When world leaders gather in November for COP26, the United Nations Climate Change Conference, there will be no shortage of crises to debate.
Attendees will have to confront the numerous environmental catastrophes that have happened since they last convened in 2019, and they will need to come up with solutions.
For business leaders, the journey towards a more sustainable future has become a matter of urgency. In 2020, the number of companies committing to net zero emissions by the end of the century increased to 1,541 from about 500 the previous year. Meanwhile, 62 per cent of companies in new research from ING say that although environmental targets are not yet linked to executive pay, they are likely to introduce these in 2021.
But their sustainability remits have to go further. The pandemic has highlighted other sustainability challenges, such as natural-resource usage, supply-chain inefficiencies and social issues such as labour rights, and businesses must face these head on. To do that, they will have to find ways to finance change while ensuring their accountability to stakeholders.
Sustainable finance is going mainstream
Lenders have expanded the once-niche sustainable finance market in recent years. The World Investment Report, published by the UN Conference on Trade and Development in June, estimates the value of sustainability-themed investment products at $3.2 trillion last year — up more than 80 per cent from 2019.
Leonie Schreve, global head of Sustainable Finance at ING, says that one of the drivers for borrowers looking to the sustainable finance market is the growing belief that "sustainable business is better business". And analysis by the Boston Consulting Group finds that sustainable business model innovation drives "business advantage and value creation".
"We have already seen an uptake of sustainable finance in the past couple of years, but I think last year started a rethink about 'How should we do things differently?'," says Schreve. "There is an immense drive now towards sustainability."
A few instruments in particular have gained momentum: sustainability-linked loans, which offer borrowers a reduced interest rate if they meet sustainability targets; green bonds; green loans; and social bonds. The latter, of which $147.7 billion were issued in 2020, have been issued by firms looking to boost social outcomes. In total, global sustainable debt issuance is set to surpass $1 trillion this year.
Accountability is essential
These tools also offer companies a chance to be more accountable. In the ING research, for example, 73 per cent of companies that say they have issued sustainable finance instruments have improved their ability to implement robust metrics for performance.
This improvement is vital, as stakeholders demand more immediate action from companies to address environmental, social and governance (ESG) issues. Last year, for instance, Legal and General Investment Management warned companies to do more to meet climate change targets or risk being publicly shamed.
One company that has put sustainable finance to good use is Aligned Energy. The US data centre firm secured a $1 billion loan to reach 100 per cent zero-carbon renewable energy consumption by 2024. To ensure accountability, the loan is structured with sustainability KPIs based on principles set by the Global ESG Benchmark for Real Assets.
Ultimately, companies will need to be prepared to be transparent about the actions they are taking to make changes, or they could fall out of favour. ING's Leonie Schreve does not hold back: "If you don't take any action," she says, "You will be out of business."
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