Sustainable treasury taking the lead
Many dismiss ‘sustainability’ as a mere buzzword or something to be left for others to ponder. But with increasing numbers of corporates beginning to see the benefits of sustainable practice - from cost savings, to efficiency improvements, to a better working environment - treasurers are well positioned to take the lead on a new way of doing better business.
The world around us is in a constant state of flux and today, sustainable practice really does matter. The extent to which companies take seriously their commitment to conduct responsible business is in the spotlight like never before - as Volkswagen’s executives will attest. Companies that fail to adopt a more environmentally friendly and socially responsible mind-set now do so at their own (often financial) peril.
Stripping out any moral or ethical imperative, it is now widely acknowledged that embracing sustainable business practices can be financially prudent for companies. While once the debate around sustainability initiatives centred on the question of affordability, now more and more businesses are questioning how and in which ways such practices can add value.
“There is now evidence which shows that clients who are leading in sustainability measures are more innovative, show better financial performance and have better credit ratings,” notes Leonie Schreve, global head of Sustainable Finance at ING. Sustainability, it seems, can be a source of competitive advantage. What’s more, according to Schreve, those companies that take sustainability seriously and demonstrate an ability to “adapt, anticipate and transition to new business models”, are likely to be the most successful in the future.
Fine words indeed, but in anticipation of tomorrow’s economy - in no small way led by the increasing scarcity of natural resources - ING has a genuine commitment to practical sustainability. “We partner with those clients we can support in taking a step ahead and anticipating the future economy,” states Schreve. This is not a concept working in isolation as a kind of PR exercise; ING does not set aside a specific sustainability portfolio to tick a few boxes. As Schreve explains: “Sustainable opportunities are integrated into all of our sectors and all of our client segments.”
The path to sustainable thinking
Sustainability at ING has its initial focus on lending; the bank even increased its lending volume for clients engaged in sustainable projects in the first half of 2015 (a portfolio that is now heading towards USD 21 bn). But it quickly recognised that to be effective, sustainability must be embedded in all areas of commercial banking. ING’s target is to grow its financing of sustainable transitions (affording social change to sustainable patterns of production and consumption) and to increase sustainable assets under management (AUM); it believes that the concept should be a mainstream priority geared to effective change of the way we all live. Embracing this way of thinking is something from which non-financial corporates can benefit and what’s more, their treasurers can have a key role to play in adopting and adapting to sustainable practices.
With a little help from friends
It is a fact that most treasurers will know and understand their business better than any consultant, bank or external advisor. They will therefore already have the fundamental tools in place that will show sustainability will work for their business. “However, it is not until you actually start working on the topic, that you appreciate all the complexities,” Schreve notes. This is where collaboration with key business partners - especially those with a firm commitment to sustainability - can help to piece together the puzzle.
Having developed a unique toolkit to enable its account managers to analyse a company’s sustainability performance, ING is well placed to help clients along the way. Its analysis of existing methods and models provides the starting point for a ‘personalised’ discussion between bank and client, taking into consideration the client’s industry sector and specific circumstances. Once the mapping of sustainability is complete the bank can help in the development areas that may need financing, for instance. “The aim is to encourage a discussion on how we can support our clients in their transition towards sustainability,” explains Schreve.
The bank takes its responsibility seriously and has an on-boarding process to identify those clients which are already proactive on sustainability initiatives and which will most benefit from its guidance. Sustainability will mean different things to different people and it is extremely beneficial for all if ING is able to get to the table early and have a more strategic discussion around how sustainability can be made to work for a specific company, based on a factual discovery rather than a lecture. As Schreve notes: “Once we have ascertained which part of the portfolio is ‘sustainably-marked’ internally, we can be better positioned to have proactive discussions with clients on what their challenges are and how best we can support them.” The consultative approach seems to be paying off. “We are seeing more and more corporates approaching us, asking what we have to offer companies that are taking sustainability as seriously as we are. On this basis alone, we can establish a more strategic partnership,” says Schreve, adding that “together, we can anticipate tomorrow’s economy”.
Cost of caring
What the on-boarding process means in practice is that ING will take an initial environmental and social risk (ESR) view of where their client is on the spectrum of international environmental, social and human right standards. This ensures that all clients in the ING portfolio are compliant with international standards. But on top of the ESR screening ING identify clients that are leading in sustainability. By mid 2015, clients spanning sectors such as energy, real estate and transport, and which met ING’s Sustainable Transitions Finance criteria, benefitted from EUR 21 billion in loans.
This is all about partnership through which value can be created, says Schreve. ING entered into partnership with Corporate Facility Partners (CFP) for real estate clients in the Netherlands. For example, clients can access a platform onto which they can upload their entire building portfolio. The tool measures the whole portfolio, identifying where certain measures can be taken to optimise energy efficiency and sustainability. This delivers an immediate correlation between a company’s sustainability performance and the financial implications this has. Initially, it highlights the measures that can be taken from a sustainability perspective. It will then translate these actions into actual cost and pay-back time.
“Initial investment costs of sustainable measures can be higher, but this will balance out when efficiency gain are made.”
Schreve notes that initial investment costs of sustainable measures can be higher, but this will balance out when efficiency gain are made. Of course, this needs to be factored into cash forecasts and financial analysis for treasurers, but if the business knows the cost/income ratio and the environmental benefit, then related cost/benefit becomes much clearer.
Despite how it may seem, embracing sustainability does not have to involve revolutionary new concepts. Indeed, expertise in this field “is more directed at re-using and maintaining a high value of resources”, notes Schreve. For a business looking to adopt this model, this always starts in the design phase where they should create products that either have a longer life-span, or which can be easily recycled whilst maintaining the value of resources and their reusability.
However, new thinking is essential at both client and financier level. A bank such as ING can step in at an early stage to ensure a “circular business model” is financed appropriately, and that innovative solutions to address certain challenges can be created wherever needed. “For example, when companies step into a service business model, pay per use such as offering light as a service instead of selling light bulbs, and remain owner of the products delivered, financing would be structured around contracts rather than the collateral of the goods,” explains Schreve.
A new sustainable world order
True sustainability cannot be achieved by companies working in isolation, strategic partnerships in the supply chain become more important. But also government measures can help in the regional context. As an archetype, ING has a separate entity - the ING Groenbank (Green Bank) - based in the Netherlands. “It is specifically designed around the regulations that the Dutch government have in place to stimulate the green economy,” notes Schreve. There are specific criteria and sectors identified that qualify for green agreements - and companies that fall into these areas can be provided finance at a discounted rate from ING’s Groenbank.
Although it is largely focused on Dutch regulation (only a small percentage of the portfolio can be used abroad), it highlights the appeal that stimulation measures and collaboration can have for corporates considering integrating sustainability into their business models.
Expansion of such measures at a European level would accelerate the drivers of sustainability, says Schreve. “But, on the other hand, based on our strong belief that sustainable business is better business, it is also the responsibility and role of financial institutions themselves to find ways to stimulate that further and shift their own portfolios towards sustainability.” And in this regard, there is a notable progression. Together with a number of banks, united in the Banking Commission of the United Nations Environmental Program Finance Initiative (UNEP FI), ING has launched a positive impact manifesto. This is a commitment from a number of member banks - and some investors - to unite, share knowledge and accelerate the banking world’s involvement in sectors and transitions that actively contribute to the sustainable development goals of the UN.
“From a commercial perspective, there are initiatives to further accelerate sustainable business,” says Schreve. Ultimately, the UNEP FI group expects a series of pilot projects to create a vibrant market place where needs, solutions and financing of sustainability can be matched effectively.
By putting the topic on the table, a new dimension to the relationship between business partners is already beginning to manifest itself. Schreve concludes: “Once you move beyond discussing the concept, start looking at figures and ratios and exploring how sustainability can be integrated into your business practices. From here, it becomes a much more strategic partnership - and one that can help future-proof your treasury.”
Leonie Schreve, global head of Sustainable Finance at ING, is responsible for driving, promoting and generating sustainable business opportunities for ING. While initially focused on lending, the mandate has been expanded to all commercial banking areas. Before joining the commercial side of the bank, Leonie headed the Environmental Social Risk Management team and introduced the new topic of sustainability risk management. Leonie represents ING in the board of the United Nations Environmental Programme (UNEP FI Banking Commission) and has acted as Chair of the Equator Principles Steering Committee until 2013.
Leonie has more than 15 years’ experience in sustainability though her work as management consultant, in which she worked with various multinationals, as independent consultant in Costa Rica, and through setting up the ESR and Sustainable Finance team within ING. Leonie holds a Master in Environmental Science, Business Ethics and International Sports Management.