In 2017, Amsterdam-headquartered ING Bank issued a EUR 1 billion loan to health technology firm, Philips, creatively linking a flexible interest rate margin to the conglomerate’s sustainability performance and ratings. The deal marked the world’s first ever sustainability-linked loan (SLL), distinguishing the structure from other forms of traditional green finance, including green bonds and green loans, through its offer of much looser restrictions around use of proceeds.
Six years later, SLLs have evolved into a $240 billion global market, with industry guidelines and principles actively issued and updated and participants from Asia Pacific often participating in the space.
As a pioneer in SLL and other sustainable finance products, ING Bank plays an important role of helping European corporates expand into the Asian market, as well as facilitating local companies’ sustainable growth story.
FinanceAsia sat down with Singapore-based Andrew Chew, Apac director of sustainable finance at ING Bank, to get his perspective on the advancement of Asia’s sustainable finance market. He shared that, while there may be some obstacles to tackle along the way, Asia’s efforts in the sustainability arena are making a mark on the global stage.
Excerpts from the interview have been edited for clarity and brevity.
Q: Six years into the development of Asia’s SLL market, what is most noticeable?
For one, standards have become higher and more harmonised. We have gone from one or two banks taking part in such issuances to the entire banking community being very familiar with SLL structures. Industry guidelines, such as the SLL principles, which have been internationally co-drafted by the Asia Pacific Loan Market Association (APLMA); the London-based Loan Market Association (LMA); and US-based Loan Syndications and Trading Association (LSTA), provide guidance for banks to structure accordingly. Then there is an element of external review, where additional parties can offer their opinion in terms of whether a SLL structure aligns with industry.
Standards are becoming higher and harder, which is a good thing. I’m sure that these will be materially different again, if we were to have this conversation three years from now.
Q: How has a high interest rate environment affected the sustainable finance market?
It has been a little bit of a challenge in terms of interest margin decrease. If you think about the size and magnitude of a SLL’s margin discount, companies could be less motivated to take action.
A five basis points decrease against an interest rate of 2% in the previous low interest rate environment is quite significant. But now we’re talking about 4-5%, where a five-basis-point deduction is having a much smaller effect on corporates.
But companies still want to show their stakeholders that they are taking action on sustainability issues, and pursuing SLLs is one way to do so. It helps galvanise the entire internal organisation by tying financial benefits to the achievement of certain targets, instead of leaving these targets to the ESG department only.
Corporates’ motives to pursue SLLs are a combination of putting higher stakes on reaching ESG goals, and receiving interest margin benefits.
As is the case in the finance market as a whole, the success of the green market is largely determined by macro conditions. A green bond or a sustainability bond is first and foremost a bond. And that means when buying a bond, investors expect to get it at a pricing that is commensurate with the risk taken.
Once macro conditions come back, we will see an increase in overall sustainable bond volumes and loan volumes. Overall, be it benign or prohibitive market conditions, I'm certain that the proportion of green, social sustainability and sustainability-linked (GSSS) bonds in all financing instruments will start to increase.
Q: Are investors still willing to pay a “greenium” for access to sustainability structures?
What we saw with the Hong Kong Mortgage Corporation’s (HKMC) recent project finance issuance, is that investors much prefer the sustainability tranche over a plain vanilla one.
For this transaction, the two tranches were the same in terms of all traditional risk metrics, including priority of cash flow and the extent of overcollateralisation. The only difference was the label of a sustainability tranche vis-à-vis its pari passu conventional tranche, which resulted in the former having a yield of ten basis points lower than the latter, which was substantial.
This served as a controlled experiment to test investor appetite – whether there are those willing to tolerate a lower return purely because of the positive environmental and social impact associated with the sustainability tranche.
We think this is part of a larger trend in the investment industry. Traditionally, investment has always been about risk and return, but now a third factor has come into play over the past five to seven years – we are adding “impact” into the mix, to become a three-factor decision making equation. This reflects a big shift in investor appetite.
Despite the various intangible benefits of a sustainable finance instrument, companies are nonetheless practical when it comes to obtaining one, asking about tangible pricing benefits to find out how much they could gain from such products. The HKMC deal has set a reference benchmark for future green and sustainable finance products issuance, as well as a market proof point of a quantifiable greenium for future issuance.
More broadly, the opportunity for Hong Kong to become a green and sustainable finance centre is huge. Having a sovereign entity like the HKMC providing such a market reference benchmark that all GSSS issuers will point to, will only serve to reinforce this position.
Q: Are you concerned about greenwashing? How can the issue be addressed?
Absolutely concerned. It is the accurate labelling of sustainable projects and assets that will enable this steering of capital towards a world where global warming is limited to 1.5 degrees. If this labelling breaks down, is imperfect, or worse, its credibility is called into question, financiers and investors will “throw the baby out of the bathwater” and avoid this space altogether. As a result, capital will not be steered effectively to fight climate change.
Having a reliable taxonomy is first and foremost. We need a definition system that clearly delineates what can and cannot be categorised as “green”, so that investors and financiers can make informed decisions around where to invest more or less, while fulfilling any related disclosure requirements.
Asia is fragmented with different markets and different jurisdictions, and having a sufficient consensus on a unified taxonomy is crucial for investors to put clarity in place.
Efforts should not only come from governments, but also industry working groups, to help work out guidelines to define what is a credible SLL or a credible green bond.
Q: Are you seeing the development of any other trends?
Now there’s an interesting trend in the market called “greenhushing”, where companies are still setting their sustainability targets, but to avoid being scrutinised and criticised during the process, they are taking a more considered approach in their marketing efforts.
The trend has gone from everybody jumping on the green finance bandwagon to swinging to the other side of the pendulum after a few high-profile cases of greenwashing. Companies are stepping back to put together more robust approaches, and ultimately, this will lead to higher industry standards and a more credible market.
There is certainly more hesitation for companies to obtain SLLs. Structuring and closing a SLL takes longer – it involves longer due diligence. A process that used to span three months could now last six months, or a year.
Our projection for SLL issuance volume this year will be more or less the same as last year. We are getting to the stage where the road is a bit bumpy. But looking at it in three- or five-years’ time, things will improve. The sector is going through a plateau at the moment because of higher standards, but once we get through this consolidation period, it is poised for future growth.
Climate adaptation is another big trend we are seeing, compared to the existing efforts of climate mitigation to decrease carbon emissions to achieve climate goals. While containing global warming is a long-term goal, like it or not, climate change is upon us. Extreme weather conditions are already starting to have an impact – hurricanes, flooding, and sea levels are rising with increased frequency and intensity.
Looking ahead to the next three years, there will be more sustainable finance issuance where climate adaptation will be the focus alongside climate mitigation.
Q: What are your suggestions to corporates that are still sitting on the fence?
Do not let perfection get in the way of good. Get started first.
A lot of companies are hesitant and remain on the sidelines, waiting for a “perfect” climate strategy. Get started first and improve along the way, instead of waiting five years to execute the perfect plan. There’s no time to lose.
