The horizon challenge: accelerating the shift to a green economy

The war in Ukraine is upending a global economy simultaneously battered by environmental disasters and the after-effects of Covid-19. The world faces crises on multiple fronts – climate, food and energy – and there are few solutions in sight. In Europe, rising temperatures and continued drought have sparked raging forest fires tipped to become the new norm. And the continent’s leaders are bracing themselves for a winter of looming gas shortages.

With each passing year, the need for a dramatic change in the way the global economy functions is growing. Yet, a focus on short-term interests have left many green initiatives without the necessary urgency. If we want a sustainable future for our planet, we need an approach that is both coordinated and merges short- and long-term needs.

Dr Roland Mees, director of Sustainable Finance at ING, describes a necessary expansion of outlook as the “phenomenological horizon” – a view that addresses both short-term and long-term demands through present-day action. “Sustainability is still something remote – outside our phenomenological horizon,” he explains. “These sustainability policies we talk about have to be so complete and tangible that they enter into this horizon of our day-to-day experience.” Having short-term vision is crucial to the transition to a green economy, he says.  

ING research reveals that progress towards tomorrow’s goals feels challenging for some corporates who see their targets as being distant: more than a third (35%) of businesses say their sustainability targets are too far in the future to ensure any meaningful accountability today. The challenge facing decision-makers today is how to define a pathway that mobilises future ambitions to drive short-term action.

More than a third of businesses say their sustainability targets are too far in the future to ensure any meaningful accountability today.

Sustainability needs mass coordination

According to Marieke Blom, Chief Economist and Global Head of Research, we need mass coordination, like with the Paris Agreement, to support a more practical transition to a greener and fairer economy. Blom says this kind of coordination underscores the significant role governments can play in addressing existential challenges such as climate change. But, if real change is to be brought about, they may need to consider even more drastic measures.

Sustainability needs mass coordination – Marieke Blom, ING

Much of this can take place through more effective implementation of regulatory policy. Take, for example, the EU Taxonomy introduced as a key part of the European Green Deal. In 2021, ING became one of 26 major banks to join the European Banking Federation and United Nations Environmental Programme Financial Initiative (UNEP FI) to assess the way the EU Taxonomy can be applied to core banking products for labelling or disclosure purposes. This action is in keeping with ING’s engagement in the area of sustainable finance.

Sustainable finance for a sustainable economy

At a corporate level, clearer guidelines from regulatory frameworks mean that companies can begin to set themselves clear, achievable goals. Sustainable finance can play a significant role in facilitating the transition. Fortunately for businesses, lenders have looked to improve access to finance through a range of fixed-income products and loans.

Companies are borrowing record sums via environmental, social, and governance (ESG) bonds. In 2021, sustainable finance bond issuance totalled €875 billion. This year, the market is set to surpass the €1 trillion mark. Moreover, green bonds raised record proceeds last year, and the asset class is set to continue to reach new highs as companies seek to lower their emissions.  

Sean Kidney, CEO of the Climate Bonds Initiative, says the fundamental reason for the market’s uptake of instruments such as green bonds, is that transparency and reporting principles enshrined in voluntary guidelines, like the Green Bond Principles and the Climate Bonds Standard, and now in regulation in many regions, ensure that issuers report on the use of proceeds from instruments such as green bonds. This is bringing a “step change in transparency” in the tracking of funds linked to environmental projects. This kind of transparency offers welcome clarity to concerned investors.

Another instrument companies can look to is green loans. Here, the use of proceeds is tied directly to green projects or green product development. These loans are typically provided at lower interest rates, with borrowers obliged to communicate environmental objectives to lenders.

On the ground: How green finance is put to use

Sustainable financing has been important for various sectors looking to transition to a greener future. Green Plains, for example, one of the largest biorefineries in North America, completed its first five-year sustainability-linked revolving credit facility in March 2022, worth $350 million. The financing will be used to expand the production of Green Plains’ sustainable ingredients.

Another example is Alcoa Corporation, a global leader in aluminium production, which aims to achieve net zero by 2050. The company took out a $1.25 billion credit facility to support its sustainability endeavours. The facility is linked to two KPIs of reducing carbon emissions and increasing the percentage of renewable-energy sources in the company’s aluminium smelters. (5)

Eye on the horizon  

While governments need to step in with a firmer and more time-sensitive regulatory hand, businesses can at least begin to take meaningful steps towards achieving their future emissions goals, through instruments such as green bonds.

But business will need to keep a steady eye on the horizon to ensure that the risks lurking there are met by action today. The greater the variety of financial instruments available, the more likely it is that companies will be able to play their part in ushering in the green economy. Now, having recognised the opportunity to rebuild for a better, greener future, they must be sure to grasp it.