Lending Sustainably Will Help Future-Proof Businesses - And Make Banks Stronger, Too

As the world’s three biggest economies – the EU, the US and China – unveil their carbon-cutting proposals for the UN climate conference in Paris at the end of the year – it is a reminder of the growing importance of issues such as resource scarcity, climate change and poverty.

The build-up to Paris highlights the fact that these sustainability issues are no longer seen as simply environmental or social issues, but as government and business issues, too. And if they are issues for businesses, then they are an issue for the banks that lend to businesses, says Christopher Steane, global head of lending at ING Commercial Bank.

Most banks are lending more money to companies or projects that help the environment than they were a few years ago. But Netherlands-based ING is taking that a step further, he argues. “We are seeking to integrate sustainability into pretty much everything we do when it comes to lending. If we are to thrive in the future, we need to help our clients address the risks and opportunities these challenges create. In other words, to future-proof our own business, we need to help our clients future-proof theirs ’.”

This is an evolution of the bank’s previous approach to sustainability, which was largely defensive. “About a decade ago, we, like many others, introduced environmental and social risk policies on a sector by sector basis. We also signed up to the Equator Principles, which were introduced around the same time to make project financing more sustainable,” Steane says.

“So, we had policies in areas such as defence, energy and agriculture, setting out how we would deal with certain environmental and social risks. These policies were about steering the business away from harmful activity and meant, for example, that we would not lend money to manufacturers of cluster bombs or to developments in UNESCO World Heritage Sites.”

At the time, even these small and eminently sensible steps met with resistance, with project financiers, for example, arguing that complying with the Equator Principles would make the bank uncompetitive. That argument has less force now that 79 financial institutions have signed up, covering 70% of international project finance lending in emerging markets.

But recently, the bank sought to take a more positive approach to sustainability. “What we had in place was fine as far as it went, but it was only about steering us away from harmful stuff,” Steane says. “We asked ourselves if we could take a more pro-active and positive approach to sustainability – and to climate change in particular.

“Our idea was to build a more universal approach than before. We wanted to get away from the idea that sustainability was just the responsibility of a few people lending to renewable energy projects,” he continues. “We concluded that we should take a sustainable approach across the board, in all the sectors in which we operate.”

That immediately raises the question of how you define sustainability and the bank was very clear that the policy had to go beyond simply avoiding projects or sectors that appeared too risky when ESG (environmental, social and governance) factors were taken into account.

Nonetheless, the first step is to identify which clients and projects are riskiest – and which are most sustainable. Those that the bank deems as most successful in tackling issues such as resource scarcity and climate change are given the bank’s Green Leaf icon. The bank lent more than €19 billion to sustainable projects in 2014 and expects the figure to grow this year.

“Introducing these concepts is not a fundamental change of approach, it’s just adapting our business to the changing world we live in,” says Steane. “These are issues that are engaging many CEOs while we, as a bank, have concerns about lending to companies and industries that are going to get left behind.”

Yet he recognises that what ING calls “environmental outperformance” is not a clear-cut area. The bank continues to lend to fossil fuel companies, for example, which many environmental groups would oppose. “The use of oil and gas is critical to many economies and we are going to continue to support those economies,” Steane argues. “But that doesn’t mean we can’t seek out the most sustainable projects to finance.”

He cites a recent loan for an LNG terminal in Rotterdam that will supply fuel to ships that currently rely on heavy bunker fuel, one of the most polluting fossil fuels there is. “LNG is clearly a more sustainable alternative and through this deal we are helping to support a transition to a lower-carbon transport sector,” he says. “However, we recognise that the concept of sustainability is evolving and that in time such operations may be seen as mainstream and not eligible for our Green Leaf status.”

In the coal sector, the subject of much debate about stranded assets, ING now has significantly tighter restrictions on the projects it will fund, focusing on areas such as recycling, waste management and clean-up operations.

Meanwhile, as well as making significant investments in renewable energy, the bank is keen to help companies “looking to stay ahead of the game and realise their visions for the future” such as lighting manufacturers seeking to move from providing bulbs to providing “lighting as a service”.

But Steane is adamant that this is not a sign of the bank branching out into venture capital or impact investing but good, solid business. “Our primary stakeholders are the depositors who have entrusted their money to us – and we have to make sure they are going to get it back,” he says.