Published: February 08, 2023
Arguably, the focus on corporate supply chains has never been more intense. Not only are companies looking for new ways to make their supply chains more resilient in the face of macroeconomic headwinds, they are also seeking to make them greener and cleaner. As ESG becomes a major factor in this space, it is important to be aware of the growing range of tools available to treasurers to help support sustainability.
Sustainability has become a key strategic topic for most corporates across the globe, with a recent ING study showing around 70% of companies accelerating their ESG activities. And as increasing numbers of businesses embark on the road to net zero, banks are also evolving to assist companies in navigating this changing environment by offering different sustainable finance solutions across all elements of the capital structure.
These solutions cover many different areas of the treasurer’s responsibility, ranging from green guarantees to sustainability improvement guarantees (SIGs), sustainable supply chain finance (SCF), sustainable receivables finance, and sustainable trade receivables purchase programmes. Let’s examine a few of the key instruments in more detail:
These are intended to provide guarantee facilities to eligible green projects that are expected to yield clear environmental benefits and are in line with Green Loan Principles. To ensure accountability, independent review, verification, certification, or rating are required during and after the green projects’ completion. There are several explicitly recognised broad categories of green projects including renewable energy, energy efficiency, clean transportation, and sustainable water management,. For instance, ING signed a Green Guarantee facility agreement securing the obligations of our client under a virtual power purchase agreement (PPA) covering three wind farms that will fully generate green electricity to be sold on the Polish market for a 15-year period.
The expected annual electricity production from 20 wind turbines with an installed capacity of around 52 MW is approximately 190 GWh, which makes this one of the largest PPAs of this type ever signed in Poland. This is equivalent to feeding around 100,000 average Polish households with electricity from renewable sources each year.
ING also believes that an inclusive and proactive approach is needed to change the real economy. To support our clients who are shifting to a more sustainable business model, we introduced SIGs to incentivise our clients to reach the pre-agreed sustainability linked KPIs or to further strengthen our clients’ external ESG scores. As there is always the reality that incentives go both ways, a SIG scheme also imposes a financial penalty if the client fails to meet the pre-agreed sustainability KPIs or its external ESG score has not been improved.
To be effective, the sustainability KPI targets linked to guarantee facility must be ambitious, recognised industry-wide and verified by a reputable, independent party. Therefore, the pricing mechanism of SIG targets between three and five sustainability metrics that are specific, measurable, ambitious, realistic, and time dependent on tenor of the facility.
Based on our conviction that climate change is a major threat to the environment and a major energy transition is required to reach net zero (ING’s 2022 Climate Report), ING has introduced green trade solutions as one of our core initiatives aimed at accelerating the energy transition and contributing to the prevention of climate change.
ING continues to pass milestones in its commitment to sustainability, having raised more than €1bn in green and sustainability improvement guarantee facilities by the end of 2022. The geographical locations of the facilities span from Europe to Australia and they cover a wide range of projects in various sectors, such as wind farms, electric battery production, and refractory products manufacturing.
As Steven van Rijswijk, CEO, ING, comments: “ING aims to be a positive force in the fight against climate change. Our approach is inclusive and collaborative. We work together with our clients to facilitate their transition to low-carbon technologies.”
As the name suggests, sustainable SCF uses the mechanics of SCF to further enhance sustainability and at the same time provide working capital support to supply chains. BSR, the sustainable business network and consultancy firm defines sustainable SCF as SCF practices and techniques that support trade transactions, in a manner that minimises negative impacts and creates environmental, social and economic benefits for all stakeholders involved in bringing products and services to markets.
Since 2021, the number of sustainable SCF programmes has started to increase. And ING is playing an important role in this by establishing new ones and migrating existing SCF programmes into fresh initiatives. In September 2022, we have presented one of our recent sustainable SCF transactions with Xylem Inc., a leading global water technology company, at the Swiss Treasury Summit[1]. This transaction was started in July 2022. In view of the ever-increasing importance of sustainability and climate change, the number of sustainable SCF transactions is expected to grow exponentially over the coming years.
Europe is striving to be the first climate-neutral continent to reduce emissions in the long term. In the area of receivables finance, sustainability-linked structures can be leveraged to positively support green transition and sustainable financing. Indeed, much progress is already being made in this space. As of 2021, with the support of ING, many of our receivables finance clients have transformed their businesses to meet the KPI requirements for the green transformation.
In 2022, ING supported a major European steel manufacturer to reach European CO2 Intensity and Responsible Steel KPIs. And for CEMEX, a global construction materials company, a sustainability-linked financing framework has been implemented for lending and receivables finance. Depending on the number of KPIs achieved (including CO2 emissions per tonneof cementitious products, power consumption from clean energy sources in cement and alternative fuels rate) sustainability margin is adjusted.
Issuing sustainable solutions can offer numerous tangible and intangible benefits to companies. In addition to potential financial benefits and improvement in ESG ratings, it can highlight that companies are making a strong statement on sustainability to their employees, shareholders and other stakeholders such as suppliers and local communities. With networks in more than 30 countries and deep sector knowledge, ING is your ideal partner to support you in your sustainable transition journey.
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