Time to shift to a sustainable model is now

For sustainability to become mainstream, greater effort across the board to focus minds is needed, and the material benefits of pursuing this strategy must be made clear

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Sustainability has firmly been in the global spotlight for some time. Close to 200 countries have signed the landmark 2015 Paris Agreement which agrees to a long-term goal of ensuring that the rise in global average temperatures is less than 2°C above pre-industrial levels, and the regulatory support for the Paris Agreement has been forthcoming in an increasing number of countries.

At COP24 last December, countries agreed on a set of rules to help prevent global warming and reduce carbon emissions. Earlier in October 2018, the Intergovernmental Panel on Climate Change (IPCC) published a special report on the imperative to keep rising global temperatures under 1.5°C, issuing a stark warning on the risks of going above this temperature, and what can be done to keep on target.  

The IPCC noted that with an increase of 1.5°C, water stress, food scarcity, sea-level change, heat-related catastrophe and a broader impact on nature on the environment could be largely diminished, however at 2°C this becomes largely impossible. The effect this will have on people and business is clearly significant, though this is yet to be sufficiently quantified and assessed in business.

There is already evidence that firms with a conscious approach to environment, social and governance (ESG) issues can deliver above-market returns and provide downside protection to portfolios. Recent research by Amundi Asset Management showed that responsible investing via the integration of ESG generated a tangible impact on equity performance in Europe and North America.

This all paints a very rosy (or should I say, green) picture. However, the reality is that sustainability is still far from mainstream. Increasing attention and a combined effort from governments, corporates, financial institutions and society more broadly is now needed to help drive a more sustainable agenda and future. 

Mainstreaming sustainable finance

A crucial element is that there must be sufficient support for corporates which are promoting the sustainability agenda. Hong Kong announced a blockbuster green bond programme to provide support by example and a Green Finance Certificate by the Hong Kong Quality Assurance Agency for local standard setting.

We are also starting to see green loans emerge in the region, following the issuance of clearer guidelines - the Green Loan Principles - from organizations such as the Asia Pacific Loan Market Association launched in March 2018 and further updated in December 2018. Businesses have capitalized on these guidelines, and in 2018, we have seen the issuance of Hong Kong’s first green loan in the real estate sector by New World Development, as well as by Frasers Property Ltd in Singapore.

Inter-governmental initiatives aimed at improving and developing a sustainable finance market in the region will also help. An example is the ASEAN Capital Markets Forum’s launch of new standards for the issuance of social and sustainability bonds in October 2018. Given the importance of the social element in Asia, there is definitely market potential for such bonds in this part of the world.

China is one of the leading Asian nations when it comes to helping foster a sustainable financial system.

As early as 2015, the People's Bank of China (PBoC) launched the “Chinese Green Financial Bond Guidelines and Catalogue”, which sets out the definition of green projects, use and management of proceeds and reporting and an updated version is likely to be released this year. Following this would demonstrate the issuer’s commitments to green finance and ensure the quality of the green financing instrument, prior and post issuance.

There is continued strong growth of green bonds in China and Hong Kong: Chinese issuance on the domestic and international markets in 2018 topped US$30 billion and green bonds arranged and issued in Hong Kong in 2018 totaled US$11 billion according to a recent report by Climate Bonds Initiative (CBI). It is also worth noting that mainland entities were the largest issuer group by origin, comprising 64% of the market share.

Mitigating risks  

Focusing on sustainability is not just about the opportunities for businesses, it is also a risk management exercise. Climate change is a material issue, that when not assessed properly could have negative effects on business in terms of contingent liabilities and other related issues.

It is crucial to show stakeholders that the narrative around sustainability is material to them and their companies – not only the future of their businesses in terms of raising funds, but future profitability as well in the mid to long term.  

For those who want to transition towards being more sustainable, what is a good starting point? In terms of financing, one possible option is to consider a sustainability-improvement linked loan. If the company meets pre-determined ambitious improvement targets for its sustainability performance the interest rate on its sustainability-improvement loan will go down.

This has already proven popular with corporates as a new way to peg their financing to sustainable measures. Since ING pioneered this loan concept with Philips in February 2017, we have completed more than 20 such deals globally across various industries and regions, including with Wilmar International Limited and Olam International Limited in Singapore.

Financial institutions also have a major role to play in supporting corporates in their sustainable development and routes for sustainable finance. They can do this by simply developing these products and offerings for clients, but importantly in a way that demonstrates to the private market that these are viable solutions.

China Development Bank’s first international green bond in 2017 was an innovative offering in the international capital markets, as it promotes green development in the Belt and Road initiative.

Transitioning to a more sustainable world will take time, and companies and their financiers must be forward looking, and innovative, in their approach. At ING we are developing the Terra approach, where we use science-based scenarios to help us to steer our 500-billion-euro lending portfolio towards meeting the Paris Agreement’s goals.

What we also see is that there is a clear symbiotic relationship between innovation and sustainability. Businesses that want to become more sustainable often find that innovation is part of the solution.

Today, taking an approach that places sustainability at the heart of a business strategy is hugely important. But a lot more needs to be done if sustainability is to truly scale globally. 

By Herry Cho, head of sustainable finance Asia Pacific - ING

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Date

11 Mar 2019

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