Financial innovation can boost sustainability

Sustainability requires investment and inventiveness by financial institutions. Here are some clever ways that finance is using its know-how.

Greater collaboration between banks, fintechs, the public sector and companies has the potential to create new business models and unlock smart routes to sustainability, as these examples demonstrate.  

1. Finance for fish

In February, the Dominican Republic signed a public private partnership agreement for co-management of an 8,000 square km marine reserve for 10 years, following work by Blue Finance, a UN-backed NGO. The co-management body, a non-profit company, comprises NGOs and local tourism operators and other associations. It focuses on social, environmental and economic benefits and aims to create new job opportunities in environmental protection, sustainable fishing and tourism for local people. It will also work to conserve critical ecosystems by investing in mangroves and sea grasses that act as a buffer to coastlines. As a public private partnership, the co-management agreement will not increase public debt but will instead seek to generate financial returns from its activities. The hope is that such co-management structures could increase protected marine areas globally from 2% to 30% by 2030.

2. Swapping debt for sustainability

On the other side of the world, marine environments in Seychelles are now protected by an innovative debt swap for marine conservation and climate adaption, structured by non-profit organisation NatureVest. In 2016, Seychelles’ government bought back $21.6 million of debt owed to Belgium, France, Italy and the UK at a discount. It was part of a deal that effectively redirects Seychelles’ debt payments from official creditors to the newly created local trust. At the same time, debt payments were restructured on more favourable terms. The trust will use Seychelles’ debt payments to repay the initial capital raised, and fund ongoing marine conservation and climate adaptation programming, including the creation of the Indian Ocean’s second largest marine reserve (covering 16% of the country’s ocean or 210,000 square km). Actor Leonardo DiCaprio, whose foundation provided a $1 million grant to the project, describes it as “a model for future marine conservation projects”.

3. Clarifying circularity

The idea of a circular economy is gaining ground among companies. To increase capital allocation to circular businesses, ING has worked with other banks and organisations, including the Ellen MacArthur Foundation, to develop guidelines to drive financing and funding best practice worldwide. The guidelines were presented at the UN High-Level Political Forum in June where countries and businesses shared their ambitions and targets to achieve the Sustainable Development Goals by 2030. Annemein Kolk, head of ING Wholesale Banking, the Netherlands, says that the finance industry lacks generally accepted guidance on circular finance: “The circular economy guidelines offer a starting point for circular initiatives in our industry and we hope they will facilitate the journey to such financing for financial services companies across the world.”

4. Choosing to cap carbon

Limiting the amount of carbon that gets into the earth’s atmosphere is critical to keeping climate change within acceptable boundaries. According to the OECD, 42 OECD and G20 governments price carbon using taxes and cap and trade schemes (where companies are given a carbon quota and must buy more, if required); including state and local schemes they account for 15% of CO2 emissions.

There are plenty of problems with carbon pricing – the OECD says there is a 76.5.% gap between current carbon prices and €30 a tonne, which it calculates as the minimum required to reflect damage imposed on the environment. Nevertheless, there have been encouraging developments. Firstly, the gap is narrowing. Secondly, more companies are using internal carbon pricing to drive their business decisions. The number of companies that embed an internal carbon price into their business strategies has quadrupled from 150 global companies in 2014 to over 600 companies in 2017, according to CDP, an organisation that collects carbon data.

Dutch nutrition ingredients producer Royal DSM is a leader in carbon pricing. Its CEO Feike Sijbesma, who also chairs the World Bank and IMF’s Carbon Pricing Leadership Coalition, says that “by putting a price on carbon, you put a real economic incentive for companies to develop new low-carbon technologies, reduce their own emissions, and develop new technologies.” Royal DSM has implemented an internal price of €50 per ton of CO2. Sijbesma says this will ‘future proof’ the business by changing its mindset when reviewing large investment decisions.

Other companies take into account likely increases in carbon prices over the long term. For example, French building materials group Saint-Gobain applies a €30 price for substantial investments, which resulted in gas being chosen over coal for a new power plant in a developing country. But for budgets that run beyond 2030, Saint-Gobain uses a €100 price to assess activities.

5. Bringing fresh perspectives to sustainability

As business models evolve, it’s inevitable that the way companies finance themselves will also change. Initiatives such as ING’s circular economy finance guidelines are an important step towards this. But there’s also scope for radical thinking, which is what the Sustainable Finance Lab aims to do. It is an informal interdisciplinary network of mostly academics from a number of Dutch universities. Their goal is to create a stable and robust financial sector that contributes to the economy without depleting the environment. By writing papers and organising events around subjects such as the dynamics of low-carbon energy finance, why reduced shareholding concentration may induce short termism, and why we will buy ‘light’ rather than lamps in the future, the Lab is helping to broaden the horizons of everyone seeking a more sustainable future.

6. Rewarding clients’ commitment

ING pioneered the sustainability improvement loan in 2017 with a €1 billion deal for Philips that was coupled to the company’s sustainability performance and rating. Since then many more loans have followed, including the first in Asia to Wilmar International. In July, ING unveiled a new made-to-measure Sustainability Improvement Loan where the interest rate is linked directly to the client’s sustainability targets rather than an external sustainability rating, as was the case with the Philips loan. ING issued several of these loans in the second quarter of 2018, including to Renewi, a recycling company that turns waste normally destined for incineration or landfill into valuable products. The loan’s interest rate depends on Renewi’s environmental performance in areas such as recycling, carbon avoidance and fleet efficiency. “This facility secures our funding for the long term and demonstrates that our focus on sustainability is matched with our approach to financing,” says Renewi’s CFO, Toby Woolrych. ING’s head of sustainable finance, Leonie Schreve, says Renewi is stepping up its already high sustainability standards by setting even more ambitious targets.

The View is the online magazine of ING Wholesale Banking