The global population is expected to be nudging 10 billion by 2050, and the energy demands of that many people will accelerate the climate crisis unless we take action to make our systems more sustainable. This is urgent: some projections estimate energy demands to grow by almost 50% by 2050.
"The challenge here is this: in the next three decades, the world population is expected to increase by approximately two billion people," says Gido van Graas, global lead New Energy Technologies at ING. "This growth significantly increases energy needs, but it should also come with net zero emissions."
Meeting that growing demand will require governments, the financial sector and companies to work together – whether that is in the creation of new business models with lower carbon footprints or supporting technology, products and services that offer a greener vision of the future.
The great pivot: Business is changing
There are plenty of incentives for companies to look into such services and products. ING research finds that 57% of consumers are prepared to pay a higher price for products that have been made in an environmentally friendly way. And EY finds that revenue from sustainable products is growing at around six times the rate of other products. It is partly why the number of companies committing to net-zero emissions by the end of the century tripled in 2020.
Others who have yet to be encouraged to actively pursue new technologies or business models in support of sustainable goals will have to adapt. Research published by ING in April found that just 32% of businesses are prioritising the greening of products and services, for example.
To manage the higher risk of financing companies that are pivoting to new business models or investing in untested technologies, banks will need to come up with innovative solutions of their own. Their funding is needed: more than half (53%) of companies surveyed by ING cite reduced capital and operating expenditure budgets as a result of the Covid-19 pandemic, leaving them with a shallower pool of funds to address the big issues.
Banks also need to realise that traditional financing solutions such as senior loans are ill-suited to companies that have a less-mature business model or are embarking on a radically different path. It means banks need to be prepared to develop both financing solutions and appropriate services for projects that are unlike any others they have previously worked on.
Sustainability through strategy
Companies will not just need to consider new technologies, services and business models – they also need to put in place a forward-looking sustainability strategy. Banks also have a role to play here.
According to Leonie Schreve, global head of Sustainable Finance at ING, this is where banks can really step in. They can provide more risk-bearing capital as an alternative to traditional finance, as well as advice about how to shift to a financial structure and business model that supports clients' sustainability goals. "That's where we are currently focusing on being a partner for our clients," she says. "It becomes a strategic dialogue with our clients to help them identify investments and divestments to safeguard their resilience in tomorrow's economy and to remain relevant to increased investor ESG appetite."
Banks are increasingly using finance to support innovative green businesses and phasing out carbon-intensive sectors in their portfolios. ING's Terra approach, for instance, helps to "measure the impact of different sectors on the climate, and to set targets for each sector to transition to a low-carbon future", steering ING's lending portfolio towards net-zero by 2050, in line with its commitment to the Net Zero Banking Alliance.
The Terra approach's strategic advice, says Schreve, can extend to supporting companies with complex regulations. The EU Green Deal, for instance, which includes the EU Taxonomy. This regulatory framework requires European companies to report on the proportion of their revenue coming from sustainable products and services, as well as the capital and operating expenditure involved.
For companies, regulation is likely to trigger a wave of investment in products or processes that help them align with the regulation. For lenders, meanwhile, regulations offer an opportunity to share practical advice about how to finance more sustainable capital expenditure, for example, or what acquisitions they can make to gain greener assets. Playing that advisory role makes lenders a valued partner to companies, and not just a source of funding.
"For us, it is a good opportunity to guide our clients through this complex regulatory environment," says Schreve. "We can start a strategic discussion about what they will need to do to transition towards a sustainable economy."
Working together to find new energy systems
For many organisations, strategic discussions can go a long way in supporting them in the scaling up of promising ideas, technologies or systems. Take the use of hydrogen as a source of renewable energy.
Hydrogen has been touted as a low or zero-carbon source of energy, particularly in sectors that are hard to electrify, making it "a very important driver in the energy transition" according to van Graas. Since February 2021, 131 large-scale hydrogen projects have been announced globally, taking the total to 359 projects, while investment into projects along the entire hydrogen value chain is estimated at $500 billion through to 2030, according to research.
But hydrogen remains expensive – particularly when it is produced by wind or solar energy as opposed to natural gas – which means that this greener mode is not yet competitive. To pave the way to a hydrogen economy, van Graas sees a role for banks like ING to have "very detailed conversations" with clients about how best they can be supported in scaling up hydrogen projects that will require significant investment to make a reality.
"The implementation of hydrogen in the coming decades will require trillions of dollars of investment not only in production facilities, but also in transportation and storage," he says. "We are very keen to support our client base in their energy transition here."
On the ground: How finance helps to pioneer new business models
Society's efforts to reach net zero now go well beyond energy technology, and we need to look more broadly at innovation and business models. One of these models is the circular economy.
In May 2020, for instance, German chemicals giant BASF placed €2 billion of bonds on the capital market, with one tranche worth €1 billion dedicated to the company's first green bond. Some of the proceeds are being used to develop innovative technologies that support the recycling of chemicals – a key element of a circular-economy operation.
According to Joost van Dun, circular economy lead at ING Sustainable Finance, the push towards a circular-economy model means new business concepts – ownership of a product remaining with the producer, for example. This moves businesses towards a "rental agreement", and incentivises producers to build durable products, placing responsibility in their hands for the "use phase and end-of-life phase" of products. In short, the longer a product is kept "in the loop", the more revenue it can generate.
There are benefits to this, but van Dun says it will demand "financial innovation" on the part of lenders.
"In this [circular] model, it is more about financing the access or use of the asset," explains van Dun. "The collateral value of the asset is limited, as it is in use by a third party. We need to rely more on the contracts between the user and the one who offers the service and how it generates revenue streams."
A number of cases are starting to emerge where banks have worked with companies to ensure that sustainable finance, based on some level of financial engineering, is supporting the shift to a circular-economy model.
Netherlands-based start-up E-bike to Go (EB2G), for instance, is working to improve use of sustainable transportation in a way that shifts away from a model of ownership to access by offering a subscription service to both businesses and consumers for e-bikes.
At the start of 2021, it was acquired by industry counterpart GreenMo in a deal designed to improve access to EB2G's sustainable transportation and provide a path to international expansion.
Given the business model is a relatively new one, financing it requires a different perspective: lenders are typically used to financing "possession" rather than "use", and there is a different risk profile to contend with given that defaults on payments, for example, risk occurring periodically rather than in one instance.
For lenders, that means looking more at cash flows that arise from the subscription service, and closely monitoring how long subscription contracts are taken out for by customers.
On the ground: How finance supports new technologies
The energy transition is another area where finance solutions are accelerating the development of innovative new technologies.
In July 2020, Swedish start-up Northvolt raised $1.6 billion in debt financing from a consortium of commercial banks, pension funds and public financial institutions to support it in its ambitions to create gigafactories – production plants that can produce lithium-ion batteries with a low carbon footprint. The deal, says Mark Weustink, ING's head of sustainable investments, is an example of "risk-bearing capital [supporting clients] during their scale-up, helping them accelerate and realise their sustainable ambitions."
Batteries are going to help decarbonise the global economy by allowing for the electrification of the automotive industry as it phases out internal combustion engines. In Europe, the lack of infrastructure to create batteries means that investment is urgently needed to produce them at scale – particularly when the market is forecasted to be worth €35 billion by 2030, which is more than twice its size in 2020.
But "there is no reason for battery performance to come at the cost of the environment," says Northvolt. So the company is working to develop two gigafactories in Sweden and Germany that are powered by clean, renewable energy, and it has committed to ensuring half of what goes into its new battery cells in 2030 comes from old batteries.
To see projects and technologies like these through to completion, it is important for lenders to collaborate with companies. As the population rises, and as that population grows increasingly mindful of sustainability, they cannot afford not to.
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