Sustainability approach to lending
ING is integrating sustainability into its lending approach. Christopher Steane, global head of Lending Services at ING Wholesale Bank, explains how and why.
The world is changing. There is now a huge focus on issues such as resource scarcity, climate change and poverty. These are no longer seen as simply environmental or social issues, but as business issues, too – and they are not going away. If ING is to thrive in the future, it needs to help its clients address the risks and opportunities these challenges create. In other words, to future-proof our own business, we need to help our clients future-proof theirs’.
Most banks are lending more money to companies or projects that are environmental outperformers than they were a few years ago. At ING, we have taken that a step further. We are seeking to integrate sustainability into pretty much everything we do when it comes to lending.
This is a step forward from the approach we used to take. About a decade ago, we, like many others, introduced environmental and social risk policies on a sector by sector basis. We also signed up to the Equator Principles, which were introduced around the same time to make project financing more sustainable.
So, we had policies in areas such as defence, energy and agriculture, setting out how we would deal with certain environmental and social risks. These policies were about steering the business away from harmful activity and meant, for example, that we would not lend money to manufacturers of cluster bombs or to developments in UNESCO World Heritage Sites.
‘To future-proof our own business, we need to help our clients future-proof theirs’
We believed that this was a sound approach because a good ethical approach is good business. But even these small steps met with resistance. When we signed up to the Equator Principles, project financiers said we couldn’t do it because it would make us uncompetitive. But over time, more and more banks have signed up to them (there are now 79 financial institutions signed up, covering 70% of international project finance lending in emerging markets) and the initiative has become more broadly effective.
About three or four years ago, we revisited the policies and decided to adopt a more ambitious goal. What we had in place was fine as far as it went, but it was only about steering us away from harmful stuff. We asked ourselves if there was a way we could take a more pro-active and positive approach to sustainability – and to climate change in particular.
We established a small team in 2012 to look at this, headed by Leonie Schreve, who has been involved in this area for a long time – and was chair of the Equator Principles when they celebrated their 10th anniversary in 2013.
Our idea was to build a more universal approach than before. We wanted to get away from the idea that sustainability was just the responsibility of a few people lending to renewable energy projects. We concluded that we should take a sustainable approach across the board, in all the sectors in which we operate.
That immediately raises the question of how you define sustainability. Rather than just avoiding projects where our risk policies are not met, we want even those dealing with sectors such as mining or energy to focus on clients and projects that are at the forefront of thinking about environmental and social issues.
In order to be able to do this, we spent quite a lot of time establishing a scorecard. For clients where we provide general corporate finance, it is about identifying which clients and projects are most sustainable. We have increased our internal focus on selecting and reaching out to companies that are adapting to and tackling issues such as resource scarcity and climate change and we recognise the most sustainable projects with our Green Leaf icon.
Introducing these concepts is not a fundamental change of approach, it’s just adapting our business to the changing world we live in. It’s very much about future-proofing the business. These are issues that are engaging many CEOs while we, as a bank, have concerns about lending to companies and industries that are going to get left behind.
Our Sustainable Lending unit has seen a significant increase in sustainable transitions financed. A large part of this increase comes from being able to identify the parts of our portfolio that were already sustainable, but there has also been significant growth in new transactions generated.
However, environmental outperformance is not a clear-cut area. Some NGOs would say that we should not lend to hydrocarbons companies, but we do. The use of oil and gas is critical to many economies and we are going to continue to support those economies. But that doesn’t mean we can’t seek out the most sustainable projects to finance. For example, our most recent “deal of the quarter” was a loan for an LNG terminal in Rotterdam that will supply fuel to ships that currently rely on heavy bunker fuel, one of the most polluting fossil fuels there is. LNG is clearly a more sustainable alternative and through this deal we are helping to support a transition to a lower-carbon transport sector. However, we recognise that the concept of sustainability is evolving and that in time such operations may be seen as mainstream and not eligible for our Green Leaf status.
We do have a revised policy on investing in coal with significantly tighter restrictions on what we can provide funding for – we seek to fund activities such as recycling, waste management and clean-up operations.
At the same time, there are many companies out there that want to radically change their business strategy – for example, makers of lightbulbs that want to move from providing bulbs to providing lighting as a service. We want to empower clients to stay ahead of the game and realise their visions for the future. But on the other hand, we are not venture capitalists and we are not a social fund. Our primary stakeholders are the depositors who have entrusted their money to us – and we have to make sure they are going to get it back.
Nonetheless, we know this is good business. We are the industry leader in “Diversified Financials” in the Dow Jones Sustainability Index and have been included in the FTSE4Good index for the past 14 years, while CDP included us in their Climate Performance Leaders Index with a score of 97/100. And UNEP FI, the United Nations Environment Programme’s Finance Initiative, has told us that because our approach encompasses all sectors, it is a market-leading approach.
On a more anecdotal basis, clients tell us that they come to us because we are doing this. And as time goes on, we are learning more about project risks and getting better at assessing them as we build our in-house expertise. The drivers for sustainable lending are not going away and this will be an important part of ING’s approach for years to come.