The shift to a more sustainable global economy is gaining pace as governments, consumers, businesses, and investors realise the urgency of addressing climate change. But balancing day-to-day challenges with long-term goals means transformation can be slow and frustrating. Financial institutions must adapt and evolve to provide the right support to help make it happen.
Sustainability has become a key strategic topic for most companies, with around 70 percent of ING’s corporate clients accelerating their sustainability activities. Our latest research underscores their commitment.
And rightly so. In the global fight against climate change, time is short. The latest report from the Intergovernmental Panel on Climate Change (IPCC), published in April 2022, stresses the need for urgent action, calling for radical changes in technology and behaviour.
Despite an exceptional drop in global greenhouse gas emissions in 2020 due to the Covid-19 pandemic, emissions rebounded and climbed to a record high in 2021, says the IPCC report. Its three main themes are: ‘We are running out of time’; ‘carbon capture and removal technologies can buy the world some extra time’ and ‘behavioral change is equally important, but will it last?’. The report is 3,000 pages long but its message is short and simple: we need urgent action now.
Moving fast, at scale
The IPCC’s regular reports are a wake-up call for the world, stressing why it’s so important for all businesses to decarbonise.
To avoid catastrophic and irreversible global warming, the global economy will need to eliminate or neutralise CO2 emissions by mid-century – this is what the United Nations terms net zero by 2050. As climate change will not develop linearly, but exponentially, we need to move fast and at scale. Greenhouse gases must be cut by half by 2030. We have to completely rewire the economy.
Three factors are driving the move toward sustainability: a surge in government pledges to become net zero economies and related regulatory initiatives; an explosion in ESG (environmental, social and governance)-themed assets under management by investors; and stricter regulations on ESG reporting and disclosure.
Global capital will move from unsustainable to sustainable activities. Corporates are starting to see this. They understand why it’s important and they want us to condense all the noise into what it means from a financial and sustainability point of view.
How to drive change
As companies embark on the road to net zero, the role of financial institutions needs to adapt and evolve to help clients navigate this changing environment. This needs a combination of traditional banking knowledge of how capital streams work, along with in-depth knowledge of the investments companies can make, and how they can change their business models to become more sustainable. To achieve real change, banks and clients need to work together.
Companies look for two key services from their finance partners – financial support and advice – says Ana Carolina Oliveira, head of Sustainable Finance at ING Americas. “When you put that into the context of net zero, they want advice on how to meet these goals. Net zero by 2050 shouldn’t be a dot on the horizon – you need a plan, and you need to be able to demonstrate progress on your way there.”
Decarbonisation is a relatively new and quickly evolving challenge for banks and their clients, Oliveira says: “We’re constantly learning from our interactions with many different clients, so we can give them the advice they need to get on the road to net zero. We have to keep adapting. For example, the ESG disclosure standard that was acceptable a few years ago may not be fit for purpose today.”
Companies that are ahead of the curve will have a good idea of which business areas need investment and which must be sold or shut down.
“For those clients, we often act as a sounding board and a source of finance,” says Oliveira. “But there are also companies that want to take action but don’t know where to start. For them, we highlight the urgency of acting now. We suggest areas where they can make an immediate impact to become aligned with what climate science says they need to do, and aligned with their peers.”
It’s not just a matter of helping our clients. ING believes companies that manage their businesses in a more sustainable way are more likely to survive and thrive in the future.
A balancing act
It’s clear that across all sectors of the economy, sustainability is a must have, not nice to have. Even so, recent research by ING reveals some of the challenges that major corporates encounter in their journey to sustainable transformation.
ING’s qualitative and quantitative research into the priorities of key senior decision-makers from some of the world’s top corporates reveal their most pressing concerns. Without exception, they name sustainability as a key challenge but say their myriad daily challenges affect their ability to fully focus on it.
It’s a balancing act. They see sustainability as a current challenge but also as a long-term goal. They realise the urgency to act, but say it will take considerable time, resourcing, financing and operational change to implement. Dealing with day-to-day challenges limits their ability to focus on sustainability commitment. They’re feeling the pressure, they say.
Challenges they list include: lack of funding; lack of market consistency; complexity of implementation; lack of knowledge and reputational risk.
Sustainable transformation varies by region
More broadly, as a global financial organisation, ING is working to measure and steer its lending portfolio towards a net-zero world by 2050 (keeping the rise in global temperatures to 1.5 degrees Celsius), a strategy we call the Terra approach.
We are focusing on the sectors in our loan book that are responsible for the most greenhouse gas emissions: power generation; upstream oil & gas; automotive; shipping; aviation; steel; cement; residential and commercial real estate.
The transformation that is happening is both a risk and an opportunity for us. We have not been shy about turning down business that will affect client relationships, but we don’t just turn our backs on clients. We see sustainable finance as a collaborative tool, and we work with our clients on ambitious sustainability-related goals. Our experience is that clients often appreciate that.
While ING takes a global approach to sustainability, regional differences have to be considered. Europe is the clear leader in sustainable finance, thanks to regulation such as the EU’s Green Deal and specifically the EU Taxonomy – a classification of economic activities according to their carbon intensity and footprint – and the Sustainable Finance Disclosure Regulation. North America and Asia-Pacific are also making progress on that front.
“In Europe we’re seeing issuers on their third or fourth green bond. There is more experimentation with new products and more advanced performance indicators targeting areas such as supply chains,” says Oliveira. “In the Americas, companies are going for their first issuance and are focusing on taking care of their own footprint first. But it’s more a question of timing rather than a difference in ambition.”
This article has been updated and adapted from ING-WSJ custom content