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Wholesale Banking

The sustainability champion you never knew you had – your CFO

In this article we take a look at the role finance has to play in sustainable transition and meeting targets; how companies could benefit financially from sustainability initiatives; and how businesses are grouping to lead the way.

A man in suit holding yellow leaves

Amid the ever-heated debate over how to address climate change, carbon emissions remain at the heart of the issue.

Achieving a 1.5°C target to align with the goals of the Paris Agreement requires carbon emissions to decrease to net zero by 2050, which relies on a far-reaching transition across the global economy in energy, land, urban, infrastructure and industrial systems. In the absence of adequate international agreements, the private sector is increasingly leading the charge.

The Mission Possible Platform is one of the most recent and high-profile examples. Launched in September 2019 by the World Economic Forum and the Energy Transitions Commission, the goal is for traditionally “hard-to-abate" sectors such as heavy industry and heavy-duty transport to deliver net-zero carbon emissions by 2050.

These companies – ranging from aviation and shipping, to aluminum and steel – can clearly play a vital role in limiting global warming, given they are responsible for about a third of global CO2 energy emissions today. Furthermore, the incentive for these companies is growing. In the steel industry, for example, failure to cut emissions at the rate required will likely result in financial losses as carbon prices rise and the planet warms.

Ensuring strong frameworks are in place to finance these initiatives will be key to their success. 

Financing a low-carbon future

As efforts to drive a sustainable low-carbon economy increase in number and frequency, private-sector capital is mobilized.
Green bonds have provided one such link between the financing needs for sustainability and energy transition, and the markets. As of December 2019, there had been more than $460 billion worth of sustainable debt raised in 2019, according to the Bloomberg NEF.

While still a small fraction of the overall capital markets, the growing allure of this asset class is its focus on raising capital directly for projects with environmental benefits.

This appeals to investors. Pressure is mounting for them to divest from carbon-intensive investments. Investment policies excluding companies that contribute to climate risks are already redirecting how capital is deployed.

On the lending front, transition financing options that help companies reduce their carbon footprint could also help support carbon-reduction initiatives. They offer an effective way for issuers, banks and investors to work together in the decarbonization process underway globally. However, measuring the impact of such lending on climate resilience is key to making transition financing a viable solution, and to ensure uptake.

Likewise, banks are considering the impact of their lending portfolios and are redirecting how capital is allocated. At ING we do this with our Terra approach. The Terra approach applies a tool called PACTA – co-created with global think tank 2˚ Investing Initiative – to the sectors in the bank’s loan book responsible for most CO2 emissions. This approach considers the technology shift that is needed across certain sectors to slow global warming and then measures and benchmarks this against the actual technology clients are either currently using or plan to use to create a climate resilience metric.

At the same time, this methodology will assist ING in proactively discussing transition strategies with its clients and finance those companies with comprehensive plans to remain relevant in tomorrow’s economy.

Making low-carbon commitments count

There are already promising examples such as the Poseidon Principles, an initiative across the leading shipping banks to integrate climate considerations into lending decisions. At the same time, a cross-industry alliance in the auto sector plans to advance shared, electric and automated mobility. Several ambitious CEOs across the aluminum sector want to develop low-carbon smelting and refining processes, as well as increase renewable energy sourcing and recycling rates. Finally, the Net-Zero Steel Initiative is looking to mobilize corporate leadership to shape a favorable policy, market and finance environment for low-carbon investment.

Global industry requires an array of sustainable finance solutions to support the various needs of companies working towards lower-carbon commitments. As industry standards evolve to support the transition financing model, this could become a key tool to help fund such initiatives in the heavy industry sectors.