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Executive Perspectives

EXECUTIVE PERSPECTIVE: Higher ESG ratings can mean lower borrowing costs

Tim Nixon

19 Jul 2018

20 July 2018

“For our Sustainable Improvement loans, discounts and penalties vary between 5 to 10% of the margin, which can be substantial for companies in today’s competitive and liquid financial markets.”

Leonie Schreve, Global Head of Sustainable Finance at ING, explains the growing business case for ESG related finance. She highlights trends in clients’ preference for sustainable investing as well as the impact that a positive ESG rating can have on a company. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.

Tim: Why expand now in America?

Leonie: Sustainability strategies are becoming increasingly important for CFOs in the Americas, so it was a natural decision for us to expand. Having a team on the ground will enable us to support our global clients with their sustainability demands. There are many opportunities across sectors and regions and we want to be there to provide the right solutions.

Our Asia team also expanded about a year ago and has seen growth in a variety of new deals and discussions for new deals in the region.

Tim: What is the growth rate of green or ESG related finance, and where is it the strongest?

Leonie: We established a global sustainable finance initiative five years ago as we saw the financial side of companies looking at sustainability in a serious way. We believe sustainable business is better business and enables us to support the leaders of tomorrow’s economy.  Since then, we have been transitioning our portfolio and focusing on supporting sustainability ambitions of our clients to grow our mandate of doing better business.

Since starting this, about 15% of our portfolio is responsible finance. We expect to see this figure grow in the future. Our target is to double this by 2022.

Tim: What are the primary drivers of the growth? Regulation? Investors? 

Leonie: Regulation and investor interest can definitely be seen as catalysts to the growth of sustainability. From a business standpoint, though, we found out through our recent sustainable finance report that sustainability practices have evolved from being predominantly cost-cutting projects to revenue-driving strategies. Revenue growth was ranked first by 39 percent of US corporations surveyed as the most important factor for deciding to implement sustainability strategies.

Tim: What types of customers are you targeting? 

Leonie: We are aiming to deepen the relationships with US clients who are supporting sustainable development and socially responsible behavior, particularly contributing to a low-carbon, self-reliant society.

“We want to support the financing of projects and fuel the positive impact of our clients while helping them achieve their business goals.”

Tim: What kinds of products/services are most in demand?

Leonie: We currently have sustainable lending products and green bonds globally, but predominantly in Europe and Asia, which we are accelerating into the Americas. We also have green loans and have seen demand from companies wanting to increase their green exposure in the market.

Another area of focus is climate finance such as green housing, renewable, and solar, as well as sustainability of healthcare and education.

Tim: How does ESG performance factor into your own lending decisions?

Leonie: ESG is a high priority for us. We make sure to check every transaction and every client against our environmental and social risk policies before working with them. If they don’t meet our standards, we provide the counsel and support to change. But ultimately, we will not do a deal if they do not meet standards or are not willing to change.

Tim: Do you offer a discount to high performers in ESG?

Leonie: For our Sustainable Improvement loans, discounts and penalties vary between 5 to 10% of the margin, which can be substantial for companies in today’s competitive and liquid financial markets.

Tim: Can the discount change with ESG performance?

Leonie: A higher ESG rating can lead to lower cost for capital, but conversely, there are penalties that come with a decline in ESG score.

This is something we evaluate meticulously since sustainability standards are raised all the time. Companies with a very high score will find it more difficult to make significant improvements than companies with an average score, so we do keep a close eye on how far the client has progressed with their sustainability rating. These factors are all taken into account when setting up a sustainability-improvement loan as well as how many banks are in the syndicate and the agreement with the banks which means the numbers will vary on a case-by-case basis.

Tim: How does your approach to green finance deepen client relationships?

Leonie: We see that sustainability is considered high on the agenda of most of our clients, though not every company is considering how sustainability strategies can help grow their business and position them for success in the future. We are proactively thinking about how these strategies can be applied to each of our clients and identifying opportunities for them. We integrate ESG performance into all our client relationships and always engage in conversations to determine a material use of ESG for the client. It can be to improve their overall sustainability score and rating, having transactions directly linked to sustainable initiatives and KPIs.

Tim: What is your overall goal for the American market?  How do you measure progress?

Leonie: We have a global aim double our funding to companies and sectors that are helping to keep global warming below 2°C and will do this by increasing our Climate Finance portfolio as well as financing (ESG) industry leaders two-fold by 2022.

Our efforts in the Americas will support our overall commitment to this goal by identifying and financing those clients who are transitioning to a low carbon economy and contribute to these causes.

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