2021 was a record-shattering year for sustainable finance.
There has never been so much capital deployed in pursuit of sustainability in the real economy — assets under management in ESG investing strategies have climbed well into the trillion-dollar realm and it looks like sustainable debt is following a similar trajectory.
Green, social, sustainability and sustainability-linked bond issuance accounted for about 11 percent of total global bond issuance last year and the Institute of International Finance sees the issuance of sustainable debt reaching $7 trillion come 2025. In the United States, loans with terms tied to ESG targets leapt to about $52 billion in 2021 — a 292 percent increase over 2020.
While sustainable debt has surged, the world’s largest banks — many of which tout their ambitions behind and support for the net-zero transition — have disappointingly been pumping billions into new oil and gas projects.
ING, one of Europe’s largest banks, with total assets of around $1.2 trillion, stands out here, for two primary reasons: It offers notably less fossil fuel expansion financing than that of peer firms of its size, and it was the first bank to link financing to a company’s sustainability performance, in 2017.
I checked in with Gerald Walker, CEO for ING Americas, to learn more about how the multinational bank is taking an innovative approach to accelerating climate progress with clients across its loan book, and how it’s working to upskill and empower employees on ESG as the bank’s overall strategy becomes increasingly climate-centric.
Grant Harrison: As an originator of sustainable finance products — many of which have absolutely exploded over the past year — what about what you’re seeing now in the sustainable debt world do you think would have been frustrating to see from ING’s 2017 lens? And, conversely, what about the evolution of sustainable debt would seem auspicious to you?
Gerald Walker: Sustainable finance has exploded over the past couple of years, so perhaps it’s easy to forget that it was only in 2017 that ING pioneered the very first sustainability-linked loan, for Philips. Over that time, sustainable finance has developed tremendously, but with that growth come accusations of greenwashing.
To truly be effective, sustainability targets linked to financing must be ambitious, recognized industry-wide and verified by reputable, independent parties. This is the only way to protect the credibility of the market and make sure companies tackle the most difficult and urgent issues first. If the ambition levels are too low, sustainability-linked financing products will not have the impact they’re designed for. So-called greenwashing only undermines those objectives.
ING isn’t the only player in this market, and sustainable finance is not something you do alone. But given our position in this space, we consider it our responsibility to speak up when it drifts from its goals, and we will continue to do so.
Harrison: ING’s inaugural integrated climate report last year said, "We increased our ambition to align our lending portfolio with a net-zero future by 2050 or sooner. This means we’ll now evolve our Terra Approach to steer our loan book towards keeping the rise in global temperatures to a maximum of 1.5 degrees C(elsius), rather than well below 2 degrees C." The emphasis on 1.5C is noteworthy. Could you share more about what’s behind this ambition?
Walker: We increased our ambition for our lending portfolio because the situation required us to. Last year, the International Energy Agency (IEA) published its roadmap special report for the energy sector, based on a 2050 net zero scenario called NZE2050. The IEA’s existing Sustainable Development Scenario, however, foresaw net-zero emissions only by 2070, so the new energy transition trajectory clearly required a greater pace and scale of change by the sector, particularly in the near-term.
Based on the new IEA scenario, we changed the reference trajectory applied to power generation and fossil fuels from "well below 2 degrees C" to NZE2050’s 1.5 degrees C. We also brought our portfolio financing trend target forward in line with NZE2050, setting a short-term absolute reduction target of 12 percent by 2025, compared to 2019, for our upstream oil and gas portfolio.
Harrison: Could you share more about the "Terra Approach" — its genesis, how it works and why you believe it’s uniquely positioned to accelerate climate progress within ING and with clients?
Walker: ING has, and continues to, make the biggest impact on climate action through our financing of companies, especially large companies. We’re steering hundreds of billions of euros in our loan book towards achieving net-zero by 2050. We call this our Terra Approach.
Terra is more than making promises. It is one way that we can bring the most transparency to our sustainability approach, including the steps and intermediate targets we are setting for ourselves on our path to net zero. At the moment, Terra focuses on the sectors responsible for most greenhouse gas emissions: power generation; fossil fuels; automotive; shipping; aviation; steel; cement; residential mortgages; and commercial real estate. We aim to roll the Terra approach across all the sectors in our loan book by the end of 2022.
Our Terra Approach uses various methodologies, but the crucial one that applies to most of the sectors in scope is called PACTA for Banks, which was co-created with the 2 Degrees Investing Initiative (2DII), a think tank developing climate metrics in financial markets. PACTA looks at the technology shift needed across certain sectors to slow global warming and measures this against the actual technology clients are using — or plan on using in the future.
The data from sector roadmaps developed by independent bodies like the IEA is then compared by a tech tool to our client data. This data comes from global databases that track public and private companies around the world, so clients don’t need to provide any data themselves.
We’ve already made great strides using Terra. The power generation, automotive, residential real estate, shipping and fossil fuel sectors are all on track with existing climate-alignment pathways. Another three sectors — steel, cement, commercial real estate — are within 5 percent of their scenario, and we’re confident we can bring these into alignment in the years to come.
Harrison: The EU has enshrined its net-zero targets into law, with legislation proposed to cut emissions by 55 percent by 2030. Given your Americas perspective, how do you see regulatory changes on the horizon in the United States — will they foster or hinder progress toward a clean economy?
Walker: Our clients operate internationally, with extensive supply chains, so they need to deal with differing regulatory approaches. The sustainable finance sector is further developed in the EU and more shaped by regulation, such as the EU Taxonomy regulation, which — like other European standards — will have knock-on consequences for global companies.
In the U.S. specifically, the regulatory conversation is picking up. We do see a growing appetite for financing connected to social impact, green recovery and a more resilient society. Looking ahead, we believe that the pandemic crisis can ultimately help to accelerate innovative sustainable progress. Businesses and society need to seize the opportunity to build back better, with more efficiency and future-proofing.
Ultimately, though, I believe that action from corporates will be a large driver in pushing the sustainability agenda here in the U.S. American corporates accounted for only 3 percent of global sustainability-linked borrowing in 2020, but this jumped to 28 percent in 2021. Boardroom attention is clearly increasing as stakeholders, shareholders, customers and employees all demand more accountability in disclosure and action upon environmental, social and governance promises.
Harrison: I appreciate how ING frames its "climate convictions" in your 2021 integrated climate report. As a leader, what are your own personal convictions on where climate change and finance intersect? And how do they inform your leadership approach and priorities?
Walker: The financial services sector is critical to the climate transition, and this is now such a central part of my job, in a way that was unimaginable 20 or even 10 years ago. We have seen climate change become a crucial factor in our clients’ long-term growth because climate risk is now a business risk.
ING is recognized as a sustainability and climate action leader in finance and part of my role as ING Americas CEO is to make sure we further build on this leadership position. I’m committed to working with my team to map out how we execute on our commitments at the next level, steering our financing to support clients to create positive change and minimize further negative impacts. We are also focused on exploring other aspects of ESG beyond climate action with a heightened focus on social as well.
Harrison: On the convictions from the prior question, how would you define "our" in this context? That is, who is actively included in this consensus around climate convictions? Could you share more about how ING includes and empowers employees across the firm on your priorities around climate?
Walker: ING empowers its employees across the business, setting an inclusive and committed culture that is genuinely both top-down and bottom-up. For example, our training sessions are open to all employees and we have internal committees started by employees that are passionate about making a difference in the areas of sustainability as well as diversity and inclusion.
Valuing our teams’ efforts and championing their causes is why we have such a high volume of graduates looking to join the company. It’s extremely gratifying to see and something I take pride in.
Harrison: One of ING’s climate objectives, built off your climate convictions, is to advise clients in line with a net-zero economy. Could you offer some color as to what this entails?
Walker: We find we can make the most impact by engaging with our clients and changing sectors from the inside out. We’re active in advising our clients around shifting investments towards low-carbon technologies. At ING, our inclusive approach is based on engagement and facilitating our clients on the path to transition. We are really looking to create a dialogue with clients. How can finance support their sustainable transition ambitions?
ING’s Terra Approach, specifically, has helped mobilize the company to set sector sustainability strategies, making sure we can best advise and finance clients in making the transition to sustainable business models, as we shift our own capital allocation choices more towards low-carbon technologies and away from high-carbon.
These types of conversations have resulted in us providing financing to companies like FedEx and Aligned last year, which set new standards for sustainable finance in their respective industries.
Harrison: As the largest Dutch bank, ING’s focus on the circular economy stands out to me. Could you provide some exemplary cases where debt instruments like green loans and sustainability bonds have been most impactful or exciting for ING in accelerating the circular economy?
Walker: We have arranged many green and sustainability instruments in support of the circular economy, but I would highlight our investment in Milgro, a leading cleantech company. Milgro has developed an interface platform that helps companies to control their waste streams, optimize recycling, reduce and prevent the waste of raw materials. We’ve also invested in Black Bear Carbon, which converts used car and truck tires into raw materials for new products like pen ink, smartphone covers and new tires.
ING has also provided several loans to recyclers and companies that produce goods using recycled resources. Some of these deals have been with ground-breaking circular businesses, like the La Trappe brewery, with a closed-loop water system and the world’s first energy-neutral and circular hotel, Breeze.
Harrison: On upskilling and empowering ING on ESG, what specific skills are you building to support a firm-wide strategy that is increasingly climate-centric? And can you share more about the Climate Change Committee and how this particular mix of leadership figures across the organization accelerates climate leadership via your financial products and advising?
Walker: A large part of our approach centers on transparency and accountability. For example, ING’s Environmental Program, which we’ve implemented globally, manages our approach to reducing our own emissions and covers our targets to reduce overall energy use, water consumption and waste. We also have a Climate Alignment Dashboard, which shows the CO2 intensity per sector of our portfolio compared to the market and the relevant climate scenario.
Our Climate Change Committee takes responsibility for our overall approach, strategy and performance. That includes mandating processes for identifying and managing climate-related risks and opportunities; guiding climate-related policies and strategy; objective-setting and performance monitoring; overseeing progress on relevant targets; and guiding external disclosures.
We want to be aligned on our approach across the entire organization because we all have a part to play in tackling climate change. If we don’t, as an institution and indeed as a broader society, we all today understand the devastating and lasting impacts on our world.