ING’s global head of supply chain finance, Adriaan Bellaart, and global head of receivable finance, Gert Sonck, provide an overview of the bank’s green trade solutions.
Sustainability and environmental, social and governance (ESG) have been increasingly dominating the agendas and priority lists of many companies’ leaders across the globe. And although many companies and organisations still struggle on how best to shape their strategies and really make a difference, a recent ING study shows that around 70% of companies are effectively accelerating their sustainability activities.
ING is pleased to see the growth in the ESG-linked finance market over recent years, but at the same time, we feel this is just the beginning. ING is committed to making a difference in this regard, evidenced for instance by our target to mobilise €125bn of sustainable finance annually by 2025 with our wholesale banking business.
Having been an early adopter of sustainable solutions, we continue to innovate and broaden our product suite to support our clients on their road to net zero. ING finances today’s society, which means we also finance things that aren’t green. We want to help clients transition to a low carbon economy.
It’s about making progress together, step-by-step. This includes the introduction of ING’s green trade solutions, which cover green guarantees, sustainability improvement guarantees, sustainable supply chain finance and sustainable receivables finance.
Supply chain finance (SCF) has the unique characteristic of effectively financially linking suppliers and trade partners to their clients. Typically, SCF is used to unlock liquidity in the value chain, where a large buyer leverages its strong credit standing to offer its suppliers access to competitively priced liquidity, flexibly through an online platform. However, with the increased need for a corporate to take responsibility over the ESG performance of its value chain partners, those same corporates consider SCF a powerful tool to incentivise their suppliers with the aim of improving on industry-relevant ESG indicators. Sustainable SCF combines the availability of liquidity through approved accounts payable with performance on pre-selected ESG criteria. Suppliers that comply with such criteria receive a price benefit, incentivising trading partners to improve and change their way of working. As evidenced by the growing adoption of sustainable SCF by market leading corporates, companies are actively seeking to minimise negative ESG impacts while promoting environmental, social and economic benefits throughout the value chain. Sustainable SCF effectively links the production process of all stakeholders involved, bringing products and services to the market with financial incentives aimed at improving the sustainability of all.
Since 2021, the number of sustainable SCF programmes has started to increase worldwide. ING wants to play a role in promoting this approach, not only by implementing new sustainable SCF programmes but also by transforming existing SCF programmes so that they include ESG factors. An example of a recent transaction with Xylem Inc, a leading global water technology company, was presented jointly at the Swiss Treasury Summit. Since sustainability and combatting climate change have increasingly become a license to operate for companies, the number of sustainable SCF transactions is expected to grow exponentially over the coming years.
A similar trend has been observed with the more traditional trade instruments, where sustainability-linked guarantees have become increasingly popular in recent years. By raising more than €1bn in green and sustainability improvement guarantee facilities at the end of 2022, ING has again shown its commitment to sustainability. These facilities are offered to clients all over the world and are applied to a variety of different projects, which include for example refractory product manufacturing, the production of electric batteries and wind farm construction.
In essence, green guarantees are financial instruments designed with the aim to support initiatives that benefit the environment. Such initiatives can cover a wide array of activities, including programmes for sustainable water management, sustainable transportation and renewable energy projects. By encouraging investment in these activities, these assurances can make it simpler for businesses and governments to finance and carry out sustainable initiatives. For instance, in 2022 ING provided a €125mn green guarantee to a global battery manufacturer to support the greenfield investment of a large lithium-ion battery plant in the Central and Eastern Europe region. Another example is ING’s participation in the issuance of performance bonds totalling €71mn in favour of METROREX SA, the metro operator of Bucharest, Romania. This transaction supports a project that significantly advances Romania’s efforts to create ‘greener cities’ with sustainable infrastructure.
Separately, sustainability improvement guarantees (SIG) are intended to encourage businesses to adopt more sustainable practices. They function by rewarding businesses financially for enhancing their sustainability policies, such as lowering their carbon footprint or putting in place more effective waste management systems. In general, the pricing structure of SIGs are based on three to five sustainability metrics that are specific, measurable, realistic and relevant to the facility’s tenor. For the guarantee facility to be effective, the sustainability goals associated with the facility must be ambitious, recognised industry-wide and verified by a reputable, independent party. The aim for SIGs is to achieve pre-established sustainability objectives or boost a client’s external ESG score.
A comparable approach applies to sustainable receivables finance solutions which aim to support our clients to enhance liquidity and cash flows linked to transforming their businesses and achieving sustainable development. A sustainable trade receivables purchase programme (TRPP) is a cost-efficient working capital instrument that aims to support the environmental and social strategy of the company. As with the previously described instrument, ESG-linked criteria are agreed with the client who receives a financial benefit when the criteria are satisfactorily complied with, providing the client with an incentive to demonstrate a certain conduct or focus on specific performance indicators.
Cemex is one of the largest cement and ready-mix producers in the world. The group aims to be at the forefront of the circular economy with innovative sustainable products and solutions in the construction value chain. It is committed to achieving carbon neutrality and has the ambition to link 85% of its debt to sustainability metrics by 2030 to combat climate change and contribute to a carbon neutral economy. ING supported Cemex in developing a comprehensive sustainability-linked ca. €180mn sustainable TRPP framework for its businesses in the UK and France. The financing includes three climate action KPIs: net CO2 emissions per tonne of cementitious material, power consumption from clean energy sources in cement and alternative fuels rate.
The performance in these metrics could result in an adjustment of the interest margin paid under the programme.
Another industry where ING has offered a sustainable receivables finance solution is the steel industry. On the one hand, steel is the material of choice for the transition towards a circular and low-carbon economy: steel is permanent, infinitely reusable and the most recycled substance on the planet. On the other hand, steel production has an undeniable environmental impact as it is very energy intensive to produce. As acknowledged in ING’s climate report, decarbonising the steel industry will be challenging. This is due to the highly competitive and cyclical nature of the sector, in combination with the material investments required to decarbonise and revamp existing plants. Estimated investments that the sector requires amount to US$1.1tn until 2050. However, developing more environmentally friendly steel products could deliver huge environmental advantages over the entire life cycle of steel, which – in our view – represents an important competitive advantage for producers. ING supported a major European steel manufacturer to reach carbon emission reduction targets and the responsible steel KPIs by linking the achievements on those metrics to the margin of our sustainable receivables finance programme.
The increased awareness of companies on how their activities impact the environment has resulted in demand for sustainability-linked trade solutions. Such facilities commonly provide financial incentives based on meeting behavioural changes and/or pre-identified targets. Incentives can directly benefit the borrower or its trading partners, but with the ultimate goal of improving ESG indicators in the influence sphere of the corporate. Benefits could include improvement of ESG scores (with cheaper funding when targets are met), and consequently demonstrating companies’ commitment to sustainability to their employees, shareholders, the markets, etc.
With a network in over 40 countries, deep sector and sustainability knowledge combined with our longstanding expertise in trade and working capital solutions, ING is your ideal partner to support you in your sustainability transition journey.