A sustainable finance pioneer issued a rallying cry for banks and their clients to set more ambitious ethical goals when selling debt.
ING Groep NV, which says it created the first loan tied to a client’s sustainability performance in 2017, warned the burgeoning market’s credibility is now at risk. Sustainability targets linked to financing must be ambitious, recognized industry-wide and verified by a reputable independent party, the lender said in a statement on its website Thursday.
“If the ambition levels are too low, sustainability-linked products will not have the impact they’re designed for,” said Leonie Schreve, ING’s sustainable finance head. “While ‘greenwashing’ is not a term we would use, there is a risk of falling standards, particularly as this type of financing becomes more mainstream.”
The sustainability-linked market is a rapidly growing segment of ethical finance. Such loans have nearly doubled this year to $255 billion, while bonds have jumped more than five-fold to above $60 billion, according to data from Bloomberg Intelligence.
More recently the structure has been expanded to everything from derivatives to repurchase agreements. Skeptics criticize a lack of ambition in companies’ targets and a willingness by both investors and banks to overlook those shortcomings, with poor transparency over loan terms having come under particular scrutiny this year.
A Bloomberg analysis of over 70 sustainability-linked revolving credit lines and term loans arranged in the U.S. since 2018 showed that more than a quarter contained no penalty for falling short of stated goals, and only a minuscule discount if targets are met.
ING also spoke out against deals where the discount or premium on a sustainability-linked transaction goes to charity, saying that doesn’t incentivize market participants to price sustainability risk. It’s common for investment-grade borrowers to give the savings they make on interest payments to charity.
ING said the credibility of the market relies on companies being committed to their sustainability goals and a net-zero future, and that it would push its own clients. However, the Dutch lender said it needs to be an industry-wide effort.
“When we structure transactions ourselves we can use our influence to steer clients towards credible targets with a big impact, even if they insist on a structure that’s not 100% to our liking,” Schreve said. “But when we participate in transactions by other banks we don’t have the same power.”
