Sustainability-linked finance, where rates are linked to a client’s sustainability performance, was created by ING back in 2017. Since then, its popularity has grown immensely, with many banks offering similar products. But do they all make the right kind of impact? ING today published a paper outlining our stance on sustainability-linked finance. Here, Sustainable Finance head Leonie Schreve explains why ING feels so strongly about protecting the integrity of this fast-growing market.
Why is the integrity of this market at risk?
“Everyone has to be on board to make sure the sustainability-linked finance market is directed at creating the big impact that these products are designed to make. ING isn’t the only player in this market and sustainability is not something you do alone.
“The credibility of the market also relies on clients themselves being committed to their sustainability goals and a net-zero future. There’s always a risk that companies go for less-ambitious targets, which in turn affects the quality of the product and lessens its impact. We prefer clients to have business-focused sustainability targets rather than targets linked to charity donations, for example. If we want to meet all the challenges of climate change that we all see now, we need to accelerate and take impactful measures.
How does ING want to ensure the credibility of sustainability-linked finance?
“When we initiated the first sustainability-linked loan for Philips in 2017, our aim was to help the client transition to a sustainable economy while having a real impact on the most material sustainability issues. To be effective, we believe the sustainability targets linked to financing must be ambitious, recognised industry-wide and verified by a reputable, independent party. This will protect the credibility of the market and make sure companies tackle the most difficult and urgent issues first. If the ambition levels are too low, sustainability-linked products will not have the impact they’re designed for.”
Why are we taking this stance?
“As we saw with the recent release of the IPCC’s climate report – a ’code red for humanity’ – the world is facing very pressing challenges. There needs to be a big push, a big impact, to respond with the urgency that’s needed to meet the goals of the Paris Agreement – and the more ambitious commitment to net-zero greenhouse gas emissions. It’s critical for sustainably-linked financing structures to be ambitious and address the most urgent challenges with maximum impact.
“Anything less won’t contribute to the herculean task of building a sustainable economy. While ‘greenwashing’ is not a term we would use, there is a risk of falling standards, particularly as this type of financing becomes more mainstream. Given the findings of the IPCC report and the enormous challenge to address the net-zero commitment, we can’t afford to take small steps. ING is not the only bank offering these products, it should be an industry effort to bring about the desired change.”
How much can ING do?
“When we structure transactions ourselves we can use our influence to steer clients towards credible targets with a big impact, even if they insist on a structure that’s not 100 percent to our liking. But when we participate in transactions by other banks we don’t have the same power.
“While we have always voiced our opinion, if we’re not in the leading role, the market dynamics don’t always allow us to put the proper structures in place. That’s why we believe it’s in the interest of all parties to safeguard the credibility of the sustainable finance market and protect the integrity of sustainability-linked banking products.
“There is already more transparency in the bonds market as issuers have to report on how they use the proceeds of green bonds and the impact of the investment. Now the global loan markets association is also strongly recommending third-party verification of sustainability-linked loans to improve the credibility of the product.
“Regulatory developments, like the European Commission’s green bond standard, will also help to improve the quality of the market as it evolves.”
What’s in it for ING? Aren’t we being too tough on ourselves by moving in this direction?
“Our starting point has always been that sustainable business is better business. We see that companies with a credible sustainability strategy and strong sustainability practices have a lower credit risk. And having lower credit risk in our portfolio means we can price it differently.
“Raising the standard of sustainability-linked products is closely linked to everything else we do to support the transition to a net-zero economy, like reducing coal power financing to close to zero by 2025, and our Terra approach, in which we measure and report on our efforts. Linking financial products to the sustainability achievements of our clients is just another way we’re helping them to accelerate their sustainability agenda and really step up and make the changes they need to reach a net-zero commitment.”