. ING owns 13.6% of Bank of Beijing and a 30% stake in Thailand’’s TMB, among other holdings in Asia-based banks.
“We definitely see a lot of traction and reverse enquiries in Europe,” he said, adding: “The syndicated loan market is very, very competitive, so getting reverse enquiries from well-rated investment grade companies is somewhat of an exception”.
Mees claimed that “many” other banks were considering similar models, partly because it is “very realistic” and “easy to implement”. “These ESG ratings are already being created and monitored by the market, so it doesn’t require anything new. That’s the elegance of the model. Many banks in the syndicated loan markets are aware of this feature and I expect they will discuss it with their clients going forward.”