Sustainable financing instruments are here to stay. ING's Head of Wholesale Banking Germany Eddy Henning describes how banks can support companies in the sustainable transformation.
It is undisputed that the world needs a radical transformation on many levels. By 2050, the world's population will have grown to almost ten billion people, which will result in unprecedented energy consumption. Climate change is already providing new arguments for making our economy and society more sustainable at an ever faster pace. This requires, among other things, the restructuring of the energy supply and the reduction of pollutant emissions, for example through the decarbonization of industry. And that means new technologies and business models.
The market for green financing is moving
However, all these measures require enormous financial resources. Banks therefore have a key role to play in the transformation, because ultimately sustainable change must also be economically feasible - otherwise it is not sustainable, but a short-term phenomenon. ING therefore developed the Terra approach early on in order to align its credit portfolio with achieving the 1.5 degree target and to make companies from sectors with high CO2 emissions in the portfolio climate-neutral by 2050.
The good news are that the transformation process is already in full swing in many cases. The figures in our Sustainable Finance Pulse show that sustainable financing instruments are here to stay. For example, the global issue volume in the first three quarters of 2024 amounted to around USD 1.2 trillion and was on a par with the very strong previous years.
With green bonds, sustainability bonds, social bonds, green loans, sustainability-linked bonds and sustainability-linked loans, banks have developed a broad toolbox of sustainable financing solutions in recent years.
With an issue volume of USD 169 billion in the third quarter of 2024, green bonds, whose funds may only be used for environmental and climate protection measures, remain the most popular financing instrument, while sustainability-linked loans and sustainability bonds, whose conditions are linked to the achievement of certain sustainability targets, are also used.
Companies should review their business model risk
The market volume shows that many companies are already looking for ways to make their funding more sustainable. At the same time, however, there are unfortunately still many companies that have no plans for the transition or that make voluntary commitments that have little impact and do not bring about any change.
There are many good reasons for companies to adopt a sustainable approach: At the forefront certainly is their business model risk. Not all products and services will still be relevant in the future. Automotive suppliers, for example, who have only specialized in combustion engines are facing considerable difficulties. Production and supply chains are also threatened by changing climate and environmental influences and business models that are heavily dependent on fossil fuels will face difficulties in the future. Added to this are reputational risks: Companies today have to deal with the question of what impact their business activities have on the climate, the environment or society.
This is also related to the fact that sustainability aspects are playing an increasingly important role for banks when lending to corporate customers. From the banks' perspective, ESG criteria can be used to comprehensively measure various risk dimensions of a company. As these also often have an impact on the long-term stability of the business model, they have become extremely important for banks. Companies that proactively address ESG risks and take them into account in their business strategies can now improve their creditworthiness and remain competitive in the long term.
Banks do more than provide sustainable financing
Choosing the right bank can be a great help when it comes to sustainability. After all, modern banks are no longer just financiers that provide capital. They are lenders, advisors, facilitators and designers. Banks with expertise in sustainability and their customers' industries are valuable sparring partners that identify strategically relevant and necessary changes. With the help of data-supported analyses, they can provide an objective assessment of companies' transformation efforts and offer practical support, for example with the introduction of promising technologies or systems.
What's more, structuring sustainable financing solutions is very complex. Their track record and expertise in structuring financing means that banks such as ING have valuable experience in developing relevant KPIs, which can also help to avoid accusations of greenwashing.
A sustainable transformation of the business model is in the companies' own interest. Banks can be valuable partners in this process. Choosing the right financing structure and the right bank is therefore crucial.
Author: Eddy Henning is Head of Wholesale Banking and Member of the board at ING Germany. This guest article was first published in "Green Works" magazine.
Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate.