September 30 (Renewables Now) - At the Climate Action Summit in New York last week, 31 banks and financial institutions signed the Collective Commitment to Climate Action (CCCA), which sets out concrete actions to increase their contribution to and align their lending with the goals of the Paris Agreement. The global head of Sustainable Finance at one of these banks, ING Groep NV (AMS:INGA), tells Renewables Now that the role of finance in tackling climate change is pivotal.
We spoke with Leonie Schreve after the Horizon19 in Boston to find out how banks are helping to speed up the energy transition.
“We are at an exciting time in the industry now, where lenders are developing innovative, bespoke financial instruments to help companies around the world transition to a low-carbon business model. The industry is accelerating quickly. As new issuers from new sectors or regions enter the market, they have unique needs and challenges. This pushes us to innovate our product offering and structuring further,” Leonie said.
Loans and bonds, where the interest/coupon changes depending on the achievement or failure to achieve certain green milestones are a prime example of a product that can help companies transition to a low-carbon business model.
In 2017, ING was the first bank to offer a sustainability improvement loan and it participated in 59 such financing arrangements until August this year when it also a announced the world’s first sustainability improvement derivative (SID) provided to SBM Offshore.
The SID is an interest rate swap that hedges the interest rate risk of the construction of one of SBM Offshore’s Floating Production Storage and Offloading facilities. This is the first derivative where the price is linked to the company’s sustainability performance, next to trading risk, capital requirements and profit.
For now, Europe is leading in sustainability-linked financing but the US market is also picking up, Leonie said, adding that the sustainability-linked loan volume for 2019 could exceed USD 81 billion (EUR 74.1 bn).
“One of the barriers was a lack of direction and consistency in identifying and measuring sustainable goals but this year we saw the Sustainability Linked Loan Principles published which provide much-needed guidance and should be a catalyst for continued and accelerated growth for this market.”
FROM TERRA TO CCCA
ING has committed to aligning its roughly EUR-600-billion lending portfolio with the Paris Agreement’s goal of keeping the global temperature rise well below two degrees Celsius. That strategy, announced a year ago, is called “the Terra approach” and it focuses on the sectors in the bank’s loan book that are responsible for most greenhouse gas emissions (GHGs). The Terra approach uses science-based methodologies to measure the impact of specific sectors on the climate and to set targets for each sector to transition to a low-carbon future.
Of course, there are sectors where such a transition would not be possible. This is why ING has set a goal of zero funding by 2025 within sectors such as a coal power generation. Leonie told Renewables Now that the bank is on track to reach the target.
According to ING, Terra can change the way banks think about climate impact measurement. After announcing it, it presented the methodology to more banks and stakeholders. In December 2018 the bank was joined by BBVA, BNP Paribas, Societe Generale and Standard Chartered in signing the Katowice Commitment – a pledge to steer their separate portfolios toward the Paris Climate Agreement target and work together to further refine the metrics and tools needed to do this.
Then in New York this month 31 banks, with over USD 13 trillion in assets, signed the Collective Commitment to Climate Action. The actions to be taken by banks under it include:
-- aligning portfolios to reflect and finance the low-carbon, climate-resilient economy required to limit global warming to well-below 2 degrees Celsius, striving for 1.5 degrees Celsius;
-- taking concrete action, within a year of joining, and using bank products, services and client relationships to facilitate the economic transition required to achieve climate neutrality;
-- being publicly accountable for the climate impact and progress on these commitments.
At the end of 2018, ING had EUR 6.3 billion in sustainable assets under management (SAuM), which is about 5% of total assets under management.